Autostore Hldgs Reg S

Good morning and welcome to Autostore's fourth quarter 2023 presentation. My name is Joe-Christian Lund-Steigerall and I'm glad to be here serving as an investor relations officer at Autostore while Hiva Flåkjær is on maternity leave. As usual, I'm joined by the two members of our executive team, Mats Hovland-Vikse, the CEO, and Paul Harrison, the CFO. As usual, we would like to remind you of our disclaimer with regards to forward-looking statements. It can be read here at your convenience. Moving on to our agenda, Mats and Paul will provide you with an update on the business and discuss the fourth quarter results. As a quick reminder, all the financials in the presentation are stated in US dollars. The presentation will be followed by Q&A session with participants joining via the earnings call and the webcast. And for those of you who are participating on the webcast and ask questions there, you can submit your questions through the webcast player at any time. We will conclude the session today with some final remarks by the CEO. And with that, Mats, the word is yours.

Thank you, Christian. And as you can see on this page, our performance was strong in fourth quarter. This is especially true when you consider that the broader market backdrop remains challenging. For 2023 as a whole, we grew our revenue by 11%, whereas the warehouse automation market in total declined. In the fourth quarter of 23, we achieved revenue of 176 million, an accelerated growth of around 20% compared to the same period in 2022. This was slightly better than our guidance in November when we estimated full year revenue of around 640 million, implying 171 million for Q4. While accelerating revenue growth, we continue to deliver high gross margins with 69% in Q4, up 8 percentage points compared to Q4 of 22. This means that the full year gross margin was 67.8%, which is a high and we believe sustainable level. And Paul will return to this shortly. Similarly, we have an efficient and scalable business model leading to strong EBITDA margin of 48%. Order intake has continued to develop positively and was in Q4 164 million, up 8% sequentially and up 7% since Q4 of last year. This brought our backlog to 447 million and around two thirds of the order intake in Q4 was from new customers. However, existing customers still make up 45% of our total backlog, which is in line with the historical mix. While standard solutions remains our most significant source of revenue, I am particularly pleased to see strong growth in high throughput solutions, where we continue the positive trend in Q4. Moving to the operational highlights, and as I mentioned in the Q3 presentation, we introduced a new price increase of net 3% in December. This was the result of us removing the grid surcharge completely and replacing it with a fixed general price increase. This price increase has been well absorbed. And at the same time, we did not see it generate any significant pull forward effect. I would also like to highlight the fact that our Poland team has successfully ramped up production capacity. At the same time, our new facility in Thailand will be fully operational in Q2 of this year. And all in all, this means that we will have production capacity that can support significant growth for many years to come without having to do any material additional investments. So moving on, this slide here summarizes our strong position and why the business is so attractive. We have now delivered 1400 systems with almost 65,000 robots in 54 countries. And the observant viewer will notice that we've entered two new countries since last quarter, New Zealand and the Dominican Republic. And these are significant numbers, but remember that still only 20% of the market for warehouse automation is currently penetrated. And that is a tremendous opportunity. And we are positioned for strong growth in the future. We have a solution for virtually all end markets and all system types with very attractive economics for our end customers. Additionally, we have developed a strong network of 23 integration partners around the world, which are complemented by our business development and global account teams. And all in all, this is the foundation for the attractive financial profile that you see. We ended 2023 with revenues of 646 million. We are back to historical high margin levels with profitability readily converting to cash. In 2023, free cash flow conversion was strong 83%. And this attractive financial profile is sustainable, given our standardized solutions and highly scalable business model. At the same time, we focus relentlessly on our customer-led product roadmap, with some 300 colleagues in R&D driving continuous performance improvement. So we believe passionately in the strength of our position in this market. But don't just take my word for it. I think you will be interested to see that we commissioned a Forrester study where Forrester has characterized a typical auto store customer as a composite of five different real customers who they interviewed. And this study can be downloaded on our website. It describes all the different inputs and cost drivers and draws a clear conclusion, which is that a typical auto store system with an investment of around $5 million provide a 79% ROI. So let's now reflect on our customer portfolio. We today count roughly 1,000 unique customers globally. We have included a small selection of them here on this page. And the key message looking at this picture is that we are very well diversified across a wide range of end markets. We support e-commerce and omni-channel fulfillment across different end markets. And in addition, we serve markets like industrial, automotive and healthcare. And there are a few warehouse automation projects that would not be well served by the addition of an autosource system. And as usual, we would love to show you an example of a successful implementation of AutoStore. And this time, we highlight the industrial equipment distributor, SMC, who was reaching their capacity ceiling using legacy storage solutions, but was able to double their throughput in their new facility with an AutoStore solution provided by our partner, Bastia. And on a higher level, I think this is a good example as to how we can serve a very broad range, if not all and markets. Automation of warehouses in the industrial space is also a segment that has proven more resilient throughout the recent quarters when we've seen that some e-commerce players has eased off their investments. So before Paul takes us through the financials of the quarters, please have a look at the SMC facility in Indiana, USA.

SMC Corporation was founded in 1959 in Japan, and our vision is to become the de facto standard, the standard for sustainable automation around the world.

So our customer base really is from the electronic industry, automotive, medical industry, food and packaging, the mining industry, those types of accounts. We currently have roughly around 60, 65,000 different SKUs. About 53,000 of those SKUs are located within the auto store. We knew as our sales have increased and our ultimate goal to get to a billion dollars and ultimately to $2 billion here in the next few years, the warehousing operation traditionally was not gonna solve or allow us to reach those goals. And the only way to do that was to automate and specifically investment in the goods to person system like the auto store. The auto store improves our fulfillment operation by us having the ability to quickly get our products in the door, into the auto store, and ready for orders. The product comes in, we get it into the auto store, and that afternoon, within a few hours, it's allocated and picked and out the door. So it really allowed us to improve our delivery time and throughput time by getting the product in quickly, getting it into the auto store, and then getting it to our customers.

The old operation, the way that the conveyor was laid out, the way that we consolidated orders, our capacity for the day was about 5,000 lines per day. That was it. We might be able to pick 7,000 lines, but we couldn't get everything consolidated and prepped for outbound shipment. Since we've moved into this facility, we have hit 10,000 lines, 12,000 lines, multiple times throughout the year and our operators are not working overtime to do that and the orders are going back out the door on the same day. We definitely would not be where we are today had we not put the auto store in place when we did.

Thank you, Matt. Good morning. It's only my second quarterly report for order stores. I joined the business in October 23. Since I joined, I've spent time getting to know the company. I've met a number of our clients and not least our partners. It's been a great experience. It's done nothing but support my initial conviction about the strength of order stores proposition, the significant market potential and our strong and sustainable financial profile. So with that said, let's look at the financial highlights on the next slide. As Matt's already stated, the quarter was strong despite challenging market conditions. We're reporting revenue of 176 million, a 68.5% gross margin and a 48% adjusted EBITDA margin. We're once again demonstrating the significant operating leverage with high margins and very strong cash conversion. On the next slides, I'll go into more details on the key financials. Let's start by looking at the order intake and backlog. As I observed, whilst the market remained challenging in 23, we're consistently outperforming it. It is also good to see that we steadily improved sequential order intake over the last two quarters, ending in quarter four at $164 million. Whilst we live in an environment of high interest rates and elevated concerns, levels of uncertainty, we expect to see a cautious approach on the part of customers to CapEx investment. However, at the same time, we know the interest in our solution is very strong. Our pipeline is at an all-time high at $6.5 billion, which is 10% higher than at the end of 2022. Looking at the order intake, the standard segment remains by far the most important, but high throughput is growing strongly, as Mats noted earlier. In quarter four, EMEA saw a strong uptick in order intake, and North America remained strong. If I look at the industry segments, apparel and sports equipment picked up in the quarter after several weaker quarters. Industrials and 3PL remained firm. We closed 2023 with an order backlog of £447 million. We expect a high proportion of this, together with our first quarter order intake, to convert to revenue in 2024. Parts of subsequent quarters order intakes will also convert to revenue in 2024, albeit at a declining rate as we progress through the year. This, combined with the stable to positive developments in order intake we have seen over several recent quarters, provides a good foundation for continued growth in 2024. Now, with that said and reflecting on a learning in the business, I'd like to add that when it comes to the distribution of absolute revenues between the quarters, it's important to bear in mind that we're a project-based business. And our business model implies some variability quarter on quarter in revenues and shipments, something to bear in mind. Okay, just staying with quarter four then, as expected and actually slightly above the recent guidance, revenues accelerated. We reached 176 million, which was 20% higher than quarter four last year. This brought our total revenue for 2023 to 646 million, up 11% year over year. This is a strong achievement given the market backdrop that Matt has discussed. We saw once again that two thirds of revenue this quarter came from new customers. Revenue is particularly boosted by high throughput installations within the apparel and sports sectors across Europe and the US. The right hand chart of the slide shows the geographical split. We see that EMEA came back strongly in quarter four with North America also continuing to perform well. Moving on from revenues to gross profit and adjusted EBITDA on the upper panel of this slide, you see that quarter four gross profit ended at $121 million, up from 80 million in the same quarter in 2022. This corresponds to a gross margin of 69% in the fourth quarter compared to 61% in the fourth quarter of 2022. In line with our comments in previous quarters, our gross margin gradually improved to a sustainable and high level. Adjusted EBITDA on the lower pane on the left side remains similarly very strong. Now I'm conscious that we use this word sustainable to refer to gross margin often, but why is this? I think it's worth reflecting on the following characteristics of our business when we think about this word sustainable. First, our standardized product set with a very limited number of modules. Whilst the customer can increase the size of its installation and benefit from that ability to scale, the products they buy are highly standardized, namely the grid and the robots. We don't create bespoke solutions and we sell them on standard consistent terms. Secondly, we sell through our partner channel. It's that channel that enables us to reach all key markets, allowing us to keep our direct sales and marketing resources in check. Third, as you know, we've invested significantly in broadening our supply and manufacturing basis. We have no single point dependencies in our production chain. And then fourthly, finally, we remain disciplined operators. We're focused on adding resources that truly drive customer value in areas such as R&D and in field sales presence. As you note on the slide, adjusted EBITDA was 84 million in the fourth quarter, representing an EBITDA margin of 48%. This represents a margin improvement of 8 percentage points versus the corresponding period last year. OK, let's turn now to our strong cash flow conversion. In the quarter, we had cash flow from operations of $80 million, as you can see in the yellow pillar on the waterfall. Operating cash flow, as reported, was $12.6 million. This was positive despite settlement payments of $31 million, which will feature for another six quarters, tax payments of $90 million, and working capital charges of $70 million, driven by the fact that a large part of our shipments were made late in the quarter. Our capex investments of 10 million were at a normal level, and we've had interest payments of around 11 million, leading to a very strong closing cash balance of 253 million. Since we've now started our new fiscal year, let me highlight some of our priorities. The key elements for us continue to be to deliver strong growth through focus on innovation, market outreach and efficiency, both for our customers and in our internal processes. During 2023, we've made significant progress in terms of product launches and new technologies, most of which increase throughput, reduce costs, or in other ways, enhances the efficiency of the cube and the environment around it. The R5 Pro robot has, for example, significantly increased throughput for large warehouses with multiple shifts. The same goes for the Autostore router software updates we deliver during the year. In 2024, our key focus continues to be the enhancement of the performance of theCUBE. We will also further support our partner network. In 2023, we increased our business development management team, seeing great results. In 2024, we'll further build on the success of BDMs, having also established a team of global account managers tasked with working even closer and on a strategic level with a selection of large global customers. And then thirdly, we'll continue to drive operating efficiency. In 2023, we established industry-leading margin levels by leveraging those characteristics of our business that we've discussed this morning. So with that, I'd like to pass back to Joe Christian, who's going to lead the Q&A.

Thank you very much, Mats and Paul. And for all of you on the webcast, please continue to submit questions in the webcast player. But for now, we will open for questions from the phone line. So please, operator, I'll hand it over to you.

Thank you. We will now start the question and answer session. If you do wish to ask questions, please press five star on your telephone keypad. If you wish to redraw it, You may do so by pressing five star again. There will be a brief pause while questions are being registered. The first question will be from the line of Mark Luckey from Citi. Please go ahead. Your line will be unmuted.

Your line will be unmuted.

Thank you. Good morning. It's Martin Wilkie from Citi. Thanks for taking my question. The main question I had was around the pipeline and how we should think about that in terms of the outlook for 2024. So I appreciate you've not given... detailed guidance for this year. But just if you could explain, when you talk about the improving pipeline, just some numbers around how long it might have taken, say, two or three years ago to convert to firm orders, how you're seeing that now. Is it really driven by interest rates and something else? Just a bit of understanding as to how we could think about that pipeline converting into an order inflection. Thank you.

a couple of comments and Matt might add. We noted the overall pipeline. The overall pipeline. And I will observe that a higher proportion of the pipeline will stay. Now, we talked in 2023 about, and I've referenced it today, about customers taking a cautious approach to making CapEx commitments. In this environment, in this macro environment, we don't expect that this will change for the time being. But nonetheless, when we look at the pipe and we look at the projects that are in the pipe, we feel very good about the quality of it and its implications for 2024.

watch in terms of what would trigger the conversion of the pipeline? I mean, obviously, we hear in other industries that it has an interest rate, for example. I suspect that's perhaps overly simplistic here. But do you sense there is something that could be a trigger, or is it more just a gradual improvement of the macro outlook? I mean, internally, when you think about what drives that conversion, what factors do you think would accelerate that?

No question that in a tougher macro environment where there are CapEx constraints, that decision making around CapEx commitments has escalated, elevated up to board of director level. And that reflects the times we live in. If we do move to a more normalised macro, then one can establish what one can imagine more regular and further sort of delegated approvals happening, and that should speed up the decision-making processes. But I think it's really important to note that there are no signs whatsoever that our strong proposition does not resonate well in this market across a wide variety of industries.

So what the pipeline development is really telling us is that we've seen that the interest level of AutoStore and the attractiveness of AutoStore has continued to increase also in 2023, both through the pipeline growth we've seen, but also the progress of projects that sits within that pipeline. So as Paul mentioned, what we need to see is that confidence gradually returning to the market, which then will lead to conversion of that pipeline.

about the oral momentum.

Well, thank you for your question. Let me take the first one about guidance and pass to Matt for your second question. Look, I think to my comments in the presentation today, we've provided, I think, a full sort of explanation of the building blocks with which one can model auto store in 2024. I mentioned the strong backlog and together with the quarter one order intake strong conversion to revenue in 2024 that typically falls in the 75 to 85 percent range of that conversion and then as I mentioned it it reduces for as the quarters go on in the year. And we've also talked about the sustainability of gross margins and EBITDA margins. So I think it seems clear to me how one would approach the modelling of this business and evident from the consensus as I look at it that that is something the analyst community does well so that's why we haven't put an explicit guidance out there and of course we will work as we always do with analysts on a one-to-one basis to have any discussions around the models that your models that you may like and to address the second part of your question we have seen the positive momentum continue also into this year and as we've talked about for a while the leading indicators of the business has

develop very positively as shown in the pipeline and the maturity of the pipeline. But of course, we're still in a macro environment that has uncertainty linked to it, and we're dependent on conversion to deliver continued growth also into 2024.

Thank you so much.

Thank you, Timo. As no one else has lined up for questions in this call, I'll hand it back to the speakers for any written questions.

Thank you very much. We have a few more questions from the webcast. So what is the new level of annual revenue that your higher production capacity supports? Or put differently, how much can revenue increase before you once again need to invest more in production capacity?

It's a very good question. And as we noted in the presentation, we have our second facility in Thailand coming online early in 2024. And that capacity will support the business for the next several years without any step change required. And then the further point, just to reiterate it, is that we've also removed any other single points of dependencies in our supply chain.

Thank you. Previously, you've talked about customers postponing orders or extending decision-making cycles. Can you give any more update on how you see that now? Is there any change versus what you saw at the Q3?

I wonder if the questions come in ahead of some of the other answers we've given. So nothing fresh to add there. I mean, we've talked about the sensitivity of the macro environment. And whilst that remains a challenging environment, we'd expect to continue to see this cautious approach to CapEx that we've talked about.

Are there any new developments in the Amazon store at Long Island that you briefly mentioned last time?

So as I mentioned last time, we have confirmed that relationship and what I can say is that it's developing positively.

There is one more question about guiding. Any further comments on the lack of guidance and the way you see the market? Can you say anything about how the current backlog is distributed across the different quarters in addition to your intro on that?

Yeah, I've talked there in a previous answer about the likely conversion of backlog into 2024, the 75% to 85% range typically. So nothing to add to that.

How are order trends faring into Q1 so far? And also another question from same analyst, are you being impacted by the Gulf shipment delays?

So we've seen a good start in terms of order intake to quarter one, albeit I would naturally stress it's the 14th of February. So there's a way to go in the quarter, but a good start to the year. And no disruptions to either deliveries or supply chain as a result of any geopolitical factors.

Thank you. There's one question on sustainability. What are your priorities and objectives for that work for 2024?

On sustainability more broadly, we are in the process of setting ourselves the right targets. We have the sustainability reporting that we do that provides more details as such, but this is an area where we are very focused as a business and in addition the inherent advantages that our solution provides to a whole host of end customers in many different segments is impact that i'm proud of

There's one question here for Paul regarding free cash flow and the simplified definition. How would you sort of comment on that as that definition and the percentage you gave excludes things like interest and tax and working capital. So how would you comment on the free cash flow when you look at the reported number?

I think all the components are there for anybody who wants to take a different definition of cash generation. They're all there for you to consider. But the measure that we've put forward, the 83% conversion, has been our chosen measure, I believe, since this business IPO. And again, I think more fundamentally, it points to the very strong cash generation, no matter which level or which measure you choose for our business.

Final question for now. Do you have any comment on SoftBank's involvement with Symbotic?

So Symbotic is a provider that predominantly provides solutions for a different segment of the warehouse than what we are doing for case handling, pallet handling, etc. But they're a very strong business. but operates in a different segment of the market than what we are doing.

One final question. Now, how sustainable is the rebound you saw in EMEA in Q4 as you head into 24? And how do you see your ability to continue to outgrow the markets going forwards?

So EMEA overall continues to be a strong market for warehouse automation more broadly, and we expect that to continue not only for 2024, but in the foreseeable future. In terms of our ability to outperform the market, I think we've proven over time that as we gain access to new opportunities, we are gaining market share. We've done so in very, very good times throughout COVID. And we've even done so in a more challenging market in 2023, where we delivered growth in a declining market. And I think that in itself speaks about the secular drivers towards auto store relative to other form of automation as well. So we feel very good about our ability to outgrow that market. And we feel very positive about the outlook of this market in a very, very long period of time.

Thank you. And on that note, we don't have any further questions. Obviously, we are available for questions later on phone or email. But with that, I'll pass back to Mats for his final remarks.

Thank you. So I would like to end the session just by calling out some key points. First, we are the pioneer and global leader of cubic storage, and we operate in a market that's still in its early stages of development. Even though more and more warehouses are automated, still only around 20% of warehouses globally are automated today, leaving plenty of space for growth. Within this market, we have a leading technology and a proven growth strategy with an efficient and scalable go-to-market model. And last, we have a long track record of delivering strong revenue growth at high margins. And for all of these reasons, we at AutoStore are both proud of what we have achieved and what we are achieving in the current market conditions. So wrapping up, I'd like to reiterate the high activity we see in the market with a strong pipeline and positive sequential development in order intake. The macroeconomic backdrop is uncertain, but for us, this uncertainty is confined to the timing of projects and not the interest and appeal of our solutions. So we are very excited and optimistic about our future, and we remain confident in our ability to continue delivering strong, profitable growth. So thanks again for joining us this morning, and we look forward to providing you with future updates.