Brooks Automation Inc. (NASDAQ:BRKS)
Barclays Capital Global Technology Conference Call
December 8, 2011 02:30 pm ET
Martin Headley - EVP & CFO
Well, good morning, ladies and gentlemen. Here to talk about Brooks Automation, the changes that we are going through leveraging our expertise for expansion into higher growth opportunities. The pathway for this will create a more diversified growth technology company. In doing so, there are a number of significant events that have occurred over the recent months. In June, we sold our Contract Manufacturing business to Celestica for a price of $80 million. This enables us to focus on higher technology development, higher margin companies. In furtherance of our Life Science Systems strategy, we acquired two leading automation sample management companies. And further, we have put in place higher research and development spend with a focus on markets that are adjacent to semiconductor wafer frontend.
If you look at the company as a whole, it is by no means clear with all these changes from the financials exactly what we have as a company, so I point out that if you take the pieces of the company that we now have, they have a trailing-12 months revenues of $580 million with gross margins of 37% to 38%.
But Brooks business today is represented in our fourth quarter fiscal 2011 financials, we are a September fiscal yearend company is within three continuing segments. Our Global Services Business which is primarily with foundries and fabs who have in place our equipment that we've sold through OEMs. It was about 17% of our business. Even though we only had the Life Sciences Business of Nexus for a part of the quarter that represented 7% of our revenues in the quarter.
Going forward on a full quarter basis it will double digits, 10% to 12% of our business. And the Brooks Product Solutions Business, that is the technology equipment solutions that we bring was 76% of our business. Within that just over half of the business saw a 47% of our total revenues in the quarter with the semiconductor frontend, 18% to Industrial Markets and 11% to other adjacent markets such as LED, MEMS, OLED, flat panel display, solar and analystical instrumentation.
It is our intent to further diversify this picture and grow elements of our business outside semiconductor frontend in the course of next two years through both organic growth and through selective acquisitions particularly in the Life Science Systems area. So the exiting in a couple of years time we anticipate a picture that would see our Life Sciences Business be upto about 20% or more of our business. The rest of the components except semi frontend being somewhat similar to where they are because of growth drivers and semi frontend products representing about 35% of our business. That diversification also reduces some of the customer concentration that Brooks has historically had.
If you look to September of 2010 we have three greater than 10% customers, Applied Materials, Varian Semiconductor and Lam Research. And together those represented 46% of our business.
If you go fast forward now 12 months to the September quarter of 2011, we had no greater than 10% customers and those three customers that represented 46% of our business, 12 months prior were 19% of our business. We think that that is a much healthier state of play.
So what are our sources of growth? Well, we’re going to continue to expand share in semiconductor wafer equipment markets for automation, instrumentation and vacuum solutions. And we intend doing so by technology leadership. We’re investing significantly in R&D in our Brooks Product Solutions Business for both wafer frontend and adjacent markets.
Our systems capabilities enable particularly smaller OEMs to optimize their time to market with tools by relying on our backbones and automation systems that represent the core tool architecture on which they then focus their process technologies. And our global support capabilities are greatly favored by the smaller OEMs who can rely on those to provide global support.
Continued expansion into adjacent markets and examples here are although the LED market could probably best be described as somewhat moribund at the moment, it will be a growth driver in the long term, driven by general illumination. And our solutions are increasing the content that we have on MOCVD tools which represent about 50% of the capital spend put in to an LED fab.
Growth in MEMS capabilities, that’s been driven by mobile computing and telecommunications and automotive applications will continue apace. Backend semiconductor applications become a new market, traditionally or historically there has been no wafer movement in the backend of semiconductor in the test and packaging areas. Those have all been [pick] type robotics.
Now with through silicon via wafer level handling we believe that within a couple of years, let’s say $50 million to $70 million market for wafer automation into backend markets. And we are already very well positioned with some of the leading players there to take a significant share of that market.
And then looking forward there are areas of nano manufacturing utilizing things such as carbon nanofiber substrate. We already have developed the capabilities to provide automated movements of those kinds of substrates. And so we believe that we are in an excellent position. And then finally we will build our new Brooks Life Science Systems vertical. That business is a $48 million business with projecting growth of at least 20% per annum. When we are already the leader in this space by virtue of our acquisitions. Our initial target in Life Sciences is automated sample management and this is our target because the core competencies are exactly the same competencies where we have developed extensive expertise and specialty within Brooks. The characteristics of automation in a controlled environment, controlled cold environment in creating that cold environment and the abilities to then track those samples which we have through our RFID capabilities.
That Sample Management System not only includes the stores themselves, but elements associated with preparation and delivery to the sample test environment. Why we are excited about this is that we see from extensive work that we did with BCG, the samples under storage are going to increase at somewhere between 25% and 30% per annum and that growth is driven by personalized medicine and the need and the requirement to maintain a lot of individualized samples to identify the various markets that interact favorably with various drug compounds and so that's going to accelerate the samples that are held under test.
The automated sample development will also benefit from the fact that manual science stores that are being used for low temperature storage as we bring low temperature automated storage available that will be increasingly attractive as the manual storage solutions become unwieldy and unacceptable at certain institutes that are already suffering. I will give you an example the Mayo Clinic has over a 1000 manual freezers and they find great difficulty now in tracking what samples they have retrieving those effectively and efficiently on a quick basis for utilization in their testing.
We bought Nexus Biosystems and RTS and together they form Brooks Life Science Systems. CEO of Nexus Biosystems John Lillig runs this business closely with Clint Haris who previously ran our Systems Business and as we located to Poway, California. The business made up three branches, Nexus, RTS and REMP, which Nexus acquired about nine months before we acquired Nexus, are located in Poway California, Oberdiessbach, Switzerland and Manchester, U.K. So we have a global business, a global business with a 170 automated sample stores representing 45% of the installed base, about 44% of the installed base in the US, 44% in Europe and the balance in Asia, which actually will be a larger growth opportunity going forward.
We have significant service opportunities and a significant ongoing service business supporting the over 100 customers that have those tools. We are moving forward. We have rationalized and enhancing the supporting infrastructure for the business and are focused R&D activities are going to leverage our existing competencies in mixed gas cryogenic automation and control environment, use of RFID to create next generation solution, should be out in 12 to 18 months.
Additionally, we will focus beyond the sample store themselves to areas where we already have a presence with these business in sample preparation and handling, scheduling in sample management software and consumable solutions. Together the service and consumables are about 20% of this business.
So there is a nice ongoing revenues piece independent of the store sales. The top 20 global pharmaceutical and biotech companies and many others already use our automated compound stores. So automated compound stores initially for the storage of drug compounds, went down probably as low as minus five, typically minus 5 degree C, and so were not extremely cold stores and we will focus more on the accurate retrieval and a clean environment and a accurate storage and a clean environment of the samples and you will see many well known names here amongst those that have made those investments in the past.
And we’re leading the way in to minus 20 degree C, minus 80 degree C bio-stores, where you’re typically storing biological samples and biological samples you want to store at much colder temperatures to prevent growth occurring loss during storage and you’ll see some of the names that already are our customers there.
Away from Brooks Life Science Systems, we continue and believe we will continue to have growth as the way of recovery in adjacent markets and semiconductor driven by continued strength in mobile computing and communications that drive a lot of capacity requirements for NAND, the miniaturization of components that’s driving us towards wafer level packaging and Through-Silicon Via.
The high definition touchscreen interfaces that require, for example, coatings on the front of the glass, which we put on with some of our mix gas cryochillers; the MEMS devices that are embedded in lots of these for self tuning antenna, screen orientation capability. All of these drive capacity requirements that are all fully automated by our solutions.
Our success is also going to be driven by what we bring to market quickly and effectively and the return we are going to get from that $40 million or so that we spend in Brooks product solutions in R&D, as well as the $8 million or so in the annualized run rate that you should expect to see in our Brooks Lifetime Systems.
What I have here on this chart are seven examples of solutions that are being brought to market in the last twelve months and which although they have modest revenue impact today, positions us in a excellent position in various markets for the future. I would note the 450 mm automation solution while clearly not going to volume now the important feature for us is to be positioned with many different companies as the automation supplier and vacuum supplier for those solutions that are currently being tested.
We also develop time payload vacuum robotics, which is the part of our success in LED environment where you have a much higher payload, where you are carrying susceptors rather than silicon wafers.
We have a number of advanced robot arm, multiple robot arm and end effector designs that drive the high tools for a particular designs of tools that our various customers have and they are being a critical part of the 79 designing wins that we had during the course of 2011 that really position us for increasing market share in the future.
We have high capacity cryo pump compressor models that we were introduced during the year. They increase tools throughput higher capacity cryo pumps that don’t need to regenerate and drop vacuum within the typical tool cycle and for the higher capacity compressors we've reduced the power requirements for running those cryo pumps.
We have chuck cooling systems that increase processed throughput particularly in ion implant processes.
We have an ultra compact nano-robotic design system that minimizes the fab footprint required for some of the simpler automation processes and in the instrumentation area in January of last year we introduced an innovative high speed ion trap that has the potential to provide real time data feedback on atmospheric and vacuum conditions and one an interesting innovation that we intend moving forward aggressively with.
Our global service reach is highly effective in both, developing new business for us in terms of our ability to support, as I said before smaller customers, as well as the degree to which we interact with individual fabs and foundries and through the effectiveness of that interface managed to drive content of our particular products, through specification of end uses on to OEM platforms.
Just to give you a sense of what the historic Brooks Product Solutions and Brooks Global Services businesses are, that’s the all of our business but the Life Sciences business and without the contract manufacturing business that we divested during June of last year.
That business in fiscal 2011 was a $540 million business .We are just shy of 38% gross margin and just shy of 15% operating margin and strong EBITDA margin of 18%. These are all record highs for this business and very strong performance in fiscal 2011.
But we are facing somewhat different market conditions now. So what are my comments and advice on that at the moment.
First, I am seeing bookings environment which is not a typical at this part of the cycle. We have very limited feasibility with much more of the activity occurring on very short lead times. You have end-users who put orders in on very short lead times to OEMs. And OEMs who drain the inventory situations, who then put very short order lead times on us.
Quarter to-date were flat sequentially with a trending upwards in the third quarters progressing and based on that the inputs we have from both our contacts with end-users, fabs and foundries and LED manufacturers and the like, together with use of OEM plants, we see the semi-front end business starting to rebound from the trough. And we see December revenues as the trough revenues for this particular area of our business with a nice move forward into the March quarter.
I don’t have the bookings in hand for the moment but all the indications are that, that is our best estimate of what should happen into the March quarter.
We have areas like LED/Solar, I could probably put flat panel display there from our adjacent markets, which are flat at the bottom of the cycle and frankly for which there isn’t a great deal of visibility for near-term recovery.
Our industrial business is typically lagging on the cycle. So we wouldn’t expect our industrial business to rebound in the March quarter. We anticipate seeing that more into the June quarter of next year.
Our Service business isn’t subject to the same cyclicality. We’ve had eight quarters of consistent growth now, even when the downturn has started in the product side of the business and we continue to see that we should have enough good trend, we see there is an opportunity with that business with some of the initiatives we have regarding upgrade and regarding diagnostics that this should be a 10% growth business.
And then the Automated Sample Management business, which we believe has an accelerating growth trajectory, which we believe should have a 20% plus CAGR to it. It’s a very good growth addition to our portfolio.
Cash; I would be remiss, if I didn’t complete the presentation without talking about cash and cash deployment. We’ve a very strong foundation. We got two -- entering the quarter we had $206 million of cash and marketable securities that are readily liquid and turn-able into cash of $3.17 per diluted share and no debt. Our cash flow from operating activities was a record in fiscal 2011 at $87.6 million.
In terms of the uses of that cash, we’ve commenced a dividend program. We’ve done two quarters of $0.08 a share dividend. We’re going to have a continuing focus on smaller acquisitions that support our diversified growth strategies, largely around Life Science systems and building on our core competency. And we will continue to fund very strong levels of internal technology development that are embedded within the cash profile.
So with that, I end my prepared remarks and would welcome any questions.
Thank you Martin, I appreciate the presentation. Curious on the, I guess the first question on the semi-equipment side, you talked about visibility tune up within Q1, but have not have any new orders in hand. Can you talk about I guess like segment where you are seeing the strength and any sense of magnitude that we could see and as part of that answer if you can highlight where you think inventories are in terms of the channel of your parts?
Okay. A lot of answers to provide; first the inventory, with the exceptional handful of vacuum systems that are in inventory, some of our smaller customers where we really have low levels of inventory if any inventory in the channel. We typically don’t have inventory carried by our OEMs of anything but the cryo pumps and we don’t know those to be entirely significant levels at the moment.
So we think inventory correction factors will have work their way through the system in the December quarter; we don’t see any continuing impact of that into the March quarter.
In terms of the areas of strongest development, I think I would characterize it in this way, I see it strongest in NAND Flash and I see it strongest in Korea being the geographic locale where we are seeing the first impetus in this capital spend which is not unlike the last cycle in fact.
But equally you see commitments from all the large players. You go through Toshiba, Intel, Samsung, Hynix, GLOBALFOUNDRIES and TSMC, they have all made indications of their intention to spend at levels that would support a rebound above the current trough position. So from the macro position, we also see it from those announcements and those indications to us specific fab-by-fab developments as they continue to build out.
And if I could follow-up, I think you guys pointed about $110 million in orders to cover and you talked about orders tracking, you know similar to that level, is that broad based across Life Science as well as sub system side or is it greater in the one versus the other?
My comparison on the orders there were solely on our core technology business, both the products and the service side. The Life Science business given the size of the orders can be much more lumpy. Just to give you a sense an Automated Sample Management system can have a price tag on it of anywhere between $0.5 million and [$4 million]. So some of those and they have fairly long life span to them, can create a fairly lumpy booking situation. The best guidance I would give there is we are seeing the orders getting placed consistent with us having that growth trajectory that I talked about for the Life Science systems business. [Olga]?
You talked about 20% CAGR that you expect within Life Sciences over next year, how much of that is being driven by the underlying market growth versus what you expect to be greater penetration by the companies that you acquired?
That is what I would, most of this is I anticipate from the market itself and so what we are seeing with the market itself is historically if you take this market, automated sample stores first was created about 10 years ago. The leaders were – two of the significant leaders were RTS and REMP which is part of our both Life Science systems now. And those will principally compound management store. So they were atmospheric minus 5 degrees. They were typically very large stores, two or three, or four times the size of this room with robotic 10 to 12 feet high going down central aisle-ways.
What we see with the biologic sample growth that’s going to be stored is a need for more stores that are at lower temperature. A lot of those are going to go into applications where you aren’t going to store the high volumes that you have in pharma environment, so you are going to see more stores, multiple stores in the National Institutes of Health, the Mayo Clinic, hospitals such as Children’s hospital in Philadelphia or Vanderbilt; people you have seen on our slide there customers have recently taken to scores.
So it’s going to be driven by more of these being adopted by a broader variety of customers, not just the major pharma customers; although we have seen them equally highly interested in lower temperature stores going forward. As they need to store more and more biologic for the drug market testing that they are now doing as part of the their development procedures.
Okay. I’ll ask a follow-up on Life Science. You talked about potential for tuck-in acquisitions. I am curious as you think about three, five years down the road, where do you hope Life Science will be as a percentage of your overall mix?
I think if you go three to five, I would say probably a third of our business would be a reasonable expectation. We like the fact that the acquisition opportunities in this area, there are more of them, smaller kinds of acquisitions than the relatively concentrated space you see in the technology equipment space. And so that’s another attraction of this area in terms of something that can be built progressively without taking excessive risk with the individual steps that you take.
Thank you very much.
Sure. Well thank you very much.
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