Brooks Automation, Inc. (NASDAQ:BRKS)
Barclays Select Growth Conference Transcript
November 20, 2013 11:20 AM ET
Steve Schwartz - Chief Executive Officer
Lindon Robertson - Chief Financial Officer
All right. So we are going to move along here with the next presentation. I’m thrilled to have Brooks Automation with us today. From the company we have Steve Schwartz, the CEO; and Lindon Robertson, CFO.
Just real -- today we are going to focus on the life sciences systems business for the company today. So they provide automated sample management systems, automated blood fractionation equipment and really lots of other things, lots of exciting things going on in the life sciences division for the company.
So, with that, (inaudible) I’ll turn over to Steve.
Thanks very much and thanks for the introduction. Yes, today we’d like to really focus on the life science growth opportunity for the company. It’s about 10% of the company’s revenue but significant part of the interest and energy we are pouring into what we think is a very significant growth opportunity for the company.
Before I begin, I will refer everyone to our Safe Harbor statement, you can find that on the website also at www.brooks.com.
So the premise for the enthusiasm of the company is really we are market leaders in two critical technology sectors. First and foremost, the history of the company has been around being a semiconductor capital equipment sub-supplier, critical technologies that we have relate to automation, the movement of wafers into and out of the process tools.
And also we have cryogenics technology product capability that came to us by acquisition. These are two critical capabilities that belong in the manufacture of semiconductor processing. The revenues in fiscal ’13 for this portion of the business were just over $400 million.
In the life sciences space, by way of acquisition, we started a couple years ago to get into the space where we use the automation and cryogenic technologies that we have developed over the semiconductor business. We have entered into approximate $500 million market for the cold storage of biological samples. It’s a very exciting opportunity, growing at about 20% per year on an annualized base.
Fiscal ’13 revenues for us were $43 million. We do anticipate strong continued growth in fiscal ’14. And as a company, we have a business model which the semiconductor capability provide us very strong cash generation capability, very strong market position. In fiscal ‘13 year ended September we generated $54 million of operating cash flow and we're using this capability to continue to drive into the life sciences sector.
A little bit of history from the company, we have been around since 1978. We became public in 1995 and in the late ‘90s the company did a series of acquisitions, the number of acquisitions to really be all things automation to semiconductor factories.
It was a vision that was compelling for some customers not for all and after the dotcom period, the company spent significant portion of the next few years divesting of some of these capabilities. So once again we were semiconductor automation company, really the initial charter 1978.
However, in 2006, the company made an acquisition of Helix Technology. The leader in cryogenic pump technology, cryogenic pump is literally a -- it’s called a capture pump. It uses a very cold element and this case Cryopump works at approximately minus 260 degree C and it used to create ultracold temperature which ultimately provides vacuum in the manufacture of semiconductor devices for a couple of critical steps.
With these two core technical capabilities, automation and cryogenics, which gave us an opportunity to begin to explore participation in the life sciences market where we could do the automated cold storage biological samples.
So today we are market leader in this particular segment of life sciences and in the segments that we serve in semiconductor and we are very pleased with the growth opportunities that exist actually in both markets but primarily in the life sciences space.
On the semiconductor side we have very strong market leadership positions in the segments and the sub-segments that we serve. These are sizable markets with number one position and we continue to make investments around design wins that will help us to maintain this particular position but we really came to talk about today was the lifesciences opportunity.
In the last 30 months, we got into the business by three major acquisitions. We acquired a company called RTS Life Sciences in April 2011, a Manchester, U.K.-based company that did automated cold storage for pharmaceutical companies. At the same time period, we acquired Nexus Biosystems and in the process of not acquiring Nexus Biosystems, we acquired a company that had recently required -- acquired another company called REMP.
So in July 2011, when we acquired Nexus, we actually owned three of the participants in the space from the year before. And just in August, we closed on Matrical Biosystems, another automated cold storage player. All very good companies, all subscale and when we add these capabilities into a company like Brooks, we’re able to bring a lot more strength and support to going after a more sizable market with the critical math that serving us particularly well.
We acquired our way into the business. We got the hundred customers and more than 200 systems in the installed base. So all top 20 pharma companies have our automated cold storage systems as do the major bio companies and significant research institutions in our customer list of now more than 100 customers. I suspected most people would recognize most of the customers on our list.
We have a very broad portfolio, which includes not just the automated cold stores but also devices that are used to format the particular samples into aloquants and put them into small sample sizes. We have thawing/freezing capability, cappers/de-cappers and consumables that allow us to both format and move in store the samples to our particular configuration.
To give a summary of the opportunity here, there are billions of biological samples stored worldwide, up until and through the 1990s, most of the freezers were manual, either door opening manual, electrochemical freezer or for samples stored in liquid nitrogen at ultra-low temperatures. As we moved into the demands for the 21st century, there is a requirement we stored billion of anything to be able to track it and to manage it to be able to handle samples both from a safety standpoint and from ensuring that you have the right sample at the right place.
At minus 20 degree C, we store basically chemical compounds mostly for large pharmaceutical companies. When we get to minus 80 degree storage, those are requirements for nuclear cathode for blood, for tissue and then at a temperature below what’s called the last transition point for water, where all biological activity stops, there is a significant amount of storage activity that happened below minus 136 degrees C for cells and tissue and in particular, when we talk about cell lines, tissue, cord blood, those kinds of things must be stored at temperatures below this last transition point. So conventional temperature is somewhere between where liquid nitrogen boils at minus 196 degrees C and minus 150 degrees C at safe temperatures.
So when we look at the size of the market today, the cold storage market for biological samples is something around $0.5 million in market size. Most of the storage has done in manual stores either at minus 150 degrees C in liquid nitrogen cool tanks called dewars or mechanical freezers that are literally door opening freezers, minus 80 degree C. That’s market that we estimate to be for the biological samples approximately $200 million.
There is an automated system opportunity that’s about $165 million in size. A bulk of that is done at minus 20 degree C still for chemical compounds. But there is a growing market for minus 80 degree C, almost -- in excess actually of 80% of the stores that we sell for automated sample management at minus 80 degree C, is for DNA and RNA storage. And there is fledgling market now, showing up for storage in automated systems below minus 150 degree C.
But the opportunity that exists for us, as we continue to be able to automate these ultracold temperatures is to take market position away from some of the manual storage because of the demands that are required for the safe handling also of the samples at minus 80 and minus 150 degree C.
So when we look at how this market continues to evolve, in 2018, we estimate a market of approximately $1 billion for the storage of these samples. They will be some shrinkage at minus 20, but significant growth for storage of samples at minus 80. And the most dramatic growth showing up for samples that are stored at minus 150 degree C. Until the automated markets approximately $400 million market five years from now.
Just to give you some idea, not that you need to understand these things, but when we break the market into size and temperature requirements, it’s a pretty significant product portfolio that we acquired as a result of the acquisition that we made. Each of these names on this sheet is the name of a particular product that fits a portion of this 3 by 3 matrix for large capacity stores. For example, at minus 20 degree C, we have major store, A5 Universal LSS A4.
And what we've done as a company in that, following the acquisition of these capabilities is we've developed a common architecture, we call the Twinbank, which is the first Brooks developed product where we took the robotics and cryogenic technical capability to the company, simplified the architecture to be much more standardized that we can serve the large and midsize minus 20 and minus 80 degree stores with the common architecture provides us cost benefit and provides standardization and capabilities to dramatically simplify what came to us from the acquisition ultimately for independent companies.
It makes us much more efficient. It makes our offering a lot more standard and a lot more beneficial to the customer. What really enthuses us, however, about the market opportunity and I will skip ahead here a little bit is that the stores for minus 150 degree C ultracold storage in a small size is where we think there is a rapidly growing opportunity to serve community, which is much larger in terms of number of customers who would be a potential customers for an automated small cold store below the glass transition point, because when we look at the number of customers who could afford storage systems that requires 1 million or 2 million samples, there is probably a list of about 200 potential customers.
The number of customers who could afford a small automated cold store, which is a lab appliance that actually goes up into the thousands of customers, so very specific target for us where we have a product development activity that’s going on in -- with great speed and great investment actually now and has been for about 18 months.
So when we take a look at the automated cold storage market, you can see a decline here slightly in the minus 20 degree store, but significant growth opportunities with the growth rate, for minus 80 degree stores of approximately 20% and the minus 150 degree C, the growth rate is somewhere around 75% CAGR. So a significant opportunity for the company, significant investments that we are making as a company to be able to capture this rapid growth.
When we take a look at the cold chain of cuts, if you will, when we start with sample preparation, alloquating and putting samples into particular carriers or to servile, the sample prep opportunity is about $1.6 billion market, in as it relates to the preparation of samples that ultimately restored cold.
The cold storage market opportunity for us we focusing on is, as I mentioned, about $165 million today in 2013. With the transporting, the formatting, the consumables capabilities that go along with the storage of these samples, we think represents another $200 million of opportunity for us in the formatting and transport space, and we really think about the cold chain of custody.
We care about the protection of the samples from formatting into storage and ultimately deliver the point of use or point of need, where we can verify the thermal history and the transport history if you will of the samples, which include the formatting and transport. So it had a significant amount of market opportunity that we will add to the portfolio in addition to the automated cold stores.
Just to summarize the dynamics that exist in the market as the pharmaceutical companies continued to move their research and development budget to be a lot more efficient and as they move into some of the biological and cell therapies, the need for storage at colder temperatures is increasing exponentially. The amount of biological sample storage is also increasing at an incredibly high rate.
We do recognize also that as people want to contract for the storage of their samples in an outsourced mode. They much prefer that the samples are stored in automated systems rather than risk, the manual handling of their particular samples, so sometime they put some pressure on the cold storage companies if you will to make sure that they consider putting these things into automated systems.
We also see very significant growth in Asia, in Korea and China and particularly in Japan recently. We’re seeing a lot more strength in the growth of the automated cold sample storage systems for the Asian markets.
With that, I would like to turn over the presentation for Lindon to kind of summarize the market and the financial position of the company.
Thanks, Steve. Good morning. You can see on the graph, the quarterly revenue trends and if you look at the far right at the very last part, you will see that’s our guidance column for the next quarter, for the December quarter, and it's probably, it just highlight a couple of points relative to the market.
The market often in the semi space with us is looking for us in terms of tracking to the front-end manufacturing space or the large blue bar at the bottom. And you can see that this is upticking fair amount into the Q1. We have that up about 15%.
And so that front-end space is growing really close to right in the middle of -- with the market. And at the same time, you can see the life sciences business that Steve has talked mostly about is right the top of the bar and you could see that expanding as well.
And so in that expansion, we just had about 28% growth rate in the third quarter. We see modest growth right now, we’ve [reported] saying we are going to go to about little over $12 million in the first quarter in that business. And so it's expanding but single-digit growth is what we’re projecting for the quarter, just quarter-over-quarter.
Now, in the middle of that bar, you can see that we also have the industrial and adjacent spaces, related more to the semi side. So the adjacent spaces in semi would also include some other industrial or some other applications.
But those spaces do contract in the first quarter but you can look across the prior two years. This -- particularly the industrial space, is a very cyclical in nature because it includes the Polycold offerings that we have which treats glass used in consumer products such as iPads, tablets, smartphones, et cetera, displays and so there is a consumer cycle there that occurs and so we see that typical contraction.
And all in all, it still expands in the quarter and you can see that it’s a very different trend than last two years. So you can see that the semi space is much more stable. Many people are just at the cusp of saying that the semi is picking up a fair amount.
We see that there is positive indicators, we would expect that our revenues next year to be modestly better than this last year. And we hope that it continues to gain steam obviously. Before I leave this chart, I’ll just highlight to you for clarity that our fiscal year finishes September 30th. And so the last four bars on here really, the three -- last three quarters and then the first quarter of our coming fiscal year ‘14.
So you could see that when we talk about the fiscal ‘13, you actually pick up the last quarter in the middle section there which was really part of the down cycle that the semi space experienced this last year. So just -- just to give you a little clarity on the apples to apples basis, we show this in the calendar quarters because many of our comparable companies have that year with the other direction.
Now, I’ll take you to the financials. On the four-year basis as mentioned, we’re about $451 million, 43 of that was in the life sciences space as Steve mentioned. 34.4% gross margin really is a story into that margin picture. It's relatively flat year-over-year versus the 2012 year.
However it came in very low at the beginning. It was on the decline in 2012 and there were two things that happened obviously we picked up some revenue but more importantly to us. We did a lot of structural and operational improvements through the year to improve that margin.
So we started in the Q1 of the year less than 33% and that the Q4, we finished at 36.9 so almost a full four point improvement across the year and it was steady the last three quarters of improvement. So you see the guidance in the first quarter, that we’re going into $122 million. So we’re expanding obviously on the quarterly run rate that we saw this last years.
So we see that uptick you just saw in the graph previously and you can see a couple point margin improvement. That margin we already exceeded in the Q4 but we say that some of that was one-time benefits and so we’re starting at this 36.4 when we see some strength in margins as we move through the year.
So we expect that we’re going to have a very good year, solid year on the top line some expansion but a very good year in the gross margin as it stands by itself without -- without some of the historical drugs that we had because we've got the operations tuned up. Because operational improvements include better supply chain efficiencies, cost of warranty, inventory reductions that produce less inventory losses and we've also exceeded some real estate space and in an early part of last year, we also reduced some of the resources back in the last cycle.
So the cost position that we’re in today is much stronger going into ‘14 as then when we first entered ‘13. The operating margins of 3% this past year obviously we would like to see better than this in the margin improvement that we just talked about, we’ll strengthen that. We see that going into the first quarter on a healthy expansion rate as well. The EBITDA similar story going from 38 in the first quarter will see ‘13 by itself is our expectation. Now all these guidance numbers have some range around them. We share them in our earnings call this last week.
Key for investors as we do pay dividend, we paid it for the last two years and this will be the ninth quarter, $0.08, so it usually translates to about a 3% return on the current price of our stock.
Operating cash, I shouldn’t overlook that $54 million. We generated $25 million in the fourth quarter. We don’t guide operating cash going forward, but the EBITDA does give you a good signal in terms of our capability to generate cash going into this next year. So if you think about -- what we’ve talked about just in summary, bring you back to just an overview of Brooks.
Two technology sectors that we participate, really very independently in terms of the market dynamics, but very common in the core assets that we apply that being automation and the cryogenic strength at Brooks has built the business around for the last 30 years.
So reliability that is semiconductor manufacturer counts on us, for is helping us to fuel the operational improvements on the semi space and generate cash. And at the same time that’s the core assets and capability that we’re applying to the life sciences and that, life sciences is in a completely different market space, so obviously it’s a diversification.
But it’s in a space that has significant growth potential, both because of life sciences expansion, but the application, the technology in the space where it’s never been is going to facilitate reliable solution in this minus 80, minus 150 environment. That diversification and that growth obviously is a value statement to those customers. And so it’s a margin opportunity, both in the life sciences but it’s a margin opportunity to Brooks.
We’ve been seeing margins in lower to mid 40s in the life sciences and this past quarter, we touched down a little bit below that because we had an inventory write-down, more of a one-time event for us and so without that we would have been above 40% on this. So this is a margin expansion as well as diversification for us.
This also gives us strong position for growth in acquisitions. We have not been shy about investing in the R&D. In the last couple of years, the company has grown the R&D investments, but with the strong belief that as we developed the next edge of technology in the semi space that’s what ensures us with our customers to maintain a primary place in their supply chain, as well as a reliable supplier which often is about a copy exact play with our customers.
And so that’s a very critical reliability factor with the semi space. But it also is applying R&D into the life sciences. And again, the beautiful thing about the model is that the automation in the cryogenics is a core assets, so there is a substantial amount of synergy in the R&D equation.
The $173 million cash and equivalents on our balance sheet, no debt, leaves us in a very, very good position to make flexible place as we see in additional strategic opportunities. The company has made four very good acquisitions in the last three years. One of those was in the semi space with Crossing, but three of them were in the building office life sciences space. So we developed a very keen capability to integrate and I have been very, very impressed with the smoothness of the operations, as well as the integrated management dialogs and style of integrating the leaderships into the company.
Look at the operating model, delivering on a profitability promise and essentially the promise is to see continued attraction in the gross margins and therefore in the bottom line profits. It has been a terrific story this past year.
The margin expansion as I mentioned, but also $54 million of cash from the operations and $25 million was incurred in Q4, mostly from profits, some from inventory and working capital. We also did some significant achievements this past year in terms of acquisition, as well as divesture.
So, in the fourth quarter for example, we picked up the Matrical acquisition for about $9 million but we also sold some real estate for about $11 million. So the two of the, I don’t -- we have taken careful care of our balance sheet and our cost initiatives are helping to fuel a transition and transformation of the company.
And then last but not least again the dividends providing consistently at 3% return to our shareholder of recent purchase.
So, with that we believe we got the company well-positioned for future, stable in the semi space, but very, very strong in the transformation toward something that offers a more stable base with a diversified plan in life sciences and applying our technology.
So, with that, we will pause. There is additional information in the backup there for you on a GAAP and non-GAAP basis of course. We will pause and both of us will take questions that may come to mind. Yes, sir?
I guess at the start you were talking about, I guess, the bio storage opportunities like Asia, so can you kind of talk about like what you are doing to kind of take advantage of that?
Yes. So, when we acquired Nexus Biosystems, they had a Japan operational ready. So we have a set team in Japan, we have a number of cold stores actually in installed based in Japan. Recently, we have installations now in India, China and the system also going to Korea. So there seems to be a significant amount of momentum if you will around some of the automated cold storage.
In particular, we think there will be an opportunity for some of the small very cold stores in Japan, in particular both for things like IPS cell development activity and fertility actually seems to be a pretty significant opportunity for some of the smaller cold stores.
I want to ask one on the market dynamics, because you do point out pretty significant growth for a lot of different groups of cold stores over the next five years? Can you talk about historical market growth and then going to some of the factors that you call now, I mean, I know that there is a transition for research to cell-based therapy is that the primary factor that's causing increased growth over the next five years or is one of those other factors more relevant?
Yes. Thank you. It is a good question. So, just let me talk very specifically about some of the growth rates. In the semiconductor side of the business it's particularly cyclical. If we look at the long-term CAGR, we are probably down to the mid-single digits in terms of growth rate opportunities there, but the cyclicality sometimes is up 20% or 30% in a particular year.
On the life sciences side, what we find is that there is a particular opportunity also driven by the ability to get the automation completed. So without a reliable automation system the samples for even at minus 80 or minus 150 degree C are more at risk then and putting it in an automated system compared to putting into manual system.
So we truly believe that some of the technical capability that we bring, using the reliability that we developed in the semiconductor space will both bring trust and capability to some of the automated cold storage. It will help to accelerate the real market opportunity.
So, I think today there is pent-up demand for truly capable automated systems and we really believe that the growth will come from systems that are capable to meet the -- not just the storage requirements but also the reliability requirement in that space. It’s especially true on a minus 150 degrees C.
And I think the thing that people are really concerned about today is the number of cycles that happens if someone reaches into a minus 150 degrees freezer, pull out a rack of samples and ultimately selects the one that they want and puts the rest of the samples back into the freezer.
I think people worry about what happens over cycles or tens of cycles of years of extracting samples that have been through freeze/thaw cycles over years and what happens to the integrity of the samples and the ability to select the single sample that you want them to move it on without disturbing what I call the inner sense is, provides the enormous opportunity for growth.
We don’t anticipate that an automated system would necessarily capture everything that exists today in the manual system. There will always be a mark-up for the manual systems but we do think the growth that comes as a result of the capability that we bring will be dramatic and measurable.
On that front, I think it makes a lot of sense that you would see some make shift for the automated systems. I was also curious as to why there was such a large amount of growth that you predicted in the manual stores as well. Is that -- is there a shift in the research priority or I just wanted to understand the fundamental on underlying growth in that overall market?
Yes. It seems as though -- I'm sorry, didn’t mean to cut you off.
No, no, it’s pretty much okay.
It seems though -- so when we spent time with the people who provide the manual freezers and the liquid oxygen dewars, if anything, we probably underestimated both the size and the growth of those markets, the number of samples that are stored is increasing at a rate where if you add up the capacity of the samples that are stored, it is growing at about a billion samples per year, which is almost unfathomable, the density of the storage if you will -- it doesn’t take up nearly that much from a sample standpoint but the growth rate on the people shipping units, it’s reserved by everybody.
And I believe, forces to move to biological samples and I think given an example that a commercial bio bank, I did it recently, when they did collection of samples five years ago they collected blood. And when they went back to the patients again they started to collect a lot of different fluids and things from the same patient, so that the size of the collection now will include things that are beyond blood and that the number of samples ultimately stored per person from the same group of candidates five years ago is almost three times as many just because they want to collect and to store more of these biological specimens.
Maybe just a follow-up on that, you have done a few acquisition over the last couple of years. Is there anything in terms of the core opportunities that you are going after that you need to continue to build on in order to address that market or do you feel like now that portfolio is where you need to be, are there any hopes?
At this point the portfolio is complete. So, for us to achieve the target that we have, we have all those capabilities. However, if there are opportunities we think to continues to go after some companies that might not have the scale but would benefit and would benefit us to be part of a larger portfolio, for example in the consumable space and some of the devices. But from a cold storage technical capability to meet the market requirements of minus 80, minus 150, we do posses all those capabilities in-house.
And on that one, you mentioned the customer profiling, can you talk about who those 200,000 of customers would be that could afford the kind of storage systems that you are looking to produce?
Yes, very specifically, to give you an idea about the large-cold storage systems the pharmaceutical companies store 10 or tens of millions of samples versus the easy one, minus 20. So it is very clear at the pharmaceutical companies who store chemical compounds are customers in the biological side just to give you an idea. Some place like the Mayo Clinic where they store -- where they have millions and millions of sample stores, some of the big research facilities have automated cold storage systems as well for the rather large collection at an individual resource institute somebody who might want to store 5000 or 10,000 or 15,000 samples might be a candidate for a small cold store but not necessarily for a large -- very large system.
Okay. We do not (inaudible). Thanks a lot for your time.
Okay. Thanks. Thanks very much.
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