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Executives

Martin Headley - CFO

Brooks Automation (BRKS) Morgan Stanley Technology, Media & Telecom Conference February 29, 2012 4:00 PM ET

Unidentified Analyst

Good afternoon everyone and thank you for coming. My name is Ms. Valerie and I'm member of the semiconductor and capital equipment equity research team here at Morgan Stanley. It's my pleasure to welcome Martin Headley, CFO of Brooks Automation. Martin is going to kick us off with some high level comments, opportunities for 2012 and then we'll jump into some Q&A.

Martin Headley

Thank you very much. I think it's best to frame what's top of mind with Brooks by maybe five significant priorities that we have at the moment. Firstly its integrating our new and very exciting Brooks Life Science Systems business into Brooks. This is a business that we entered with the acquisitions of RTF Life Sciences and Nexus Bio Systems during the course of 2011 and followed up with a very exciting product line acquisition of an automated Cytometer called Celigo in December of 2011 and this is a business that we see having a growth potential of over 20% per annum driven by personalized medicine initiatives that are really expanding the amount of biological samples that are being stored on this earth to facilitate those initiatives and we see the amount of samples being stored growing at somewhere between 25% and 30% per year and really being the fuel behind the driver for a fully effective sample management solution that will enable a better yield of the samples available from storage.

In addition to that we're not short changing our core business. Our Brooks Product Solutions business which is focused on semiconductor front end, adjacent market and investor markets, we are looking to grow our market share in that business by about 300 basis points per year and that's fueled by the design wins that we have with our OEM customer base.

About 80% of that business is sold through OEMs where you get designs into the platform and wining that position is critical to the long term growth of the business. We had 79 such design and wins in fiscal 2011. We continued that strong momentum with 22 design wins in the first quarter of our fiscal 2012 for September fiscal year.

We're also looking at the operational aspects of our business. We are spending some not inconsiderable amounts currently with consultants as well as upgrading our critical capabilities within the company to support supply chain operational initiatives where we're targeting the next time we reach $150 million run rate in a quarter to be the 40% gross margin which contrast with just shy of 37% for the calendar year ended December 2012 if you exclude the contract manufacturing business.

We have a very strong balance, just shy of $20 million of cash. We have relatively limited requirements to run our business and as a result we believe that we can utilize this cash very effectively in supporting growth initiatives particularly in the Life Science Systems area where we believe there are a number of smaller acquisitions that can build out this strong footprint that we've started to establish and build further our capabilities in this area. We don’t need to do any further acquisitions in order to get the yield we expected from our existing acquisitions but see this more as future opportunity as well as potentially acquisitions that might add other technical capabilities to our core portfolio even in the other parts of our technology and product solutions business.

And financially in an in-certain world the other thing that we've got ahead of mind, top of mind is maintaining operational and financial nimbleness so that you continue to see a variable margin drop through that surround 40% of every revenue variation so that we can drive the returns that are expected from this business.

Unidentified Analyst

Thank you very much. So just talking about Life Sciences, you had a strong quarter, your trailing 12 month revenues what you mentioned from RTS and Nexus, about $48 million and you indicated about 20% growth and if you take a step back at the highest level, like what kind of a potential market size and opportunity are you talking about?

Martin Headley

If you are look at what we currently address with the Life Science Systems business we address about $150 million market for automated sample management stores and the service of both stores and we address about a $200 million addressable market with our other instrument solutions such as the Celigo Cytometer. If you were to look at the potential for growth in those different aspects, they are little different. The automated sample management area, we see that predominantly driven by growth in the market size, that the market needs to grow rapidly to provide lower temperature automated storage to improve the management of a increasing number of biological samples to be stored and we see that the market growth is the driver behind 20% plus market growth of our business.

If I were to look at the instrument piece of the business, we believe it's predominantly around share growth with our Cytometer being something of a disruptive technology that we believe will be able to displace existing flow Cytometer technologies.

Unidentified Analyst

Right. So in all your acquisitions, can you talk about some kind of operational synergies that you are able to leverage post your acquisitions?

Martin Headley

The synergies that come from putting together our core competencies of automation in a controlled environment, creating very cold environments and tracking things as we do, now where we track wafers with our RFID equipment is that the core competency automated sample management are automation in a very difficult environment, in this case a cold environment. Creating that cold environment and again tracking the samples being a very important core aspect of automated sample management. So levering off those core competencies we were able to develop new solutions that currently are not available in the market and we're working with our R&D teams from our Brooks Product Solutions Group integrated with engineers from the Life Sciences Systems group to pull together next generation product solution, we're able through our existing competencies in mix that priority link which is the essential technology that we use in your minus 80 degree stores, we are able to use on manufacturing and field service engineers to improve the processes of manufacturing of the existing products and the field service of those products, we've already integrated Life Sciences Business to having the back office support from a point of view of finance, human resources, IT that is integral to growth. At this stage the relatively modest levels of operations synergies that we see our folks taking advantage of, that may change in the future.

Unidentified Analyst

Okay. So just taking a step back. So for Calendar year '12, how do you compare your growth rates and your traditional products versus your products?

Martin Headley

Well clearly, the Life Science Systems businesses you made mention of at the time we brought the two core sample management businesses, they are doing about $48 million run rate for the trailing 12 months prior to our acquisition. We've talked about how you think of this business is about, running it about $60 million now, so clearly well on track for 20% growth rate with that business.

Compare that, our semiconductor business, although we're gaining share Calendar year '12 is going to be a difficult comparison to Calendar year '11. I think although we've started nicely out of the blocks on a sequential basis, the December quarter of 2011 was the trough quarter in the semiconductor business and we're projecting nice growth for the March quarter and the June quarter beyond that. That is being driven predominantly by business in Korea and Taiwan or just in Korea and Taiwan.

There is some possibility, you will see some pull back or flattening out from that situation going into the back half of Calendar '12 and so most people talk about the semi business being flat to down 10% for Calendar '12. I don’t think we'd dispute that view. There's not an awful lot of visibility beyond the next six months out there. So there is nothing of great insight to provide at this junction, only to say we'll have nice growth even with that situation because we see with market share growth and in our adjacent markets that that should have a reasonable comparison year-over-year. Our industrial business is likely to be down slightly having a very slow start to the year with a little bit of inventory in our distribution channel and modest demand for some of the key drivers such as currently a key driver for us is putting the coatings onto your Tablet PCs or your Access phones at the moment it seems like capacity has built out there.

Unidentified Analyst

Okay, so how do you see a recovery in the industrial market? Like what are the kind of the trends that investors can kind of look for?

Martin Headley

I think it's difficult given the wide variety of applications that are our products serve in the industrial markets. It's largely more to do with macroeconomic situation. So I think, historically we have seen it lag the semiconductor business by about three to six months, partially due to the fact that we're going through channel well and direct and therefore we're seeing semiconductor recovery in the early part of this year. We believe we will see industrial markets pick up probably into the June quarter or beyond.

Unidentified Analyst

So on a cycle basis, can you just compare industrial, or do you think from a cyclical point of view do you see like anything much more stronger, industrial coming out coming out much more stronger in this cycle as compared to prior cycles?

Martin Headley

I think if you look at the cycle as a whole for our businesses, I think there is still strong capacity build out because the capabilities that are needed by our mobile technology devices which are the key drivers of capacity requirement are for lower power devices, higher capability devices, lower profile devices and that's all new capacity. That isn’t necessarily the capacity that's already in place in foundries. So not all capacity is the same capacity and I think because of that we can expect a reasonable capital intensity within the business going forward.

Unidentified Analyst

You'll talk about deign activity wins in your product solutions group. Can you just explain a little bit on that and as compared to like last year, or maybe even going back a couple of years, what has kind of changed in the competitor landscape? Are you able to convert a greater amount of additions or if you can just maybe elaborate a little bit.

Martin Headley

Yes. Our ability to achieve these design wins is a function of us having technology leadership in the products that we provide. Having the responsiveness to adapt those solutions to the particular requirement of our customer needs, few of our products are off the shelf products that don’t require some degree of integration into an OEM tool in order to function optimally and we also are higher favored because we enable customers to get to market more quickly through utilizing some of our systems solutions and if they were to develop the own internal developments from scratch and increasing the way some of the smaller OEMs are highly attractive and gaining us market share win.

So if I were to contrast with what we had in the past, increased capability both in terms of numbers and capabilities within our engineering group enable us to be more nimble and be able to respond to those situations much more effectively, much more quickly and that results in a much higher level of design and wins. Currently we are seeing probably about two out of every three opportunities that are becoming available that we're winning. So winning more than our share and we think that that is a very strong foundation for the future growth.

Unidentified Analyst

If I look at your customer landscape, so there has been a lot of acquisitions in that front leg land, acquiring (inaudible) and so there is a contraction in your customer base, like how do you kind of see that? Is that like a shrinking, instead of selling to two customers you have potential customer?

Martin Headley

In one sense there's a bit of a contraction with (inaudible) going on with the large U.S. OEM customers. Equally there are Asian based customers who are beginning to develop solutions that are being favored by some of the end users. So while there is a contraction at that we also find that there are newer companies to the fore that need to be served and can be favorably be advanced from use of our product solutions. So whist we see that contraction, we see opportunities elsewhere. We equally see opportunities to serve those important U.S. customers more effectively and better as we deal with these large companies.

Unidentified Analyst

Okay, on the LED side, can you just talk about a little bit on what the traction is like?

Martin Headley

LED we feel very well positioned for the future growth in the business that we believe will occur. In the near term we see very little capacity going in place, particularly with MOCVD capability but those latest MOCVD capable tools will have an increased content of our products as compared to the past and we see LED will have a high level of acceptance particularly for general illumination markets. In the near term we do see some opportunity with some of the applications for patent and other steps in the LED process but I would say that's still a long term growth driver for us but it's not something like that is likely to be favorable to calendar year or fiscal year '12 comparison.

Unidentified Analyst

Just talking about the 450 millimeter design activities, you shipped one system and had orders for three new systems but in terms of growth driver, is it 12 or is it a longer term phenomenon?

Martin Headley

Thus far we've shipped more than the, the one unit we shipped was on top of three we previously shipped. So we've show shipped four 450 millimeter tools. With this you save more in the pipeline. I don’t think you should look to this in the next couple of years as being a meaningful revenue driver for Brooks. I think the importance is that where the partners four 450 millimeter, if you look to what happened in the 300 millimeter developments it was of those people who are partnered with automation vacuum solutions at the time of development, that were most favored in went out when that went to volume. We think 450 millimeters is a couple of years away from volume but we think we are very well positioned by the partnering with companies in that development and of course we do have revenue opportunities just from providing these development systems.

Unidentified Analyst

Yes, so just shifting gears towards services, so how do you see services revenues when you talk about top line growth from adjacent markets? Are these going to be in the same operating margin compared as what your traditions have given products off?

Martin Headley

Our services business, if I talk about the Brooks Global services business which supports service of our Brooks Product Solutions, not our Life Science Solutions, that business is running in the kind of the 33% to 35% gross margin range. I think we would see gross margins be somewhat similar to that going forward. This is a business that to the extent you start having growth, you do have to have an element of capacity going into the business, be it for service engineers or repair technicians and so there is relatively modest leverage from the volume point of view, a bit more leverage to the operating profit line as there should be little in the way of SG&A infrastructure that needs to be added to this business in the future.

Unidentified Analyst

And just talking about margins, given your diversification with product rates as compared to prior cycles, you mentioned that you would like to get to the 40% margin line and yes, the comment like what could be a potential from a cycle to cycle comparison, like what kind of an upside you could pretty much see for margin profile?

Martin Headley

I think there is an upside, not to be an upside with the business of getting into the low to mid 40% for the business as a whole. It will a function of the relative mix of the business as well as the pricing dynamics within the business which we still to be relatively good. So we think that that will be a meaningful move from the 37% which is what we have for fiscal 2011 excluding contract manufacturing business and significantly better than 32% to 33% that we had including the contract manufacturing business. So we think that the actions we've taken will substantially improve the margin profile of the business.

Unidentified Analyst

I think you had touched upon; you have about slightly less than 200 in cash, no debt. You talked about like M&A; you're open to kind of M&A activities. Is this mainly in your adjacent space that you are trying to look at and how much CapEx do you need kind to run the business?

Martin Headley

To run the business we've kind of guided people to thinking that a roundabout $10 million of the year is a good level of capital expenditure that does not starve the business. The Life Sciences Business much like our core business is relatively capital in extent it does not have expensive capital requirements. The Life Sciences business doesn’t even have the kind of the clean room requirements that we have without Brooks Product Solutions which is one of the major CapEx issues that comes on capacity expansion in that business.

So we see for the near foreseeable future something around that level is not starving the business of capital in any way which leads us to a very substantial capital availability. Part of that of course we already have in place, now with dividend program we instituted a $0.08 a quarter dividend in September quarter and have repeated that in the two subsequent quarters. I think you can see that that's a fairly meaningful dividend program but that still then leaves us the opportunity to invest in external growth and we see opportunities, we believe to do so with relatively small sized acquisitions that will complement the Life Sciences business or even technical capabilities in our Brooks product solutions business to advance those businesses.

Unidentified Analyst

I guess we'll open to, if there any questions from the audience? I think we'll stop it right here then.

Martin Headley

Okay. Thank you much.

Unidentified Analyst

Thank you very much.

Martin Headley

Thank you very much indeed.

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