Brooks Automation, Inc. (NASDAQ:BRKS)
Wells Fargo Securities Health Care Conference Call
September 7, 2016 2:55 PM ET
Lindon Robertson - Executive Vice President & Chief Financial Officer
Maurice Tenney - President, Brooks Life Science Systems
Well, good afternoon. Lindon Robertson, the CFO for Brooks Automation, I really appreciate the interest and the time that you’re spending with us today. I will cover the customary that this has got some forward-looking comments in it, and of course, we don’t see the obligation to update those or look for you to look at the Safe Harbor statements that we provide to you in the presentation in our 10-Qs and Ks.
With me today I also have Dusty Tenney, the President of our Brooks Life Science Division. Our agenda is going to be – I’m going to give you a quick overview of Brooks. Just to touch on the semiconductor business, which is still the larger portion of our business, but we’re major on the life sciences and what we’re doing is, it’s an exciting space on its way. It’s 20% of our business now on its way to 25% next year. And then I’ll come back and talk a bit about the profit model that we have laid out.
At a glance, you’ll see an 80-20 story here right now. But it’s been in movement. If you went back a year ago, it was only 13% life sciences. And we’ve actually taken quite formative transformation step, I’d say in the last three years, as we moved this business forward.
At the core, Brooks has been a company for 30 years and then public for more than 20, with 80% of our revenue now still in the semiconductor capital equipment space, servicing the fab with a capital equipment that it takes to move wafers in the line and to create a vacuum space, and most of our customers are in that OEM chain between us and the fab. We do sell directly to the fabs as well in the semiconductor business.
In the life sciences space, we take a core technology that we have done for decades in the life or in the semi business and apply those capabilities to life sciences, those capabilities being around automation that being precision automation and cryogenic temperatures. We use cryogenics and semiconductor could create a vacuum space for manufacturing in life sciences, we use that cryogenics for freezing at very deep cold temperatures and, of course, we use the automation for handling samples, biological samples, compound samples, where back in semi, it was all about the wafer.
But you can see there’s a core technology that we share across these businesses. We are a business based here close to Boston. Sales all over the world, or services to support our sales all over the world, and heavily based with patents and IP around, both product sets and we haven’t had any debt in many years, 72 million of cash in the latest quarter on the balance sheet.
So with that, let me just show you that this isn’t all about what we’re going to do in the future. We have been moving a small forward over the last recent years. You can see the operating income has gone up from a low level on $13.05 [ph] up to last year of $37 million. And by the way, we’re at a fiscal year end of September 30th, as a company. So we’re just approaching our fiscal year-end and you’ll see our 10-K come out generally though very end of October, the first week of November, so watch for that.
As I turn it over to Dusty – well, I should say before I go into the semiconductor space, let me just highlight that we did an Investor Day in the June month. So still really fresh information, I’ll highlight it and it’s easy whether to go to our web site and look at those materials, you’ll see a more expensive explanation of our semiconductor business, as well as our life sciences versus what we can do here in the half-hour that we have.
But one of the key messages that we had there was on this chart. And that is at this point, we really do see ourselves at an inflection point. An inflection point, both on the semiconductor side of the business and the life science business that the semiconductor business has positioned for continued growth and improved profitability, and I’ll show – I’ll talk just a little bit about that on the next page.
And then on the life sciences, Dusty will outline for you just why the space is in high growth and why – what we have done reasonably to really turn the corner toward a profit picture. In other words, we’re just crossing the line. The business becomes profitable this quarter is our projection and the 2017 maintains profitability and continues from there.
So we believe this is an inflection point and, in fact, we put a financial model out that versus the consensus around this year that ranges in the $0.42 range and next year, our earnings per share should be in the $0.82 to $1 on a non-GAAP basis.
Mentioned the core competencies are shared, I want to hit the – just the customer base on the semiconductor and the life sciences side really quickly. You’ll see household names on both sides. You have the largest fabs, the largest OEMs that we service around the world on semiconductor. We are a household name with anybody dealing with automation in the fab.
And on the life science space, we serve all the large pharmaceuticals and biotech companies. These are only samples. We have hundreds of customers in both sides and and we’re well-known and key suppliers into both sides of the business or at both markets.
Now, on the semi side, just a brief overview. We’re about the – or we are the automation company that helps the wafer move in the line. So if you think about a semiconductor fab being totally automated, you don’t see many people on it. The reason that can be is, because the wafer moves on its own with robotics provided by Brooks Automation. And we integrate that with vacuum system.
So we have a technology to create a vacuum space that and has done so with a cryogenic technology. In other words, it compresses helium through a chamber and the physical reactions bring that temperature down to minus 260 degrees Celsius. In doing so, it freezes everything out of the vacuum chamber and out of the atmosphere. So that a semiconductor fab company can then apply material, such as electron shoot amounts of the wafer without running into other matter in that space.
That capability has made a score in supplying the large OEMs and tool providers into the semiconductor fab space. We also have full services around our equipment in the space. And then in 2014 in the top right, you see a photo of an automated FOUP cleaner, which is the – the FOUP is the box, the front open unified pod, that orange looking box is just about two feet square as a cube, and it carries 25 wafers at a time in that automated fab.
But as you clean wafers to make sure that they’re contaminants, where you also must clean the FOUP box. The box is automated – has – is automatically cleaned by the tool you see there, that tool is an average selling price of approximately $1 million. And it’s our largest average selling price in the semiconductor space.
We are key in the process. We are key in the wafer capital equipment space. There are three trends that are moving this toward an inflection – in an inflection point right now. And that is, if you’re familiar with semiconductor, there’s an increased process step for deposition in edge, every incremental process now required also carries a demand for automation. There is also increased vulnerabilities contamination. So the contamination control tool set is benefiting and growing from that demand equation.
And then finally, the advanced packaging or the wafer level packaging is now packaging chips together at the four wafer rather than cutting the wafers into pieces. And so, we’ve extended our relevance into what’s referred to as the back-end of the line in the semiconductor process.
So we are more relevant than ever in the semiconductor space, and we see this as a growing trend. We’ve maintained that we believe going forward, we will have growth rates of about two to four points faster than the semiconductor market itself. And then when I say the market, I mean, the wafer fab equipment market, the capital investment for that market.
With that, let me just highlight quickly that the earnings improvement on the semiconductor side has been quite remarkable as well, that has been driving a good portion of our improvement, but it’s not by itself also life sciences has been strengthening. So both are feeding the improvements and this is at a point now, where we would say the inflection point serves us well.
With that, let me just short circuit that light or that semi side, turn it over to Dusty to give you more on the life sciences, which is the focus today.
Thanks, Lindon. I’m going to kick things off here, maybe talk a little bit about our customer base, because I think it’s important just to have a frame reference in terms of the customers that are coming to Brooks for a broad range of sample management needs.
The life science business at Brooks is really centered around sample management. In fact, if you take a look at this customer set, they’ve engaged with us for consumables, for samples, they’ve engaged with us for large automated storage, ultra cold storage for samples. They’ve come to us for archival stories. They come to us for genomic analysis and they come to us for informatics.
All those aspects really build a total comprehensive solution that today in the marketplace, it’s probably one of the more leading solutions out there that gives customers depending on where they are in their strategic continuum inside the respective businesses the opportunity to engage with Brooks going forward, as you can see some pretty prominent customers in terms of their reputation in the marketplace.
Let me just maybe build up their framework here, so that you have our perspective. Samples used to be put in basements of pharmaceutical government and academic institutions. They were sort of put there forgotten about, never really archived, never really managed from an inventory standpoint.
And finally, I think there was a wake up call realizing that samples are now becoming assets, especially in the advent of biologic and personalized medicine. And as that has come fast-forward over the last, I’d say, five to ten years, the amount of samples being stored at this point in time has dramatically increased.
We estimate that there’s about 6 billion samples that are stored today, and that crosses the chasm from compound – chemical compounds to biologics and ultimately into tissues and cells at cryogenic temperatures. That itself is really the transformational aspect associated with what’s happening with samples and ultimately is the reason why we’ve decided to invest heavily into this comprehensive sample management solutions that we’ve been able to put together.
If you take a look at it from the standpoint of what’s happening in the industry and why there’s such a need for samples – good samples, high-quality samples for that matter is really driven from the standpoint of a confluence of things that are happening with the industry. Many of you follow a number of different technologies that are being applied. Mass spectrometry is becoming more common place, the utilization of that tool, the ability to get more information from samples and single shots is pretty incredible.
You sort of couple that with the fact that Big Data becomes really relevant here in terms of imaging, understanding some of the sample, sample dynamics, and ultimately the ability to utilize that sample. The third is really around life science tools. The fact that it’s becoming faster, smarter, and more effective and more efficient. Those three things are really combining, driving the need for samples, good quality samples to support analytical requirements that ultimately lead to drug development, ultimately lead to therapies.
And if you put that in the framework of what we’re trying to do, ultimately we’re in the front-end of that process in the development and the discovery phases of each of these respective institutions and that ultimately is opening the door for many of the broader solutions that we’re putting in place inclusive of the services that we’re providing to them as well.
Adding to that dimension is the fact that the market is very vibrant. I mentioned before that there’s about 6 billion samples stored That’s a $7 billion estimated market. We serve about $1.3 billion of that market in our addressable market with what we currently have in our portfolio. The targeted areas are really in the colored areas in terms of the high growth segments, in that essence, we’re serving about 75% of that $7 billion market.
Our targeted markets are growing about 15%. We’ve seen tremendous growth in and across our entire portfolio, and I’ll talk here in a second in terms of the growth that we’re going to see in the life science business and ultimately how that culminates and ultimately builds on the broader aspect of Brooks going forward.
Today, we represent about 10% of that $1.3 billion market, with about $110 million is estimated for this fiscal quarter ending September. Following this aspect is how we built out our strategy. Brooks has come into the life science space through acquisition. We started back in 2011 and really the revelation of taking a pure-play semiconductor company leveraging some of the capabilities, specifically automation and the cryogenic capability and leveraging that into life science space.
So we went out in essence did a roll up over the first couple of years in 2011 and 2012 of the large automated stores. And in essence basically had four different companies that we bought during that period of time and became the most predominant installed base. Today, we have about 250 stores installed in the industry today and ultimately that’s been the framework in terms of what we built off of.
Following that we realized that we needed to move in a parallel path to build out our portfolio. And the large capital investments that customers were making didn’t have the recurring revenues that we’re looking for. So we acquired a consumables company, made an equity investment in a couple of other consumables companies, and that helped us to round out reshape the portfolio.
And then finally, in 2015, we acquired a company called BioStorage Technologies. And that became an outsource services play, centered around samples, which then further rounded the capabilities that we had in our portfolio that offered the customer one stop shopping in terms of their complete comprehensive sample management needs, while also giving us the diversification that we’re looking for in terms of the annuity base that came by virtue of those acquisitions.
To that extent, we’ve also invested internally leveraging the cryogenic capability, as well as the informatics, because those are two more significant, more prominent opportunities that we envision, given the size of those end markets that we’re trying to address, and ultimately, the information management needs around samples that that flow out of that.
We’re well-positioned. We’re number one in the space around automated stores. We play number two position in the biological consumable space. We’re the number one pure-play in terms of outsourced sample management through the acquisition of BioStorage, and we do have a technology play that came by virtue of the acquisition of BioStorage that now will serve as a commercial offering that we’re going to be launching in 2017 to actually manage biological samples for biobanks and for pharmaceutical customers, and that will be an additional offering that adds to the portfolio mix that you see here in a second that really ties to the numbers.
To that extent, the business has grown very, very quickly over the last three years in 2016, again, September ending quarter for our year. We envision that we’re going to be roughly about $110 million business. We’ve seen a couple of dynamics. One is that, we have a very strong backlog position by virtue of bringing the services. We have a lot of visibility to what’s going on inside the business as you can see about 65% of our revenues are recurring. And on top of that, we’re actually building backlog.
So we’re seeing customers, some large strategic investments in terms of outsourcing and also a resurgence in terms of the large automated stores from a capital standpoint to play it into the mix. So those two dynamics really gives us some great visibility that Lindon will share with you in a second in terms of total rollout for Brooks. But ultimately, offers has a great recurring revenue base that ultimately provides us the segue in terms of visibility that we’re looking at for 2017 and beyond.
To that extent, I’ll just put a couple of other things that we’re looking at for the business in 2017. We anticipate that we’ll have gross margins in the low 40s. We’re going to be a profitable business, whereas in the couple of years prior to me joining Brooks, the company was actually running at a deficit. And ultimately, we positioned the company here in the last quarter, ending June for break-even for a business that’s running roughly about $110 million on an annualized basis.
So we’re going to move to a profitable play here that ultimately helps us in a couple of different aspects, gives us some leverage, but pretty significant growth as we move into 2017 with an estimated revenue base of $160 million, that’s roughly about 50% growth, and a lot of companies out there doing it, but we clearly have a good line of sight in terms of the opportunity set that’s delivering that growth.
Ultimately, we’re going to get leverage off of that growth, drive profitability for that period of time. And then as we envision going forward with the visibility that we have on the backlog, you can see a $200 million business that ultimately is delivering mid-40s on the gross margins and operating profits in the mid- to high-double digits. So those are the elements.
So, as I sort of put everything together here in terms of the business profile. I’m clearly excited about what we have inside the portfolio. Brooks, we have spent the last, I’d say, five years building out a portfolio that clearly is resonating with customers. The interactions that we’re having continued to grow on multiple different dimensions, the new product investments that we’re making, ultimately, being capitalized and monetized through the engagements that we’re having with customers at this point in time.
The growth, I think, speaks for itself in terms of what we see going forward. But the growth is coming with profit at this point in time and we’re going to see that as we move into 2017 and beyond. The other dynamic is the fact that, we do have a strong recurring revenue base. Visibility gives us a level of assurance in terms of delivering, while at the same time, it also provides us with a broader aspect of a revenue stream that drives us forward.
The fact that we do have a comprehensive sample management solution is the ability for us to apply these broader solutions. And as we look at 2017 and beyond, clearly, we see continued upside in terms of the things that we’re doing in driving the performance across the business.
With that, I’m going to turn it back to Lindon to put together some summary perspectives and just together, both the semiconductor and life science side of the business.
So clearly, we’re focused on using the strength of both portfolios for growth, but also to drive margin expansion. And I think if you look at the history of what we’ve done over the last five years, you’d see a very disciplined balanced level of capital deployment, I’ll just give you a quick summary of that.
This is a chart that I think deserves a minute. The 2017 model, we laid it out in 2014 and we’ve updated it at our Analyst Day. This is what we see in 2017. And I’ll emphasize that the semiconductor business is not one that we can guide with the year. So it sounds like, we are guiding. This is a model that demonstrate what the earnings potential of the company is, it semis in this range.
We get orders in the semi business within 90 days and we respond to those. We don’t guide the year. But as you can see, we’re just talking about a very modest level, no growth environment in semi, which right now we’re seeing some growth. So it could be better, but at the same time, I should say, it could be worse on the semi side. But with this, what is the powers of the – power of the earnings model? With life science is becoming 25% at this range of the portfolio, we see our margins incrementing to about 38%. This year, we – last quarter we had 38.5%, so 38% is not out of the ballpark now.
We see ourselves running on average of 38% next year. That level of operating income there at 12% really depends on three things; margin improvement in semi continuing, the expansion of life sciences revenue with stronger margins in life sciences, just last quarter, we had 40% just in the life sciences business. And continuing that combination, we see that the earnings per share then gets us to the $0.80 to $1 next year where that revenue growth that Dusty hit.
So our consensus this year, by the way, we don’t show 2016, because we haven’t put a full P&L out. We don’t guide that level of detail. But the consensus is in the $0.42, $0.43 this year. So you’re looking at just about a doubling of the EPS, as our model materializes into 2017.
Let me – people ask, well, how can you be confident? Let me show you the elements that we’re counting on, and I think it just add some reality to it. First, we acknowledge – first, that we had some IP income the trails off mostly last quarter into this quarter, we’ll have just a touch of it this quarter. But we had $2 million to $3 million each quarter. So we’re kind of on a $0.12 headwind on IP income. But the margin improvement that Dusty has been driving in life sciences will continue to contribute about $0.08 above what you saw in the 2015 timeframe.
We have $0.22 being contributed from the growth of life sciences, and about half of that is in the BioStorage acquisition that house sourcing business and half of it and what we refer to as the legacy business before we had to buy a storage outsourcing business.
And then the semi and corporate efficiencies, we did a significant restructuring in the April timeframe. That’s got about $15 million of annual cost, both on semi and corporate levels. We also described to our investors in June that we see about $8 million opportunities we step into 2017 to take out additional $7 million to $8 million of cost and expense in 2017.
And then on top of that, we have a tax rate benefit of about $0.07. That being directly related to the fact that, we put a valuation allowance reserve on the books back in the March quarter. That provides an optic change, but I would just highlight, connected to that, we have deferred tax assets that exceed $90 million with the reserves completed against them complete – completely reserved in the U.S. And so that continues to provide a very nice cash equation for us, as we don’t pay tax in the U.S. for sometime to come. That we believe gets us to that midpoint of $0.90 plus or minus.
I’ll just hit, as Dusty laid out, there’s a business model here that says that we can get to a semi business up about 15%. But the life sciences cross over to the 16% to 18% operating margins by 19%. We don’t think it’s finished there. We think this life science business can run at 20% plus operating margins, as we grow and leverage the size of it, but we’re also focused on the ROIC. In doing so that we see this getting to 13% or better, which exceeds our weighted average cost of capital.
I mentioned our deployment of capital. I’ll just give you a snapshot. Just since the beginning of 2013, you can see nearly a quarter of a billion dollars invested in our organic base through R&D and CapEx, it’s a fairly low CapEx equation. In past years, it’s been a little less than $10 million. Our current guidance with the BioStorage business is to expect typically $10 million to $15 million on an annual basis.
So it’s up a little bit, but it’s not a capital intensive business. Acquisitions, another quarter of a billion spent. A portion of that sourced out of two divestitures, I should say, one in the last three years for $85 million. We use ROIC and net present value in our criteria that ROIC focus is our key priority to get this. Above that 13%, most of them are about 20% within a three to five-year period. And then shareholder return, we have the dividend in place. We’ve now, since the inception of the dividend back in 2011, we returned more than a $100 million of dividends back to shareholders.
So this is just the summary. Improved financial performance, we’ve got the model in place. We really believe we’re at an inflection point, and we’ve got the capital deployment history that, I think, demonstrates a respectable way to run a business.
So with that, let me just pause and see if there’s any questions in the last few minutes here. Yes, sir?
Q - Unidentified Analyst
Yes. So it’s referring to the model here in 2019. When we look at productivity, that is we will not be growing operating expense at the same rate as revenue. In fact, on the semiconductor business, while we’ll have mid single-digit growth we expect that semiconductor trends maintain, which are typically one or two points and exceed of – in excess of GDP, will be two to four points faster than that.
So you would see flat perhaps operating expense on semi. And we would see and then we’ll continue to gain productivity perhaps even some savings from that base. Life sciences, we will support with some operating expense investment, but it will not at all be close to the revenues. So we’ll gain leverage on operating expense on both sides of the business. Any other questions?
I know you’re here mostly to talk about the life sciences business, but I want to talk about that the semi business just a little bit. If I’m a typical life science tools investor, I’m used to a certain amount of predictability and you noted that it’s hard to guide precisely on the semiconductor business. And I might think well, jeez, this is a pretty compelling story, but still looking at the 2019 model and I’ve got 70% of my revenue still in the semi end market.
I know you’re comfortable with that business. Can you help us understand for the typical healthcare investor, what’s the profile of that business? How volatile is it? What kind of risks am I taking that maybe don’t – you don’t hit that model?
So number one, how confidence in the industry. The confidence in the industry has been tarnished and that there were volatile swings before and I have to say, we often say, we don’t project any volatile swings until they happen, right?
So once they happen then you say, well, gosh, that was another volatile swing. But we don’t see that and we haven’t seen it since the 2009 timeframe for a couple of reasons The Internet of Things is really expanding fast. And so it’s not just about the iPad and the smartphone, although it is, but it’s also about your watch. It’s about the car. It’s about the plane. It’s about monitoring your temperature in your house, in your buildings, in your utilities.
The Internet of Things has exploded, not just using the most advanced technology, but also the old technology from 200 millimeter fab. So semiconductor industry have confidence so.
Second, that that confidence demonstrates a steady growth more than GDP by one or two points. And then finally, we have been in an inflection point that supported with key growth trends inside semiconductor, as I mentioned, trends that have happened. The smaller node line, which in semi have made it more demanding and manufacturing and requiring more process steps, more sensitivity the contamination control. Both of those strike at more of the offerings that we have. And that’s where our offerings really sink up within industry.
The volatility, I can’t promise that doesn’t happen. But most analysts say the depths in the valleys are not as much and not projected to be as much. When they are we are a cash capable company. We’ve been sustainable on cash and typically been generating $50 million. We pay out about $27 million of dividends a year, and we expect that to improve obviously with the earnings projections that we have so that and I think there’s real reason for confidence.
So, thanks, again, for all the interest in Brooks Automation. If people are in the area were local here and we do take visits. So but – and phone calls, so I appreciate that interest. Tim, thanks for the invitation today.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!