AutoStore Holdings Ltd. (AUTO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the AutoStore Q3 Earnings Call. [Operator Instructions] This call is being recorded. I will now hand the call over to the speakers, please begin.

Thank you very much, and good afternoon from Oslo, Norway. My name is Hiva Ghiri, and I'm the Investor Relations Officer. I'm very pleased to have this earnings call together with the members of our executive management team, including Karl Johan Lier, AutoStore President and CEO; Bent Skisaker, Chief Financial Officer; and Mats Hovland Vikse, Chief Revenue Officer. Before I hand over the word to Karl Johan, I would just like to remind you that we will be using the presentation deck from this morning, which you can find on our website. And with that, I will hand over the word to Karl Johan.

Thank you, Hiva. So if you have the slide deck, we can go to Slide #3. So thank you for joining us today for a review of our quarter 3 results. Let me begin by saying that I'm very proud of the performance delivered by the AutoStore team. We delivered another excellent quarter with revenue growth of 74% even as well as the prior year quarter of 95% growth. If you also take currency effects into consideration, we have recorded a growth of 86% compared to quarter 3 2021. Despite the volatility and uncertainty of economic market conditions, we have been aiming to maintain a strong growth rate throughout the year, demonstrating the resilience of our business model and the value that our customers derive from our technology. In this quarter, we reported an adjusted EBITDA margin of 37% with the year-over-year decrease primarily due to continued pricing pressure for grid parts and other key components. As a reminder, we have already implemented pricing actions to mitigate rising costs. Our price increase was introduced in quarter 4, 2021, and we start to benefit margins in quarter 4, 2022. And our surcharge implemented at the end of quarter 1, 2022 will be phased in beginning in 2023. It takes some time to see the full benefit of these actions due to the time lag we see in order intake and project delivery and cost of revenues are recognized in our P&L. We must first work through existing orders in our backlog that's placed at the previous pricing and cost levels. While we are not happy with our margins, we believe that the third quarter represent a floor and that we have a path to return to historical adjusted EBITDA margins, and Bent will say more about that later on. Moving on to our order intake. We saw continuing strength with Q3 orders of USD 155 million, an increase of 11% compared to the same period last year, considering that we are positioning to shorter lead times and a negative FX impact, this is a solid figure. As we mentioned in our previous earnings presentation from the beginning of the year through the second quarter, our average lead time decreased from 35 weeks to 20 weeks. Our focus on operational excellence, including managing our supply chain helped us reduce lead times as we diversify our supplier base, optimize inventory, improve collaboration and increase visibility with suppliers, including doubling of aluminum capacity in the last 12 months. The significant work on supply chain also results in a more resilient AutoStore to support growth in 2022 and 2023. Our team is continuously focused on operational excellence, and we are very pleased with our improved ability to offer faster delivery times for customers by strengthening the resiliency of our sources. The significant drop in lead time now allows customers to place their orders closer to delivery, which is fantastic. This has had a temporary impact of delaying some orders as customers take advantage of shorter lead times. We are, therefore, very pleased with the strength of order intake during the quarter. At the end of the quarter, our order backlog was $470 million, up 37% year-over-year. We are confident in our underlying growth followed by solid demand across regions and markets and warehouse categories. We are able to reaffirm our guidance range for full year 2022 and 2023. On operational highlights, as I just mentioned, price increases and surcharges have already been introduced, at the international environment process, we have announced an additional net price increase of 5%, which includes a general price increase partially offset by a reduction in surcharge, taking effect on new orders starting in January 2023. During the quarter and in November, we have launched several new commercial offerings, which include our pay-per-pick revenue model, which represents a recurring revenue model for us and a more flexible financing alternative for the customer. And we are in dialogue with many more potential customers. Mats will take -- talk more about this later in the presentation. I'm also very excited about a pilot and first order for our new multi-temperature zone grid that we have been developing at our Innovation Hub for some time. Our multi-temperature zone grid also includes frozen capabilities, promising excellent growth opportunities in the grocery sector. Furthermore, we have released our PickUpPort and having pick-up directly from the AutoStore system and Unify Analytics, which is a cloud-based service and data platform that automates the collection and analysis of real-time AutoStore data. Mats will also talk more about this later in the presentation. To meet our growth targets, we are continuing to expand our assembly facility in Thailand. The facility is expected to be online in the second half of 2023 to enable access to new suppliers and ensure closer proximity to customers. In addition, it provides flexibility and reduces our dependency in European supply. Also during the quarter, we reached an important achievement for AutoStore by passing the milestone of selling 100 (sic) [ 1,000 ] systems globally. This is a remarkable achievement and firmly establishes our position as the market leader of cube storage automation. Finally, there are several other noteworthy developments to highlight. First, our distribution partners. StrongPoint has expanded its reach to include the U.K. and Ireland in addition to its previous territories in the Nordic and Baltic countries. Additionally, Fives Group is going to expand beyond Southern Europe to now include Japan. And part of SmartLog is also now also going to cover Middle East in addition to LatAm. Next, we continue to make great progress towards our strategic goals despite current uncertain market conditions. So the revenue growth trend, order intake pace and operational efficiency support our 2022 guidance and continue strong growth in 2022. With that, I hand then over to Mats.

Thanks, Karl Johan. So if you then go to Page #4, let me start off today with an overview of AutoStore for those of you that may be new to our story. Let's take a step back and look at some of our unique attributes and accomplishments in numbers. So we have now sold more than 1,000 installations and over 40,000 robots in over 40 countries. We have an efficient go-to-market model where we sell through a network of currently 22 distribution partners with more than 2,000 certified sales representatives. We have a scaled global platform with a strong blue-chip customer base, and we have sold to more than 600 end customers. And our lean and efficient business model has resulted in a superior financial profile with high growth, approximately 50% CAGR since 2010, an 80% growth last year, high margins with EBITDA margins of around 50% in recent years and high cash conversion above 80%. On Slide #5, you'll see that we are operating in what's a large and underpenetrated market for warehouse automation. The total addressable market is huge and still has below penetration rate. We believe that currently only around 15% to 20% of warehouses are automated globally. What's driving penetration here is megatrends that you all know very well. You have the shift to e-commerce, the fact that we as consumers are getting more and more demanding. And on top of that, companies globally are looking more and more to solutions that reduce labor dependencies and improve the supply chain. When we look at our current customer portfolio, we see that we've only scratched the surface and that there is tremendous opportunity for us. Looking at our current customer base, we have a lot of growth opportunities. If you take our top 10 customers alone, we estimate that we have less than 5% average penetration. We're also optimistic about the new opportunities unlocked by our strategic initiatives and product announcements like frozen temperature capabilities and our new pay-per-pick offering, which I will get back to later. Moving then on to Page #6. And as I mentioned on the previous slide, the long-term growth of the automation market is supported by global secular megatrends and will continue to drive automation adoption and AutoStore growth. Economic challenges such as labor constraints and inflation, coupled with consumer preferences for same-day delivery reinforce the value of our technology. We can help our customers reduce cost, become more efficient and deliver an ROI in 1 year to 3 years. While AutoStore is not immune to the capital cycle, we remain very optimistic about our long-term growth opportunity and our ability to help companies in all end markets drive efficiencies and meet today's challenges. On Page #7, let us now discuss the value proposition to our customers, how we are addressing aspects, customers value the most. And throughput is very important as our customers needs to be able to meet consumer demand for fast delivery and to be able to handle big volumes. Today, we're able to achieve up to 650 picks per hour per port and more than 20,000 picks per hour per grid, and you can have multiple grids within one distribution sector. We reached this throughput level in 2020 when we introduced the Router software, and this is what really has enabled us to enter the high throughput market. Also, space efficiency is key when customers calculate their payback time, and we offer the densest solution available. Modularity is also important, especially if you want to utilize existing real estate. And AutoStore is able to fit virtually any warehouse layout, and our customers can easily expand their solution as they grow, enabling them to rightsize from the start. And then reliability, AutoStore has on average across all of our system are best-in-class at the time of 99.7% and no single point of failure. Being able to deliver performance consistently without downtime is critical for operators. So all of these features together with a low payback time drive market share growth and higher ROI. Moving then on to Page #8. So along with reaching the milestone of 1,000 systems sold globally, we have achieved an average compounded annual revenue growth rate of more than 50% for more than 10 years, a variety of business cycles and periods of economic strength and weakness. The uncertainty facing today's global economy are widely acknowledged. However, we believe that in the medium term, we can grow revenue by approximately 2x to 3x the growth rate of the broader warehouse automation market. AutoStore continues to benefit from an underpenetrated cubic storage market that is both massive and rapidly expanding. Given current market growth estimates, this implies a future CAGR for AutoStore of approximately 40%. So moving to Page #9. So now looking at how we're navigating and progressing in respect to our own strategic ambitions, I'm pleased to say that we're on plan. On the first one, we've seen strong growth in our key focus areas with year-to-date revenue growth of MFCs of 128% versus the prior year period. When it comes to our fulfillment platform with WMS, we continue to grow our pipeline of large high-quality customers that we expect to convert to revenues in 2023. We are also now introducing a new pay-per-pick revenue model, which will both enables us to increase our recurring revenue share and provide a more flexible financing solution for our customers as the upfront CapEx is significantly reduced, and I'll provide more details on this shortly. As also previously mentioned, we have made a lot of progress on product innovation. We have now received our first order for our new multi-temperature zone grid, which means the increasing demands of grocery retailers to automate their e-grocery fulfillment services. Also, we have launched our new Unify Analytics cloud-based service and data platform. It always collected data from our sites to help us improve our technology. But this platform now also gives real-time visibility and data that helps our customers to drive operational efficiency and better utilize our technology. A group of customers has already used the platform for a while, and now it's available for all existing and new customers. Furthermore, we're now also launching our PickUpPort, which is the first consumer-facing workstation offered by AutoStore. With this port, anyone can interact with our cube technology without any training. And what this enables is new shopping experiences, where a consumer can pick up an order directly from the AutoStore system without any associates involved. And with this in place, maybe in the future, you can find products available in an AutoStore near you and you can pick it up whenever you want, and this can help form the future of retail. So I've talked to you about our APAC and North American expansion before, and I'm pleased to say that we're tracking according to plan. We have been growing our sales organization, including BDMs and partner managers in U.S., Australia, Japan and Singapore to ensure that we're well positioned for future growth. Year-to-date, we've seen sales growth of 115% in APAC and 82% in North America. And our current order backlog supports strong full year growth. And to support the operations to meet our growth targets, we are continuing to expand with our assembly facility in Thailand, which is expected to be online in the second half of 2023. And then on the M&A side, we continuously evaluate potential targets, look for technologies that can enhance our offering, but we remain disciplined and opportunistic as before. Moving then to Page #10. As Karl Johan mentioned, we are now launching our new commercial model that provides recurring revenue with a pay-per-pick pricing structure. Under this alternative pricing model, the customer has a lower upfront investment cost, which only consists of the grid and infrastructure. This will be then combined with a pay-per-pick presentation fee that will drive recurring revenue for AutoStore and partners over time. We have introduced this option based on increasing customer demand, and we believe it offers potential for true incremental opportunities in the market, especially considering the current macro situation. In this model, the upfront CapEx will be reduced to roughly 20% to 40% of today's level, making it very attractive for some customers. The remaining value of the project will be captured through a recurring component based on pay-per-pick mechanism to cover the cost of robots, ports and software. We would also like to emphasize that we're implementing and deploying this pricing model in a controlled manner. In the near term, most of our revenues will still be with the current upfront CapEx pricing. And regarding split with partners, enabling strong margins for our partners has been and will continue to be a critical success factor for our commercial model. And because of this, it has been important for us to maintain the same split and attractivity for our partners. There is no change to our distribution model strategy, which is key to drive strong growth. If we then move to Page #11. As we've discussed each quarter since our IPO, product innovation is deeply ingrained in our culture. The grocery segment is one of our key focus areas, and our goal is to further expand within this retail space. Managing grocery retail supply chains come with unique challenges and demands requiring specialized knowledge. And the multi-temperature grid is one of our latest innovations, and we are very excited to share this technology with our partners and customers. The new grocery offering enables retailers to automate frozen goods and achieve next level warehouse efficiency, creating also better work environment for employees by decreasing exposure to cold temperatures, as well as substantially decreasing energy costs. So we have received our first order for a multi-temperature grid, which now also includes a frozen temperature zone, and it will be installed in the first quarter of 2023 at delivery. If we then move to Page #12. As you've heard, we've had a lot of initiatives going on that we expect will drive growth in the future. And our order intake and backlog in the third quarter is supportive. As Karl Johan mentioned earlier in the presentation, in third quarter, we have an order intake of $155 million, representing 11% growth compared to the third quarter of 2021. This is a solid number, especially considering that we're transitioning to shorter lead times and negative FX impact. We ended the quarter with an order book of $470 million, which is an increase of 30% (sic) [ 37% ] year-over-year, which provides good revenue visibility for the rest of this year and into next. And with that, I'll hand it over to Bent, who will walk us through the numbers.

Thank you, Mats. So let's look at the financial highlights on Page 14. As Karl Johan and Mats already have stated, we delivered another strong quarter with 74% revenue growth year-on-year, and adjusted EBITDA margin of 37%, 88% cash conversion, 11% growth in order intake year-on-year and 37% growth in backlog. On Slide 15, I will go into more detail. AutoStore reported revenues of $147 million in the third quarter of 2022, up by 74% from $85 million in the corresponding quarter last year. And as Karl Johan said, if we apply 2021 foreign exchange rate, the revenue growth would have been 86% in Q3. Year-to-date, 2022 revenues increased by 86% to $436 million from $234 million in the corresponding period last year. Year-to-date 2022 revenues were supported by strong growth in all regions, healthy demand from end markets, including omnichannel, 3PL and industrial, as well as a solid mix of high throughput micro fulfillment centers and standard systems. Again, if we apply 2021 FX rate on year-to-date revenues, growth would have been 99%. Now let's look into the trends in the geographies where we do business. Revenue in the EMEA region increased to $104 million in the third quarter, up by 75% year-on-year. While EMEA continues to represent a majority of our revenue, we see that revenues in North America increased by 45% compared to a year ago. And revenues in APAC region increased significantly by 164%. Year-to-date 2022 revenues in EMEA grew by 85% compared to the corresponding period in 2021, while the North America region increased by 82% year-on-year. And the APAC region achieved revenue growth of 115%. This is a very satisfactory development. So moving to Slide 16, we look at gross profit and adjusted EBITDA. In Q3, gross profit ended at $80 million, up from $56 million in the same quarter last year. This corresponds to a gross margin of 54% in Q3, a decrease compared to a gross margin of 66% in Q3 last year. Year-to-date 2022 gross profit ended at $251 million, up from $158 million in the same period last year. This corresponds to a gross margin of 58% year-to-date 2022, down from 67% in the corresponding period last year. The decrease in gross margin was predominantly linked to continued hybrid costs in 2022 and limited impact yet from pricing actions implemented. Adjusted EBITDA was $55 million in Q3, representing an adjusted EBITDA margin of 37% compared to an adjusted EBITDA margin of 50% in Q3 2021. Year-to-date 2022 adjusted EBITDA was $179 million, corresponding to an adjusted EBITDA margin of 41% versus $117 million and the corresponding adjusted EBITDA margin of 50% in the same period last year. As we have -- as we communicated in our Q2 presentation in August, we have continued to see additional pressure on margins in the second half. Q3 was significantly impacted by increased cost inflation, particularly related to grid cost. We expect this trend of margin pressure to gradually reverse from next quarter onwards as our initiatives that we implemented are starting to come into effect. I will, on the next slide, go into a bit more detail on the margin development and our pathway back to historical margin levels. So as shown on the left here on Slide 17, based on the actions already implemented and the grid cost level on orders currently placed, our pro forma gross margin for Q3 is 67%. We expect that Q3 gross margins represent the low point as we in the quarter are delivering on backlog with peak grid costs and all prices. In Q4, we will start to see the positive impact as pricing actions are phased in for roughly half of the orders delivered. In Q1 2023, most projects will be with new prices. And hence, we expect gross margin to start improving in Q4 and further into Q1 2023. In addition to the effects from the price increases, we will in Q1 2023 start to benefit from reduced grid costs already secured on projects in the backlog. And then go to Slide 18. Since we since last year have had significant costs related to various items, such as the Ocado litigation costs related to the IPO and option costs, we are providing a breakdown of the different costs that to a very large extent has a onetime character. Looking at Q3, there are 2 noteworthy adjustments. One relates to employee benefit expenses, which were reduced due to a reduction of the provision for social security tax on management options following the reduced share price of the company as per the 30th of September. The other adjustments relates to litigation costs pertaining to the ongoing Ocado litigation. Adjusted EBITDA is an important supplemental measure to give our investors the overall picture of operating activity, profit generation. For the full P&L, balance sheet and cash flow statement, please see the Board of Directors report amounts at 6:00 CET this morning, which provides an in-depth discussion of the consolidated IFRS accounts. You will find additional information on adjusted EBITDA and the IFRS financial statements as a part of the APM section in the financial report on Pages 28, 29 and 30. And with that, I'll hand over the word to Karl Johan, who will walk us through the outlook.

Thank you, Bent. If you go to Slide 20, as we have presented today, AutoStore operate in a fast-growing market. Even though more and more AutoStore has automated, only about 50% of the market is automated today leaving plenty of space for our company to continue growth. We are operating in a more uncertain market today compared to 12 months ago. Nevertheless, the underlying drivers of increased demand for automation remains impacted. Solid demand across regions, end markets and warehouse categories in the third quarter reinforces overall optimism about AutoStore's continued strong growth and performance. So if we go to the next slide, Slide 21. We also reiterate our 2023 revenue of $700 million to $800 million. This is underpinned by our solid backlog, strong pipeline and historical pipeline conversion. I would also like to point out that because our revenue is project-based by nature, large amount of revenue can fall into one particular quarter or the next. This is why we focus on annual revenue guidance and we are thoroughly focused on the results from 1 particular quarter. We remain very confident in our growth trajectory over the long-term. While the current macro backdrop is uncertain, we believe we can grow revenue over the medium term, the effect of approximately 2x to 3x the growth rate of the broader warehouse automation market. Given current market growth estimates, this implies an average annual growth rate of 40%. We are confident in our ability to return to historical margin levels in 2023 through pricing and other mitigating actions and based on current grid cost levels. And as we say in AutoStore, the best is yet to come. The journey has just begun. And with that, I'll give the word to you, Hiva.

Thank you, Karl Johan. And actually, we'll -- we are ready now for questions from the callers. So operator, if you could open up for questions.

[Operator Instructions] The first question will be from the line of Lucas Ferhani from Jefferies.

I'll have 3, if we can take them maybe one at a time. The first one is on order. Could you see a similar boom in orders in Q4 2022 as clients kind of rush to put in their order before the additional price increase happening in January, is that something you have seen and also on orders? Is the impact of the rigid lead times roughly behind you now, if we look at the recurring lead time, it's [ 50% ], that's roughly 3 months, so we should be past the worst impact from that?

So to address the first one, I think we are in a different market now than 1 year ago, but I know that it's definitely a conversation happening on whether customers should pull forward orders because of the price increase that's taking effect from 1st of January.

And regarding the lead times?

So on the lead time question, yes, we are getting to an end of those impact because that is mainly a transitional impact, and we have stabilized on roughly 20 weeks now.

Okay. The second one is on the additional price increase of 5%. Is that fair to say that you need that to come through the P&L in order to get back to historical margin levels? And so given it's starting in 2023 and the lead times you have is going to probably start to impact the P&L from H2, does that mean roughly you're back to your historical margin levels in H2 '23 rather than the start of the year?

Some of the effect is included because of that, but that's a very small part of the path back to 67%.

Okay. And the last point is just on some of that you provided. Can you discuss a little bit more the grid model for Unify Analytics and the PickUpPort? So, Unify, is that now a specific software solution that lead to additional software revenues or is it just part of the Router software and it does not lead necessarily to additional revenue? And same for the PickUpPort is with now some of the orders can come in with the hardware order for the PickUpPort of some existing clients and also order the PickUpPort separately in grids that are already in existence?

So to first address the Unify Analytics point, that will be a separate software product that goes on [Technical Difficulty] software and other software that we already have. And yes, we are monetizing that through a recurring model that scales with number of robots operating at the site. So this is an incremental software recurring revenue opportunity for us. When it comes to the PickUpPort, that can also be used by existing installations as well as new ones. And we are pricing that similarly to how we are pricing other ports, which now also is available through a pay-per-pick mechanisms with the new model that we launched today.

[Operator Instructions] As there are no further questions at this moment, I will hand it back to the speakers for any closing remarks.

Thank you. Karl Johan, your final remarks.

Yes. All right. We will end the market today with 4 key takeaways. Our team remains focused on our production and sourcing strategy to reduce dependencies on individual suppliers, with inventory optimization, redundancy, improved collaboration and increased visibility with suppliers as part of our team works. These help us significantly reduce our lead time to 20 weeks. As mentioned several times already, we have taken the necessary actions to these margins back to historical levels in 2023. And in third quarter 2022, order intake of $155 million, growth backlog of $470 million, representing growth of 37% year-on-year. This highlights AutoStore's strong fundamentals, including solid demand across regions and markets and warehouse categories. So with that, thank you for spending the time with us. We look forward to providing you with future updates.

Thank you, and goodbye.

This now concludes the conference call. You may now disconnect your lines.