Greetings and welcome to the Brooks Automation Q1 2020 Financial Results Call. During the presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. [Operator Instructions] This conference is being recorded, Thursday, February 6th, 2020. And now I'd like to turn the conference over to Mark Namaroff, Director, Investor Relations. Please go ahead.

Thank you. Good afternoon everyone on the line today. We'd like to welcome you to our earnings conference call for the first quarter of fiscal 2020. Our first quarter earnings press release was issued after the close of the market today and is available on our Investor Relations' website located at brooks.investorroom.com as are the supplementary PowerPoint slides that we'll be using during the prepared remarks today. Before we start, I'd like to remind everyone that during the course of the call we'll be making a number of forward-looking statements within the meaning of the Private Litigation Security Act of 1995. There are many factors that may cause our 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 our 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 that we present today. Also we may refer to a number of non-GAAP financial measures which are used in addition to and conjunction with results presented in accordance with GAAP. We believe that 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 Brooks' business. Non-GAAP measures should not be relied upon to the exclusion of GAAP measures themselves. And on the call with me today is our President and Chief Executive Officer, Steve Schwartz; and Executive Vice President and Chief Financial Officer, Lindon Robertson. We will open up the call with remarks from Steve on the highlights of the first quarter and then Lindon will provide a more detailed look into our financial results and provide a summary of our outlook for the second fiscal quarter of 2020. And then we’ll have time to take your questions at the end of our prepared remarks. And with that, I’d like to turn the call over to Steve Schwartz, our CEO.

Thank you, Mark and good afternoon everyone. We're pleased to report to you results from our first fiscal quarter of 2020. We're off to a strong start to the year with Q1 revenue coming in at $210 million, up 6% sequentially and 17% year-over-year. In the quarter, we began to witness the start of a meaningful uplift in the semiconductor equipment market. And in Life Sciences we delivered performance that was right on plan. Our Q1 momentum supports yet another growth year as we have much confidence in the strength of our markets, the products and services that we've developed to serve these markets, and a very strong customer capture. That said, in the near-term, it's prudent to address the impact of the coronavirus. Today Lindon and I will do our best to articulate to you how we're thinking about our business, what we anticipate in the coming weeks, and we'll share with you a range of outcomes that vary mostly due to uncertainty about timing. I'll now give a recap of our business starting with Life Sciences. Q1 was a solid quarter for Life Sciences as we came in essentially where we'd forecasted. Revenue was $92 million consistent with our guidance and expectations and showing pro forma organic growth of 10% year-over-year. We made significant progress across both subsegments and we accomplished what we intended in order to meet our goals for 2020. I'll start with a review of Sample Management. In Sample Management, we hit our Q1 operating targets that support our objective to return to double-digit growth by year-end and we made progress against the promise for a higher-margin more-profitable business. In terms of our priorities for Sample Management, we're focused on growth and profitability. But before I talk about growth, let me make a comment about…

Thank you, Steve. I'd like to refer your attention to the slides on our website starting with Slide 3 and starting with the key highlights. Growth in the quarter is supported with growth in each business as Steve has highlighted. We saw a 38% year-to-year growth in Life Sciences, which includes the final quarter of the effect of the acquisition. The acquisition of GENEWIZ, which occurred in November of 2018 has been a positive addition to our portfolio profile fueling growth, higher margins and cash flow. The organic growth this quarter for GENEWIZ was 22% year-over-year. Sample Management grew 3%. The Semiconductor business is also ramping as we expected up 13% sequentially and showing 5% growth year-over-year. We didn't experience a decline in 2019 that most Semi CapEx companies did and now we've returned to the range of that prior peak, which is up 5% again year-over-year but is also 25% higher than two years ago. The increase of momentum in this period came from the record shipments of contamination control solutions to chip manufacturers and growth from vacuum robust shipments to our large OEM customers. We had 37% growth in our non-GAAP EPS year-over-year. The highlights driving EPS are really centered around the revenue growth in each business, the growth – the gross margin performance improvement in Sample Management and the profit profile which we added with the GENEWIZ business. Cash flow from operations was strong from our first fiscal quarter, when we pay out our variable compensation for the prior year. The operating cash flow was $26 million in this quarter and this followed a strong fourth quarter of fiscal 2019, where we highlighted $46 million of adjusted cash flow driven from the continuing operations. With approximately $210 million net cash available for operations and investments, we have…

Thank you. [Operator Instructions] And we have a question from the line of Paul Knight with Janney Montgomery. Please go ahead.

Hi guys. It's actually Mike on for Paul. Congrats on the quarter.

Hi, Mike, thank you very much.

So on the sample management side, that's obviously been the one that has been kind of the most volatile that we've seen. Can -- Steve can you kind of just talk to what gives you guys the confidence and the visibility to actually see a continued ramp-up in the other quarters and hit that 7% growth for the full year?

Sure. Yeah, Mike I think you said it exactly right. We had some volatility. We've done a lot to stabilize first the internal operations of the group. I think of making really good progress there. We've added some sales capability and we focus on a couple of initiatives that I just talked about. One the clinical trial samples, we call Sample Hub started to have good traction, good success. And frankly that's back to the sweet spot on our Sample Management capability. We can see real traction in the Cryogenics business. The booking levels are meaningful and significant. And those tools will be delivered through the year. So it's not a sugar high. We get some bookings and we'll distribute the tools out through the year. So we have some pretty good visibility there. And frankly there's just hard work left. We've got some contracts that we're working on that we anticipate will bring in and we want to stay, so that we're not too aggressive on the timing because we don't want to miss on the timing. So I think we have good visibility into what the back half of the year looks like. It will work like crazy to see if we can pull some of that stuff into the current quarter, but we're a little bit more confident about what Q3 and Q4 look like. But again, it's started to build in backlog and a lot of the customer contract activity.

Thanks. And then just on the GENEWIZ front, kind of, it looks like a record quarter there. Can you kind of just talk to, is that a result of just GENEWIZ executing and being such a great business that you guys acquired, or are you starting to see some synergies with a result of combining a Life Science business and your customer base? Thanks.

Lindon and I want to take full credit for everything that GENEWIZ is doing. But, frankly, it's an outstanding team, Mike, and they were on a trajectory. So this is the thing that GENEWIZ knows how to do. They expand, they developed capability, they capture customers and they win business. I think our contribution here so far has been that we haven't constrained capital and we've allowed some of the expansions to take place. In some of the regional labs, we did a pretty significant modification of the laboratory in New Jersey, to allow some of the expansion of NGS. And, frankly, there are synergies that are beginning to show. And one of the things that we haven't talked too much about is, between the Sample Storage business and the GENEWIZ team; we think there are real synergy opportunities there. We started by exchanging leads and customer contacts and meaningfully, now, we're starting to see things transmit between the two organizations that help both businesses. So, again, GENEWIZ has that capability built in. We do think that there are benefits accruing to both sides of the business. And it's our hope and our desire and a lot of energy we're putting in to make sure that we can accrue benefits to both parts of the business, by having them work more closely together, but the teams are doing that organically. And, right now, we're starting to see the kernels of what we think is great promise for us.

Thanks for the time, guys. Appreciate it.

Thanks, Mike.

And our next question is from John Pitzer with Credit Suisse. Please go ahead.

Yes. Good afternoon, guys. Thanks for letting me ask the questions. Steve, I guess, my first question, just on the semi side of the business. You guys had an excellent calendar year 2019, with some sort of company-specific drivers. As we look out to calendar 2020 and just kind of look at the WFE forecast that are out there, you've had two the front end guys come out and give somewhat different views. One talking about potentially as much as 20% year-over-year growth in WFE; the other, kind of, closer to 10%. I'm just kind of curious, how you'd characterize, sort of, just the backdrop of the spending environment? But perhaps more importantly, how do we think about your growth in that context with some of the company-specific drivers?

Yes. Thanks John. That's one of those things that's on our white board every day. But let me do my best here. A couple of things are happening that are just the general growth drivers for our business, whether it's 10% or 20% growth rate. The content in foundry, from 10-nanometer to 7-nanometer, to 5-nanometer and ultimately to 3-nanometer, the content for Contamination Control continues to go up. And I won't say it's exponential, but it's certainly multiplicative in terms of how many tools and how much content we have when the device node shrinks. Just even a consistent level of foundry spend from one year to the next, but from one node to the next, would increase our business necessarily. So a flat spend, for example, from TSMC, but if they went from 7-nanometer to 5-nanometer, a flat spend at the CapEx level would be an increase for us, because they put more of our cleaning tools in, as an example. By the same token, the complexity of the device spend for the vacuum processes for really sophisticated deposition and etch steps and a higher number of -- higher count of those process steps is what we saw in the 2017, 2018, 2019 timeframe where we had a lot more vacuum technology content, so that even in a down semi environment we grew. So we anticipate that those trends are continuing into 2020. Having said that, I'd be hard-pressed to tell you if it's a 10% or 20% number, but if it's 10, we anticipate we'd outgrow that. If it's 20 we had anticipate, we'd outgrow that for the same reason.

So perfect. So just not to put words in your mouth but despite outperforming last year, you don't think that the harder year-over-year compares prevents you from out of performing this year again?

Yeah, John that's a really good question. Just because of the high level of foundry spend, we -- it gives us a lot more confidence. If foundry fell off and we were relegated to the things that weren't high-end foundry, we'd probably be back -- we still anticipate would be higher than the industry. We would probably be closer to it, we wouldn't have such a big gap between our performance and industry performance. It's how we think about that.

That's helpful. And then just on the coronavirus, I appreciate you guys sharing thoughts. I'm just kind of curious, if you've embedded any uncertainty around the virus in the semi business? And is it only revenue uncertainty, or are you trying to curtail expenses in the quarter to match some of the revenue uncertainty, or will you spend regardless? I guess the question being is if the revenue uncertainty doesn't show up is there a lot more leverage in the March quarter earnings?

Yeah. So John let me try it this way. We look at our supply chain and it feels like we're covered for the quarter. And so we don't anticipate issues. We do have things that are -- that China would impact, but we think we've managed those pretty well. The thing that we would not be able to account for is for example if a fab didn't take product or if part of the supply chain prohibited a different supplier who puts a critical subcomponent into an OEM who suddenly can't ship a tool for another reason. They may not need to take our robots for example if they had other reasons they couldn't get tools shipped. But right now, our semi forecast is pretty solid based on how we look at it. And so we don't have much risk hedge built in there on coronavirus, but we are paying close attention. We think our supply chain is secure. But if a customer couldn't open a fab to take tools that would have an impact. And if another supplier had trouble with their supply base and couldn't get components that shutdown the OEMS then that would have an impact on us.

And then just my last question, a pure Life Science question. You guys have done a good job on the gross margin over the last several quarters. You talked about 42% to 44% by 2022. I'm just wondering, if you can talk about the drivers that get you there? And how we should think about the linearity from here to there over that time period?

Yeah, John I'll chime in here. And as you know Steve is managing Sample Management pretty closely nowadays, so I'll give him the option to chime in as well. But our primary dynamic as we said before is really driven -- twofold; one, the growth of GENEWIZ is a natural help on gross margins. And this was the last quarter of a mix benefit just due to the contribution of the incremental acquisition year-over-year. Next year it will be a full -- next quarter it will be a full compare year-over-year on a GENEWIZ mix. But the growth has been faster at this 20%-plus trajectory, so that's a nice mix benefit. But more -- and equally and more impactful is the performance step function that we've been able to see opportunity around Sample Management. Inside Sample Management, it's largely around the product shipments, not the services as much. Service has been pretty stable and nice margins. But the product shipments is significant. And this includes some cost of materials, but more so cost of quality and cost of labor in those quality and/or project management steps. And this is where we've been able to take a fair amount of cost out. I'll highlight that, as we've disclosed before, as Steve stepped in, we did take a senior executive from our development quality, the head of semi development who had already helped to influence the Life Sciences business in the past years, especially, when we were first building the business from the strength of our Cryogenics-based semi business. But he's now stepped in and full-time on Sample Management on the quality side and applying those semi disciplines. It's already seen -- we've already seen the impacts of his actions, but there's still more opportunities laying there to be gathered. So we see more traction. But to really reinforce what we called, is what happened and that is a significant improvement in the systems, the large systems most notably. And then we got another nice benefit as we're ramping this B3 Cryo system. That's really coming from the size of that business and critical mass and improved margins from that, not so much a cost issue, but just on size. So both of these are -- we expect to continue to help in carry us. And this isn't a territory that's completely foreign to us. We had been above 40% three-plus years ago and we've been struggling with this. But, I think, we've really -- we feel confident in the trajectory here, for the rest of the year being above 40s, I should say, above 40%. As Steve highlighted, we struck 41-plus and getting to 42% to 44% seems pretty reasonable for us going into next year.

Thanks, guys.

Yeah. Thanks a lot, John.

And we have a question from Craig Ellis with B. Riley FBR. Please go ahead.

Yes. Thanks for taking the questions. I appreciate that. Steve, I wanted to follow-up on some of the earlier questions on semi to start. First, the example you gave when you talked about some of the strength in the business and maybe it was just directed at CCS, the 7, 5, et cetera, increased content intensity. Clearly, we've got a very strong foundry and logic spending environment now. Is your sense that some of the strength that you're seeing in the business yet is related to memory, or is increased memory spending still in front of the business and something that we see later in 2020 and potentially 2021?

Yes. Craig, thanks. For sure on the CCS side, it's heavily foundry spending right now. And we don't see much at all at this moment from memory. And so, we'll draw our conclusions from that. We do anticipate that some of the vacuum automation systems that we're shipping though are from memory, but it's difficult for us to tell. However, having said that, a pretty significant part is foundry, but the customer base for the CCS products is now more than 70 different customers. And so, we anticipate that when memory does pick up, we'll start to see some of the shift from -- maybe, from foundry goes into memory. But, right now, our understanding is that's still coming behind the pretty significant foundry logic spend.

And how are you feeling about CCS's capacity at this point Steve as you look out over a 12 to 18-month period?

We're meeting some pretty -- we made it through a pretty good ramp and we're not constrained at all. If business picked up 30%, you'd probably hear us growing a little bit. We've got good supply base, a good partner on the contract manufacturing side and they've kept up extremely well. We -- frankly a year ago, we wouldn't have anticipated levels like this, but I think we had enough advanced look in preparation that feels pretty good. So we're about at the levels that feel really good to us. But anytime you get to a threshold like this, you're always thinking about what will you do when you have the next ramp like this or you have to hit these kinds of capacity levels? But we do have room to move, we can't do it quickly. And at the moment there's not a need to do it quickly. We think we've got the current quarter covered as well and it gives us a little bit of breathing room if we need to be able to find a way to add some more systems.

Got it. And then switching to Life Sciences. Thanks for giving us the data point on cell and gene therapy at $20 million last year. Can you just talk a little bit more about the things that Brooks is doing to grow in that area? And how should investors think about the multiyear revenue potential that's in front of the company from a base that is small, but it's clearly getting bigger pretty quickly?

Sure. So Craig, I'll give you a couple of -- I'll give you a couple of data points here, one from the GENEWIZ side, and one from the Cryogenic side of the system and it's interesting. We're starting to see the same customers there and we do anticipate that ultimately there'll be some convergence of opportunity, satisfying the research side, the Sample Management side. One of the things that we're really proud of is that recently and Craig I don't know if this will mean particularly lot to you, but to some of the people on the call it will and I'm working to make sure that it means a little bit more to me as I get a little smarter about it. But GENEWIZ has developed among other things a proprietary technology that's related to a particular virus an AAV ITR, which is a necessary construct for people who are doing research in the cell and gene therapy space and it's extremely hard to sequence through. But the delivery of the therapeutic on a virus is accomplished by this construct and GENEWIZ has a proprietary means by which they can read this construct and it's unique in the industry. And they beta launched it last summer and the acceptance has been overwhelmingly positive. A lot of enthusiastic people participating and that's something we rolled out just recently beyond the U.S. into Europe and China and their reception has been extremely strong. And we see the customers continuing to come to GENEWIZ. When you see us and hear us talk about this incredible customer capture, it's not just the centers for disease control that know about the capability of GENEWIZ, it's the research of who are in and around this space. And when we imagine how big the opportunities might…

That's helpful. And then the last one before I hop back in the queue, Lindon, as I look at the segment dynamics quarter-on-quarter, we've got rapid Semi growth and we're flatter in Life Sciences, unless there isn't that coronavirus risk that you've earmarked. But it seems like there would be a downward drift in gross margin at a segment basis, I'm not sure what's going on, on a subsegment basis, but can you just talk about the puts and takes in gross margin? And then, if you can, what you might see as you look out to the June quarter? Thanks.

Sure. Really, I think, right now, I would guide that in the center of our guidance, we're expecting approximately stable margins on a sequential basis. So Semiconductor, while we're starting to pick up, for example, in systems, it's not as much in the backroom systems. It's not quite broad-based as what we expect to see in the second half of our fiscal year. When that comes back, we expect our gross margins in semi to come back to those levels that we've seen this last year. And in the Life Sciences space, while I expect to have a little bit of benefit – additional benefit in Sample Management, I think, overall, in our financials here, we're counting on just above flat, stable gross margins. And there's a little – there is a bit of question on GENEWIZ in terms of the impact that we carry in the China space on the coronavirus and the impact on operations. So right now we're being -- I don't want to describe it as conservative, I think we're being responsible in the guidance that we've given you around the flat margins.

Thanks guys.

Thanks Craig. Appreciate the attention

And we have a question from Jacob Johnson from Stephens. Please go ahead.

Hey, thanks for taking the question. I would be interested in your latest thoughts on the Indianapolis facility. I think you announced a 20% capacity expansion a couple of weeks ago Just be interested kind of where capacity stands today? And how much is being utilized currently?

Yeah, this is a reinforcement of what's happening in Indianapolis and in the storage footprint. And in -- what's happening is we're pushing the last step of our warehouse space that we had gathered. But I want to put this in the right context. The warehouse space that we have is in a industrial park near the airport. And I mean, it's a nice industrial part. And we had had rights to expand into certain additional I'll call it caves or the next phase of the building. And we expanded one more and we made the investment to fit it out. That fit out includes the electrical and the air conditioning around it and it gives us that 20% increase. Put it in context up until that time since the beginning of when we've owned it in 2015, we've just about doubled the footprint of the site. And so this is another step, probably consistent on an annual basis and reflects the growth that we see. And I'd highlight that I have often described this as a variable CapEx. We take this step of investment in this fitting this up, but we don't put the freezers in until the week before we see samples coming in. So we generally put a few freezers in as the demand is coming in and we have that set up. So some of you have seen photos that I've shown, but it's just empty racks of electrical harnesses ready for the freezer drop in right in a row and that's why I call it a variable CapEx. We don't have idle freezer sitting empty for very long. It's just a few -- it's just ahead of demand. So I appreciate your attention on that side of the marketing releases.

Thanks for that one. And then just one other question, just on 2020 EPS guidance that we put together, first quarter results and the second quarter guidance, it implies kind of a back half loaded year. From your comments, it sounds like you've got some visibility into a strong second half. But I'd just be curious any additional thoughts you have as we think about how 2020 plays out particularly on the EPS line?

Yeah. So I think point number one is there's nothing that we have crossed or seen that takes us off of the viewer trajectory that we planned for the year. So we had always -- if you go back over our remarks, I'll just highlight that we saw the semi through verbal indications of what was going to happen from the time prior to our Investor Day that we would -- and we had a very strong order load in September, all around contamination control, gave us a good sense and additional groundwork for discussions on what would happen on our other customers. And so while orders don't come in generally until the quarter before in semi, it gave us a strong indication that the first half was going to write on contamination control. And we were starting, we were really pleased to see the start of the ramp in September and then again in December of the Tier 1 OEMS, which confirmed everything that you would be hearing in the market as well. And meanwhile, we also shared with you that the systems business, we didn't anticipate would be coming back inside this first half, that it would be more of a second half comeback, possibly start to tip up in March quarter and on the hold, this is exactly what's happening. So we have confidence in that. And so, as I included in one of the other questions, I'll comment, again, with that coming back, we do see improved margin profile in that Semi business in the second half, because the Systems business and the more broad-based Customer business, both -- even in Contamination Control, but especially around Systems, will provide us a little broader and more robust gross margins to leverage with the growth. Now on the…

Got it. Thanks Lindon.

Yes. Thank you.

And, I believe, that's all the time we have for questions. I'll turn the call back to Lindon Robertson, CFO.

Yes. Thank you very much, Scott. And we so appreciate the attention and the interest that we get. And we always see a significant amount of interest immediately after the calls as well and we welcome that. Mark Namaroff introduced the calls for us here, but he's active every day with our investor family. We invite you to call in and reach out to him. You can find his contact on our IR website. And we look forward to seeing you through between now and the next quarter, but certainly look forward to seeing you on the next call. So thank you very much.

That does conclude the call for today. We thank you for your participation and ask that you please disconnect your line.