Greetings, and welcome to the Azenta Second Quarter 2024 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, March 8, 2024. I will now turn the conference over to Yvonne Perron, Vice President, FP&A and Investor Relations.

Thank you, operator, and good afternoon to everyone on the line today. We would like to welcome you to our earnings conference call for the second quarter of fiscal year 2024. Our second quarter earnings press release was issued after the close of the market today, and is available on our Investor Relations website located at investors.azenta.com in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the safe harbor slide on the aforementioned PowerPoint presentation on our website and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. We may refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. On the call with me today is our President and Chief Executive Officer, Steve Schwartz; and our Chief Financial Officer, Herman Cueto. We will open the call with remarks from Steve on the highlights of the second quarter, then Herman will provide a more detailed look into our financial results and our outlook for fiscal year 2024. We will then take your questions at the end of the prepared remarks. With that, I would like to turn the call over to our CEO, Steve Schwartz.

Thank you, Yvonne. Good afternoon, everyone, and thank you for joining us today. I'd like to start off by welcoming Yvonne to her new position as our Head of Investor Relations. Yvonne is steeped in the knowledge of all aspects of Azenta by virtue of the fact that she's also been the leader of our global FP&A function for more than a year, and we're fortunate to have her leading IR here at Azenta. And Sara Silverman, who many of you have gotten to know, has moved to become the CFO of our Multiomics segment. And of course, she's flourishing in that role as well. Before we get into the quarter, I want to address the announcement that we made in addition to our earnings release about my decision to retire as CEO after more than 14 years at Azenta. This decision follows the discussion with the Board as part of the company's active succession planning process. To ensure a smooth transition, I will continue to serve as CEO until a successor is appointed. In the meantime, the Board has initiated a search to identify my successor and has engaged Heidrick & Struggles, a leading executive search firm, to assist in the process of identifying and evaluating candidates. I'm confident now is the right time for a transition and the Board agrees. During my tenure, I've been fortunate to work with the incredible people from whom I've learned much, and together, we accomplished some incredible feats, including transforming from semiconductor capital equipment company, Brooks Automation into Azenta, a stand-alone publicly traded pure-play life sciences company. We've delivered outsized shareholder returns and yet it seems like we're just getting started. Azenta, we believe that's the way all companies should feel. I also want to express my gratitude for the strong support…

Thank you, Steve. Before I begin to discuss the quarter, I would like to add my thanks to Steve for leading Azenta for so many years and positioning the company where it is today. Steve, you will be a hard act to follow and I, like many others, I'm grateful for the leadership and collaboration you've shown me since I joined. And with that, let's begin the review of the quarter. Good afternoon, everyone. As I shared with you in March, we are building the company for scale and growth and the actions that I'm going to talk to you about today will certainly bring that to light because things are moving at a terrific pace. Let me begin with the $111 million noncash goodwill impairment charge we recorded in the quarter. This is related to the B Medical segment and is due to the reduction of the long-term revenue growth rate, which had included a contribution from the non-vaccine cold chain products that we are exiting. This is part of operationalizing the strategic portfolio shift that we outlined at Investor Day. The singular focus on vaccine cold chain enables a more profitable B Medical segment as we move towards its strategic intent of sample acquisition. Before I get into the quarterly results, I want to spend some time discussing Ascend 2026, the transformation program that I introduced at Investor Day in March. I am very excited to announce several key milestones beginning with our portfolio simplification initiatives. In the second quarter, we exited B Medical products in the U.S. market and announced the wind down of the sample sourcing product offering within our Sample Management Solutions business. Within our site optimization initiative, we have successfully exited 7 locations with another 2 to be completed in the very near term.…

[Operator Instructions] And our first question will come from the line of David Saxon from Needham.

And Steve, congrats on all you've accomplished at Brooks and Azenta, and I hope you enjoy retirement.

Thank you, David.

Yes, of course. In terms of questions, maybe just 2 from me. Maybe I'll start probably for Herman. Just on the B Medical guidance, you're bringing that down. I just want to understand how much of that is driven by the DRC contract? Maybe getting pushed out to fiscal '25 and kind of how much of that is driven by just the rest of the pipeline and timing in that part of the pipeline?

Yes, David, thank you for the question. It's a combination of things. The DRC is certainly a part of the takedown. If you recall back to the Q4 call, in November, I explained that DRC was already in the pipeline, but not at the magnitude of $60 million. That size, that $60 million certainly bolstered the pipeline up. But the fact of the matter is we removed DRC from our current guide. We still feel good about the order, but unsure about the timing. In fact, we continue to work closely with the DRC as part of our sample acquisition strategy. So talks are progressing, but the timing of the $60 million is still an open item. The exit from the U.S. non-VCC market is also a factor. And I would say, the combination of DRC and the exit of the U.S. market in non-VCC are key contributors to the takedown.

Okay. That's helpful. And then maybe this is for Steve, I think. So for SMS, one of the questions I get from investors is about the large stores growth. And how much of that is being driven by just working down the backlog? So can you talk about the backlog and the order pipeline there? And what you're seeing that gives you confidence that the backlog can continue to grow or at least be replenished? And I know it's early in the BioArc Ultra launch, but how significant could that be to the backlog and the durability of large stores revenue growth?

Yes, you bet. Thanks, David. Yes, it's really an interesting period for us. And every quarter, we're stop being surprised by the magnitude of the orders that are coming. So the backlog continues to build even as the revenue growth. So we're -- we think we're in a good position from that standpoint. Actually, the large stores revenue year-over-year grew 50% in the quarter. So it was particularly strong and the backlog continues to grow. In terms of the BioArc Ultra, we're -- we went through a factory acceptance test couple of weeks ago. As we mentioned, I was fortunate to be there when the customer was there, and that was a pretty nice event. That's a massive store and a capability that they'll receive here this year. And our conversation pipeline is really strong. So there's a high level of interest there for all of the large automated stores. So -- to summarize for you, I think the activity level is as high as we can remember, the revenue increases so too to the bookings, the backlog continues to be really solid. So when we talked about a solid backlog 12 months ago, we have more backlog now and the revenue continues to grow. So I don't know how long this is going to be, but we also talked about additional vectors, not just the particular samples for biological studies, for population studies, for rare disease, but rather, we're seeing now these additional vectors for manufactured products, which also continues to be strong. So good environment for large stores, and we continue to see a healthy backlog. So when we when we look at what the next 12 months look like, we feel pretty confident in our ability to forecast that business.

Our next question comes from line of Jacob Johnson from Stephens.

It's actually Hannah on for Jacob. First, you all have done a really good job guiding quarterly for B Medical. Is there anything you can do to better forecast B Medical revenue over longer periods of time?

Let me -- this is Steve. Let me try it a couple of ways. We look at a number of things, including the sources of funding, which actually -- this is Gavi [indiscernible] and the various funding organizations who do put out their projections for how much they're going to invest in some of these. And that represents about half of the business. So we get a pretty good idea in the -- with the 12 months' notice as to what we think is going. Of course, we have to win our share of that business, but we're -- we have high market share. So we're pretty steady there. And I would say that it's the other half of the revenue, it's a little bit tougher to call. Again, when Herman mentioned that when we know we've won business, we generally won it. The timing, in particular, is pretty hard. So when we guide the business, I think at the -- at our Investor Day, we guided the business after we took out the Med Ref and Blood Management Systems that fiscal '23 was around $100 million. We guided our multiyear plan toward low single digits. We have a pretty good sense that that's going to be it. So when we look at the business right now, just the vaccine cold chain portion to be around $100 million every 12-month period, plus a little bit of growth built in feels like the right way to do it. I won't tell you that we'll be able to nail it from that standpoint. But generally, if the funding agencies don't fund, then they've missed an opportunity. They've missed what the people who contribute that money have asked them to do. So that part gives us some -- a pretty good feeling that it will get spent. But right now, we're looking at that business in 100, 100 plus a little bit range. And we feel pretty good about what it looks like over a 12-month period.

Great. And then also, Steve, congrats on all the accomplishments on your upcoming retirement. What are the key criteria the Board is looking for in a new CEO?

Gosh, I don't know, but they're -- Hannah, here's my thought on that. This is a really excellent company. And if you ask any one of us, everybody will tell you the same. I think they're going to -- I know they're going to look for somebody who's going to keep the strategy alive and just continue to take advantage of what we see as tremendous market opportunities. And I'm really eager to see who can step forward. My background wasn't here. And there are a lot of people who are really equipped to just do excellent things with the company to work with this team. I think the Board is in the process, again, that specification defined, and I'll be really excited to see who they bring and be very supportive of that transition.

Our next question will come from the line of Vijay Kumar from Evercore ISI.

Steve, you'll be missed. Wishing you all the best. It's been quite a journey.

Vijay, we had conversations a long ago. So yes, it's been a long time at it.

Yes, the transformation is complete. So wishing you all the best. I had a few questions here. On guidance here, Sample Management, I think, in the first half, we've done low singles. Is the third quarter guide assuming low single sort of sample management and I think that would imply double digit in Q4, am I thinking about it the right way and what drives the 3Q to 4Q step up?

Yes. So Vijay, SMS in Q3, I do have a firm order in hand right now that I pushed into Q4. It's worth a couple of million dollars. We have a minor supply chain delay that we expect to have resolved in May or early June. But I don't want to say I could do something and then end up not being able to deliver it. So I pull that order or push that order into Q4. So that's -- so there is a step up. That's part of the reason you see it.

I see. And for 3Q, Herman, am I thinking about the right way, Sample Management is up low singles?

Yes. It's -- you're certainly thinking about it the right way, Vijay, yes.

Understood. And one on the NGS side here. Steve, I want to make sure I understood this correctly, right? Total NGS, I think, you said was up slightly. With North America, it looks like flat to down. Europe, up significantly. What's driving this disparity from a regional perspective? And is that the transition to the NovaSeq X? I think at your Analyst Day, you had a slide on the amount of data being generated on the NovaSeq X. So is now at this point in time, the transition complete and should we expect NGS to grow in the back half?

Vijay, our history would say that. But -- so let me do it in a few pieces. We've shifted almost all of the NGS to the NovaSeq X Plus, and we're running at 3 sites. We have most of the -- we have the majority of those tools in North America. This is customer business level. So the strength in Europe is, again, offer a little bit of a smaller base. In North America, it's the funding levels that are consistent with the rest of the business, consistent with also what we've seen in Sanger. But indeed, when we look at history, we've taken a 2 or maybe 3 quarter dip sometimes as we get the volumes up, as we get calibrated on how to run the new tools. But already, we're in a little bit better spot just on the second quarter of this transition, holding and improving actually gross margin and holding the revenue flat during the transition. So it feels pretty good. So we like where we are in the cycle. And we'll just keep reporting every quarter to let you know how we're doing. But if you compare where we were in the last 3 transition cycles, we're a little bit ahead of where we were in each of those transition cycles.

That's helpful, Steve. And maybe one last one, Herman. EPS was raised by $0.08. It looks like all of it came from below the line, right, between tax and lower interest income. You lowered your revenues. Is the implication here your margins are stepping up? I'm just trying to understand if the margin expansion didn't change and your revenues came down, what's driving this EPS increase?

Yes. So Vijay, what I would say is let me begin with sales. If you look at -- and you could see this math and you're already doing it, we have a step-up from Q3 to Q4. That will be in the neighborhood of about $20 million. B Medical is about $4 million of that step-up. And based on prior quarter's performance, we could see some of that come in Q3. In SMS, as I just described to you, there's a couple of million dollar order that we have in hand that could be delivered in Q3 if we get the parts that I pushed to Q4. In Multiomics, if you remember, we started to see the pricing pressure in Q4 of last year. So we expect to cycle through those headwinds as we exit Q3 and head into Q4. And beyond that, we have businesses, as you were just talking to Steve about, stores and storage that are growing nicely for us. And consumables, as we talked about in the prepared remarks, are on a very positive trajectory. In the middle of the P&L, we talked about 9 site exits. There are other plans underway right now that reduce the footprint of sites even further. And beyond that, we're making really good progress on our organization simplification initiatives. So the way I would think about it, Vijay, is the combination of the GP drop on the sales step-up and the Ascend 2026 programs, it gives us the line of sight to the EBITDA and EPS that we're guiding. I hope that's helpful.

And our next question will come from line of Yuan Zhi from B. Riley.

Steve, it has been great working with you, and thank you for your contribution to introduce this automation to biologic sample management.

Thanks, Yuan.

Maybe a couple of questions from us. Just a clarification for the lower guidance. Herman, was it mainly coming from the lower revenue guidance from B Medical? Or were there some other factors in this aspect?

No, it was B Medical. We reiterated the full year guide for both Multiomics and SMS.

Got it. And then maybe we take a step back here, so with lowered revenue for 2024 and then some accelerating of business here, what does this mean to the 2025 and 2026 guidance on both the top line and bottom line?

No, I don't think it changes anything, Yuan. When we think about SMS and Multiomics, we continue to feel really good about those 2 businesses and the trajectory that they're on. As we talked about, large stores grew 50% this quarter and new vectors in Multiomics are starting to contribute nicely to the top line. And in Multiomics, we're growing when everybody else is down. So we feel really strongly about those 2 businesses. In B Medical, as Steve reminded everybody, when we were at Investor Day, when we removed the non-vaccine cold chain product lines from the starting point of B Medical, fiscal year '23 will be about $100 million. And we said that business will grow low single digits. And we feel good about that, especially when we look at the forecasted funding projections that actually enable vaccine cold chain. Timing, of course, is always a question.

And our next question will come from the line of Matt Stanton from Jefferies.

Maybe one on China. Mid-teens growth in Multiomics was nice to see. Clearly, it's been a challenging market for the broader tool space. Can you just unpack a bit more what you're seeing in China, what's kind of underpinning that demand and then what you're penciling in, in China for the year?

Yes. So Matt, this is Steve. When we look at China, there's been really outperformance for the past 4 quarters. We've been in double digits growth in China when the market has been down significantly each of the last 4 quarters. I'll give you a couple of things. One, being in China is serving Chinese customers is a big deal. We're right in the middle of Suzhou and there are hundreds, if not 1,000 life sciences companies close by. We're staffed with really outstanding scientists and really aggressive sales teams who serve the customers particularly well. When the GENEWIZ team was founded and all the way until we acquired them and beyond, their driving force is solid science, superior service. And I think they really apply that in China. And so as other competitors have struggled, we picked up that business. And as we build capacity, we have a new facility there. We have an enormous amount of capacity built into China. It allows us to also serve larger customers because we have the capacity to take on contracts that we couldn't when we're a smaller entity. So I think it's just aggressive sales and huge capability that allows us to be successful in China. Similarly, it's where we perform our synthetic biology. So the Synthesis business is from China, and as we've built capacity and capability, they serve most of our global capacity. And I think just the better they get, that's a market that's booming for all of us. There's a lot of business to be had. We continue to win it by serving the customers with high quality and fast churn even though we do it in China. And I think that's proven to be particularly successful. So better business in China, for China and from China for the rest of the world, both businesses are doing particularly well.

That's helpful. And maybe one on instruments, which remain a bit challenged. Any signs you're seeing that we're at or near the bottom, whether it be orders, just kind of a change in conversations with customers? I guess, any more color or visibility on when things could improve and maybe return to growth, understanding they start to go up against some easier comps there, too?

Yes, that's -- you said instruments, you mean the Consumables & Instruments part of the business?

Yes, exactly.

Okay. Because yes, instruments for some people is our tools business also. I think our Stores -- Storage businesses are particularly strong. On the Consumables & Instruments, Herman mentioned that we saw a pretty strong uplift in orders towards the end of the quarter, and they came in time that we couldn't necessarily get them all solved. I will tell you that we could feel the momentum starting to pick up. And if anything, I think we had anticipated the orders coming a little bit earlier in the quarter. But in general, we're positive that we're out of depleted backlog situation, people are starting to take supply now. So we don't have the proof points in front of us right now, but we've got a good order pattern here in the near term. And it feels like that we're up off the math here in the Consumables & Instruments business. Herman, anything to add?

Yes. I mean, maybe, Matt, just a little bit of color. Revenue and bookings for Instruments in the quarter was soft and we saw capital spending continue to be constrained. However, the pipeline continues to look really strong, indicating that demand is healthy, it's just tied up in spending delays. And on the consumables side, it was very strong. We saw significant double-digit sequential and year-over-year increases in bookings. And the bookings number in Q2 was the highest that we've seen since the pandemic. So the instruments are caught up in capital funding. That hasn't changed. We do hear that biotech funding, as an example, is starting to loosen up. We expect that there will be a lag there between that funding starting to happen and orders coming through. So we're just right in the same way as everybody else on that instrument side.

And I'm not showing any further questions in the queue. I'd like to turn the call back over to Herman for any closing remarks.

Well, thanks, everybody. I appreciate you joining the call today. I want to have to say a big thank you to Steve for leading this wonderful company for 14 years. We look forward to working with you over the next several months until your successor is identified. Big shoes to fill, as I said in the prepared remarks. But thank you to the 3,500-plus employee associates around the world. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.