Greetings and welcome to the Brooks Automation Q2 2021 Financial Results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Monday, May 10, 2021. I would now turn the conference over to Sara Silverman, Director of Investor Relations. Please go ahead.

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 2021. Earlier this afternoon, we also issued a press release describing plans for separating our company into two independent publicly traded companies – one for our semiconductor business and one for our Life Sciences business. We will use this call to also address this important announcement. Both press releases were issued after the close of the market today and are available on our Investor Relations website located at brooks.investorroom.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 such 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 Brooks business. Non-GAAP measures should not be relied upon to the exclusion of GAAP measures themselves. 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 the call with remarks from Steve on the announced separation and on highlights of the first quarter. Then Lindon will provide a more detailed look into our financial results and our outlook for the third fiscal quarter of 2021. We will then take your questions at the end of the prepared remarks. With that, I would like to turn our call over to our CEO, Steve Schwartz.

Thank you, Sarah. And good afternoon, everyone. I ask you to please refer to slide 3 of our presentation materials as I begin my remarks. This is a big day for Brooks and for our shareholders. We just announced perhaps the most meaningful strategic action since our decision to step into the life sciences market almost a decade ago by declaring our intention to separate the Semiconductor and Life Sciences businesses into two independent publicly traded companies, a move that we believe will allow each of the businesses to flourish independently and pursue even more growth and profitability. Additionally, and I hope not completely overshadowed by this news, we'll use some of our time to report to you on the highlights from an outstanding second fiscal quarter, results that continue the momentum of our performance over the past several years and a reinforcement that this separation is the right strategic move, and that now is an appropriate time for such a structural change. I call your attention to slide 4. As most of you are aware in 2011, when we were a pure play semiconductor capital equipment company, we made a strategic decision to utilize our core automation and cryogenic technologies to address customer needs in the life sciences market, thereby growing a new business. Over the years, we made several acquisitions and significant investments in new product development to capitalize on a life sciences market need for critical sample management. We started by solving the challenges of automation in cryogenic environments and then we engineered systems and consumables products to ensure the fidelity of critical biological samples throughout the entire cold chain condition. Ultimately, we added capability for interrogation of the samples with high quality genomic measurement solutions to complete the full sample to answer workflow. With our focused…

Thank you, Steve. We will continue through the slide deck, transitioning now to the financial results charts for the second fiscal quarter starting on slide 13. In light of the announcement, I will clarify for everyone that we will continue to reflect the total company results just as you are accustomed to seeing them until the separation culminates, which we expect to occur by the end of the calendar year. As we go through the details, you will see that our record revenue of $287 million and 30% year-over-year growth as well as our record level non-GAAP earnings per share of $0.61 in the quarter came from strength on both sides of the business, underscoring two strong business models with margin expansion and good cash generation. When you look at a trailing 12-month snapshot of our business, the results are quite impressive. As you may have noticed in Steve's charts, we crossed over the $1 billion revenue mark for the past 12 months. I would also add that, over the same time period, compared to the prior 12-month period, we drove 400 basis points of gross margin expansion, 620 basis points of operating margin expansion, and we generated over $150 million in operating cash flow. Moving on to slide 14. Let's go into the details. With revenue up 15% sequentially and 30% year to year, the GAAP earnings per share from continuing operations was $0.32, up $0.20 year-over-year, but down $0.04 from the prior quarter. Before explaining this, I'll draw your attention to the same earnings per share line under the non-GAAP side, which shows 30% increase sequentially. I'll call out the primary drivers of the differences here as we step through the GAAP side on the left. On the gross profit line, we were down 90 basis points quarter…

[Operator Instructions]. First question is from David Saxon with Needham.

First, just on the split, you kind of lay out some points in the slides. But can you talk a little bit more specifically about how you plan to kind of augment the strategy specific to the Life Sciences business? And if you think you can – following the split, if revenue growth and margins could be above what they would have been if you kept as a combined company. And then I have just one follow up.

We appreciate you picking up coverage this quarter. Let me comment first and then I'll have Steve chime. One, we have maintained over recent years, as we grew both businesses, that we hadn't sacrificed investments to date in either business. And I think it's fair to say we wouldn't look to the past year or past two years and say, gee, we could have done better because we think we've dealt with it in an unconstrained – we didn't make trade-offs between the two as of yet. We're at a point now where the strategy in the Life Sciences and the strategy in the Semiconductor business could certainly, in your words, has augmentation – or in our words, has additional growth vectors to exercise. And so, those that Steve outlined in the Life Sciences space, and certainly take us to the sample base service area, including the focus on aggregating sample data, helping to service customers perhaps in that realm. And certainly, the acceleration in science advances of viral vectors, et cetera, point to a lot of service offerings and, I'll say, expansion of value that we can provide to the customer base. So, the separation in itself doesn't slow us down at all. If anything, it provides that concentrated focus and capability to move forward in that space, whether it be organic or inorganic, and we'll have management team purely focused on that. So, we don't think the separation affects that opportunity. And in fact, we think this juncture is timed just right because if we were trying to move forward, let's say two more years, we may start seeing things start to compete with each other in terms of attention and focus. But right now, we think in this coming timeframe is good timing.

David, this is Steve. We're confident that with two rapidly growing businesses, good cash generating capability, and a strategic roadmap is one that we can satisfy. So, we're really enthusiastic about the future. We think the separation allows both companies to go even at a faster pace in terms of growth. And I will say, from the standpoint of inorganic and the organic investments, just the innovation that we have in our own pipeline, we have two groups that are really enthusiastic about what the future looks like.

My second question is just on GENEWIZ. It sounds like NGS and synthesis are seeing some very strong demand. And as you noted, Sanger is starting to lap some easier comps. But just given the demand in NGS and synthesis, how should we think about growth in the back half? And then, just given that, these carry favorable margins. How that kind of plays out in the gross margin. Thanks so much. And congrats on the quarter and the news.

On the growth path, we have a pretty fast turn business. So, we don't have a lot of visibility beyond where we are. But what we find is, the more business that we win, the more that we satisfy in a high quality, timely fashion. We get repeats from those customers. And we actually did add hundreds of customers again this quarter. So we're really confident about the current position and the capability. And you'll see that, over the past couple years, we've made a significant amount of investment in lab capacity and capability. We've been hiring some really skilled employees to help us continue to satisfy the demand. So, we feel really good about the continued growth in NGS, synthesis and Sanger, actually, but the opportunities that exist in synthesis and NGS are more significant. And as long as we're staying in front of it, we anticipate the business will keep coming at the rates that we've seen so far.

David, I'll pick up on the margin question. And it's a good opportunity for me to interject some thoughts here on the guidance going into the Q3. I won't comment on the whole year so much, but I wouldn't expect things to change significantly. But interestingly, I'll start with the services business where you were – the services gross margins, we're seeing really good stability going into the third quarter. And so, it could be approximately flat, could be a little bit positive, in fact, in our projection. In the products business, we actually see stability as well, as we do in the Semi business on the other side. And when it's all added up, I think the underscoring description is we're seeing stability and gross margin structure as we go from Q2 to Q3 overall. And that's what's inherent in our guidance equation.

[Operator Instructions]. Our next question is from Patrick Ho with Stifel.

Congratulations on the announcement. And this sounds like a really exciting way to extract value for all Brooks shareholders. So congrats on that. Steve, since I only have you for a few more quarters on the semiconductor side of things, maybe I'll start off with this on that business. And you talked about the growth in the contamination control business and also in terms of new opportunities. You've talked about memory in the past. Would it be fair to characterize some of the emerging opportunities coming more from DRAM given the challenges and the new manufacturing processes that are going on in DRAM that require higher levels of contamination control?

Patrick, indeed. I think probably the last quarter and the current quarter for sure, the order patterns, it's the first meaningful slug, if you will, in memory application. So, we are starting to see that. Some of the design wins we referenced are for DRAM and for memory application. So, we don't know where it goes. But we had anticipated that the growth would begin more meaningfully. It won't be still like tier one foundry, but the density of tools in a DRAM fab has begun. And indeed, we're starting to see it.

As my follow-up question on the Life Sciences, you talked about strong growth from both existing as well as new customers on the services sides of the end, which includes your GENEWIZ business. Would it be fair to say that the strength at least near term is coming from more existing customers and that the new customer attraction "is still forthcoming," or was it balanced more so this past quarter and going forward?

Patrick, the majority of the business always comes from existing customers. We usually get a toehold and we start with customers and the business builds over time. So, when we talk about new customer wins, those are really important to us, but quarter after quarter, those become more meaningful. So, we treat them as equally important. So, when we win new customers, they're precious because they're the ones who turn out to be really significant customers in six or eight quarters. But the majority of the business is from existing customers and the balance has been great so far. And the fact that the GENEWIZ team brought to us thousands of customers, it's really expanded the touch points and the number of offerings that we can bring. Putting the services business together with the GENEWIZ and SRS together under Amy has started to generate some meaningful synergies. And so, we're taking full advantage of customer capture to share some of the offerings across the SRS and the GENEWIZ space.

Our next question is from Jacob Johnson with Stephens.

I'll add my congrats as well. And I'll ask another question on GENEWIZ. Obviously, GENEWIZ posted really strong growth. Maybe asking this a different way, can you just talk about what end markets or customer types are driving the demand you're seeing in NGS and synthesis? How much is biopharma versus academic? And maybe any comments about how this has or has not shifted over the last couple of years?

Jacob, it's a tough one to answer because we do have thousands of customers. So the mix isn't moving appreciably. But what I will tell you is, in the earliest days of COVID, we saw a pretty significant shift from existing customers into the research on the virus. And then, as we continue to work on synthesis and on testing, we saw it move more toward the vaccine development. But these are – because the customers have shifted their work and their research activity. So, same customers, different activities. And we're particularly strong in the academic space and the research space. And we haven't seen any changes there. Again, the customer capture remains really strong. So, in terms of mix, it's not appreciably different from a customer standpoint, but the kinds of work that we've done have shifted with the necessity of the shift in the research.

I guess my other question, we've seen some other companies get into the freezer product business. Can you maybe just remind us the competitive advantage of your onsite freezers, which I think is largely around automation? And then second, maybe talk about the near-term demand trends are seeing for that business? Have you seen any impact as we reopen yet? And then, maybe also just touch on the longer-term demand for freezers given what's going on in cell and gene therapy and broader biologics?

You're exactly right. There are a lot a lot of freezer companies. A lot of freezer capacity. A lot of ways to get a sample cold. We really believe that the automation adds tremendous value. We think the fidelity of the sample is critical. The history of it, the provenance of the sample, how many times it's been removed, did it ever thaw, we think those are critical to the samples. And the longer samples are held, the more that history is important. And it's just impossible to do with the hundreds of thousands of freezers that are out there in installed base and I think what people are finding is the records of that capability are proving to be essential in terms of the value of the sample. So, indeed, there's a lot of freezer demand. And we continue to believe that the automation is a critical part and our customers believe that too. And I think that's what's helping us to continue to drive the business. So, that's particularly important to us. And we have an entire range actually from room temperature automated samples just from the automation standpoint for the simple handling and location, as you know, all the way down through cryogenic temperatures at minus 190 degrees C. And again, automation is a non-trivial capability, but it's an essential part in the value of a sample.

Our next question is from Craig Ellis with B. Riley.

To start, I'll echo the congratulations, guys, to the long term evolution of the business and the juncture you're at now where Semi and Life Sciences can spin out. And no offense to you guys, we love having you around, but it'll be great to hear from Dave and Dave quarterly as well. So, the first question I wanted to ask, Steve, is, can you just go into a little bit more detail on the point you made about Semi's bookings and design win activity? So, very, very robust bookings at $286 million? And then design wins very strong. On the Semi side, are you starting to see more order pipelining? And is that contributing to the rise in bookings? Or are we just at a point where the half on half inflection that's coming into the business is going to be just exceptionally powerful here?

Craig, it's tough to call. But for us, it feels like we're really going to ride a powerful wave here. The bookings were really strong. They haven't subsided so much coming into the quarter here. The requests of all of our customers about making sure that we have adequate capacity continue to roll in. We do have concerns generally about capability of the supply base even though we've been able to keep up without any issues. But if the kinds of requests that are being put on to the industry persist and then the growth continues, ultimately, it'll creak a little bit here over the coming quarters. But the demand is robust. It's from a really broad base. We're just now seeing memory pickup, which is adding to an already strong foundry and logic environment. And again, Craig, as you know really well, we have not just North American OEMs as our customers. We're a seller of capability around the world. We have a lot of Asian equipment makers who are gaining share in Asia, and it continues to drive our business. So, the footprint and the global presence we have continues to sustain us above what might be reported by some US publicly traded companies.

Just on one of the points that you made in prepared remarks on CCS, I think we've expected that there would be a coming inflection for memory in CCS, and we've certainly seen some advanced node DRAM projects announced and those [indiscernible] as we look ahead and as we look inside some of the bookings activity, are you starting to see increased CCS activity within memory too?

We're starting to see memory add on to the growth of the – breadth of the business that we have. And I mentioned in the prepared remarks, in the fall of 2019, we're working to get our factory capacity up in a pretty fast ramp to a new level. And we're at that again, making sure that we have adequate capacity because we see another high watermark coming for CCS. And a lot of that is fueled by this expansion beyond just the foundry, but also into memory now.

Lindon, for you. Helpful color just on the gross margin characterization. Stability makes sense. Although, I might argue that volume in both businesses could suggest maybe something that would be up sequentially. So, maybe you can touch on why that would be the case. But the real question is on the intermediate term view for Life Sciences. I think we just put up our third consecutive quarter of 50% or better gross margin. So, are we now to a level where – or at a time where you think 50% is really a sustainable number for that business?

First, on the sequential, you're right. In a ramp, we generally do see momentum with revenue in the gross margin line here. Here's the difference. In the coming quarter and this guidance, more of our upside – we're not slipping away in our manufactured product, but more of our upside is in CCS on the sequential guide and it's a product that we manufacture with the help of an outsourced partner. And so, it will be certainly nice incremental revenue at the gross margins of that structure, but doesn't contribute further to the absorption that we've seen the benefit of the last two quarters of the ramp. So, we're at a good stable point in our manufacturing ramp internally. We're positioned that we could do more, but right now our guidance contemplates more stability on our manufactured product and more growth on our outsourced product. So, that's why you're not seeing quite as much as you might expect in this kind of brand going forward. That doesn't mean that we wouldn't see it towards the end of the year or into the into next year because I think the robustness is there for the business to continue to expand. I will highlight that we're very focused on ensuring capacity in the semi manufacturing space in-house, as well as in our partner. But in house, both space wise and resource wise to make sure that we can ramp going forward. And certainly, your question would convey in the later quarters. On the Life Sciences question, the intermediate term, the 50% is something that – I don't want to say that we wouldn't expect it going forward. We think that it's probably going to be centered in that 49% to 50% and 50.5% range. We keep this latitude – and I've been…

Next question is from Paul Knight with KeyBanc.

Can you talk to – besides the improved financial performance in Life Science, what happened or what did you see the markets that said it's time to do the spin?

Paul, a couple of things. One, we had – as you remember, it took us a while to get to a cash generating position in Life Sciences. And we've been there for the better part of almost two years. The size is pretty significant and the amount of investments that we need to make to stay in front of the opportunity, we think, those are short cycle decisions. We're pretty aggressive about expanding capacity and capability. And the team has really demonstrated that they're able to capture everything that we invest in. So, that's been pretty successful. At the same time, we have a Semi business that has its own trajectory and its own investment patterns. And when we looked at it, we looked at the balanced opportunity here to stand up two companies and make sure they didn't compete for capital. We think it'll keep them both on really significant growth paths. And if anything, allow them to both accelerate by not sharing a balance sheet actually, by each having their own independent balance sheet. So, size, scale and overall capability of a Life Sciences businesses that's now running at a $500 million run rate, we think, made this a really right time for us to stand that business up.

It does look like the industry is clearly doing more M&A in life science. Do you hold that view?

I think so. We believe so. The pipeline is good. There are a lot of good opportunities and a lot of good growth potential, both for the organic investment that we're making, but certainly from an M&A standpoint.

You had mentioned in the call that you add a major biopharma customer. I understand that you've done Lilly in the past. Is this customer an incremental new one in terms of sample management?

It is. We talked about a win we had a quarter ago, the samples started to come in now. So, this is a brand new customer for us. And it's a really significant one. I think you'll remember at the Analyst Day we had in September of 2019, we talked about doubling down and looking for more large customers, who would give us considerably more of their business and trust samples to us. And it turns out this customer has not only given us samples to manage, we also had pretty significant large automated store wins to manage their chemical compound collections as well. And the magnitude of that win was even more significant. And that's a couple of years project that we're about halfway through right now. So, it was a major win for this large pharmaceutical company all the way around. Biological samples are heading into Indianapolis and Griesheim and large, automated store to their – to one of their central research sites.

When does the China GENEWIZ facility come online?

It should be online by the end of the calendar year. And we have overlap with the other buildings into the beginning of next calendar year to ensure a timely transition.

Next question is from John Pitzer with Credit Suisse.

I'll add my congratulations. Steve, I've got a couple of questions on the Semi business and then a couple on the Life Science. Just on the Semi business, when you look into the fiscal third quarter and the guidance you're giving, is there a sense that you can give us as to what WFE level that equates to? Is that sort of a $75 billion level? Is it an $80 billion level? How are you viewing that? And certainly not for this year, but especially as you think about sort of government involvement and the desire to regionalize capacity, can you help me better understand kind of what portion of your Semi business is tied to new fab builds versus sort of equipment installation? Because, clearly, I think, on some of the automation products, you should benefit a little bit early? How do I think about brick and mortar versus WFE within your semi mix?

John, a lot of questions there. So, the first one, it'd be hard for us to imagine that it's – how to pick the WFE number, but it sure feels like it will be consistent with a $75 billion-ish level compared to order patterns that we've seen in the past. And the best metric for us is simply a full count, if you will, for some OEMs. And so, when we compare run rate one year to run with the next, we'd say it's pretty consistent with the $75 billion spend. But I couldn't put too much precision around that. But we'd say that's consistent. In terms of the brick and mortar and the tool counts, most everything that we ship, it relates to capacity. There's no question about it. But as you know, the fabs are generally – the brick and mortar is put up and then the fabs are populated in phases. And so, you're right, some of the contamination control tools go in a little bit earlier. But the entire fab isn't filled with contamination control, but it does go in a little bit earlier. Probably similar to the metrology tools that go into a factory. But we see steady build out. So, when there's a large fab built and it gets populated in phases, we see that for the direct to fab contamination control systems that go in, but if there's a difference, it might be a lag of a quarter, but probably not more. And then, steadily, all the automation capabilities we provide to OEMs, they go in as those process tools go. And, John, same thing. Often, we'll ship and recognize revenue, say, for a robot or for a vacuum system that the OEM will recognize as revenue, maybe a quarter later. So, indeed, our revenue is probably always just a little bit in advance of what you'd see from a large OEM shipping product to those same fabs.

On the Life Sciences side, the midpoint of your guidance is up sequentially. But the range includes a down. Is that a reflection of seasonality in the business? Is it a reflection of some caution of not knowing whether or not COVID was a headwind or a tailwind to the business? And then, as a follow-up on the Life Sciences, Lindon, when you think about the OpEx you want to add there, is the plan that that gets added before the split? And if it does, is it sort of a linear add between now and year-end?

I'll try to take both questions here. First, we range around the Life Sciences – on both revenues because we see that there's potential, as you said, softness in terms of when does COVID drop or not, how much does that affect us? Also, if COVID spikes, in particular territories and things close down again, those aren't unheard of options either. So, we do put a range around this. We have a pretty good history of striking at the midpoint. But there's a range around everything here. On the OpEx, we said we would add about $15 million of additional structure to both companies. There's a portion of this that doesn't become effective until it's separated. Let me highlight. We will be adding some governance. So, that includes board, audit fees, things of that nature would start with the start of the company, not ahead of time. But there are some aspects that will start – that we start building. And as you've seen, we've already worked on the financial pull parts of the carve-outs, et cetera. But certainly, we'll be hiring some resources to stand up two companies. I wouldn't call it exactly linear. We're going to – but might be a good assumption on your part. But I would say probably more as we get into the September quarter, less in the June quarter.

And our last question is a follow-up from Craig Ellis with B. Riley.

Just a quick clarification on that last comment, Lindon. So, I thought in the prepared remarks, you said you would add $15 million. And then I thought I heard in response to John's question, you say you would add $15 million to both companies? So, is it that there's $15 million of expense currently in the model for corporate expenses and that stays with either Life Sciences or Semi and there's $15 million that's added? Or is it really $15 million that is added for both companies? So, $30 million in total.

It's just one $15 million. So, thanks for clarifying, Craig. I really appreciate. So, from our current run rate, of course, we'll be adding investment at a modest level, as we always do operationally, but in terms of standing up the two companies separately, it's just one additional slice of $15 million. And I gave a few examples. There's IT infrastructure, there's public officers, things like that in the company. So, I think everybody will understand that. But just one. Just one. And in the prepared remarks I gave, I think, info. If you were to take the trailing 12-month data on each segment page of the results, which I gave trailing 12-month information, I tried to service all analysts and investors here, giving you something to start with and then point to the reallocation dynamics versus what would happen if we pull that apart. So, you could apply that back to that and get a good feel for where a starting point might be.

We have no further questions on the phones.

All right. Look, these are so exciting times and energizing for our Brooks teammates. And it comes with an exciting market both on the Life Sciences and on the Semi markets. It's particularly exciting for us to see Dave Jarzynka and Dave Pietrantoni named, anticipating taking on the leadership of another public company for us. So, those are internally rewarding time periods for us. But when we come back to the earnings, if you just think about what we've talked about, we're guiding a Q3 that in a range is expected to grow 35% to 45% year-over-year. Well, at the end of the quarter, at the midpoint of the guidance, we will claim that we have exceeded – or met or exceeded the business model that we set up to do in 2022, more than a year ahead of time. The strength of both the industries are really, really strong. The growth trajectories, the capabilities of the teammates are equal and capable to match up to the strength of those markets. And we just think it really makes good strategic sense. This has been a thoughtful process, months in the making, years in the making of the transformation, but months of work on behalf of our teammates to be ready for today and to be ready by later this year to culminate the separation. But it's a clear growth path for each business and their individual industries. It's well positioned strategically, operationally and I think, as you can see, financially, both on a balance sheet as well as in the leverage profit model for growth. So, it's exciting times for us. We look forward to seeing you during the quarter. We'll be at multiple investor conferences in the quarter and anticipate a lot of good dialogue off of the announcements today. And we look forward to seeing you at the same time at the end of next quarter. So, thank you very much for tuning in with us.

And that does conclude our conference call for today. We thank everyone for participating and you may now disconnect.