WEBINAR REPLAY: January 2023 Investor Call

Hello everybody. Welcome to our January 2023 investor name. My title is Jeremie Capron, I’m the Director of Research right here at ROBO Global, and I’m speaking to you from New York. And with me in the present day, my colleagues, Lisa Chai and Zeno Mercer. And we’re going to speak robotics, automation, AI, healthcare applied sciences. We’re going to share some ideas concerning the latest market developments, after which we’ll take a better take a look at a few of our index portfolios. And the primary one is ROBO, R-O-B-O. That was the primary Robotics Automation Index. It began greater than 9 years in the past, in 2013. The second one is THNQ, T-H-N-Q. That’s the Artificial Intelligence Index. The third one is HTEC, H-T-E-C. That’s the Healthcare Technology and Innovation Index. And these portfolios mix analysis with the advantages of index investing. They’re composed of best-in-class firms from world wide.

We have small, mid, massive caps that we analysis, and we rating on varied metrics. And the best scoring shares make it into the portfolios. And then we’ll be taking your questions, so be happy to sort them into the Q&A field on the backside of your display. And I feel for all of us in funding trade, we’re glad to show the web page on the yr 2022, which actually was one for the historical past books by way of the hardships delivered to fairness and bond buyers, however particularly to massive tech, the place we have seen a few of the most brutal declines after two years of euphoria. And the ROBO Global Innovation indices weren’t proof against that, they usually underperformed international equities for the yr 2022, however actually to not the identical extent as a few of the extra concentrated, disruptive know-how indices on the market. Within this new yr, 2023 is a yr of alternative, as a result of there’s an enormous distinction between the declines that we noticed within the inventory market, and what automation firms are telling us and exhibiting us by way of their report order consumption and their, in lots of instances, report order backlogs.

So within the remaining quarter of the yr, the ROBO Global Innovation indices noticed fairly good positive aspects, and a few inexperienced shoots which may be setting the stage for progress to return. So let’s begin with robotics and automation, and the ROBO index portfolio that was up 12% in This autumn. It outperformed international equities by just a little greater than two share factors, with some fairly robust positive aspects in Europe, that was up 25%. And additionally in logistics automation, that was up some 20% or so. And I feel it is value discussing in the present day, logistics automation right here, as a result of that is an more and more essential a part of the robotics trade.

And many buyers in public equities are simply not uncovered to this large progress alternative. In truth, since we launched the ROBO index in 2013, this has been one of the best performing of the 11 sub-sectors that composed the portfolio. We noticed a complete return of greater than 300%, 340% via the top of 2022. And that is after the substantial decline final yr, when the sector was down greater than 40% in 2022. So what is going on on right here is that there’s an arms race to automate provide chains and warehouses world wide. And that race was began by Amazon, which is now operating one of many largest warehouse robotics operations on this planet. And that is actually enabling more and more brief supply occasions from click on to order to supply. And everyone else within the e-commerce trade is mainly scrambling to compete with this operational excellence. And it isn’t solely concerning the growth in e-commerce, but additionally, conventional retailers which can be constructing omnichannel operations which can be then feeding that vast transport and logistics trade, that’s dealing with a major label scarcity problem these days.

So there’s large progress in demand for logistics and warehouse automation, and it is essential to know that greater than 90% of the 20,000 or so warehouses within the US in the present day haven’t any automation in any respect in additional than 90% of these warehouses. So, we have recognized one of the best in school firms which can be on the forefront of this pattern. And in the present day, we now have 10 ROBO index members which can be centered on that, they usually account for about 14% of the portfolio. So you’ll discover firms like Daifuku in Japan, that’s the international chief in materials dealing with gear. You have GXO, that’s utilized by a few of the largest blue chip firms to outsource their order success or logistics operations. You’ll have firms like Zebra, that’s the international chief in computerized identification and different observe and hint applied sciences for provide chain. And Zebra was truly an early investor in Fetch robotics that is made the headlines this yr.

Fetch robotics makes autonomous cell robots for warehouses and distribution facilities and manufacturing and so forth. You’ll discover firms like Manhattan Associates, that could be a chief within the warehouse administration system, so that’s on the software program aspect. You’ll discover a firm like Cardex, that’s primarily based in Switzerland, that makes automated storage and retrieval techniques. And then you might have Auto Store from Norway, which is a warehouse robotic know-how firm that invented the dice storage automation. That is a really dense resolution for auto success, which you can mainly convey into an present warehouse and automate it in a flip turnkey style. And so, Auto Store was one of the best performing inventory within the ROBO index in This autumn, it was up greater than 65%. That’s coming after a really risky yr because it went public on the finish of 2021. They’re doing very well. You take a look at a gross sales progress that is nicely over 50% yr over yr, and enterprise that is already very worthwhile with EBITDA margins over 50%.

So, that is logistics. But as lots of you understand, the ROBO portfolio is uncovered to many different very robust robotics functions, from manufacturing to healthcare and enterprise course of and meals and agriculture. And in actual fact, the ROBO portfolio may be very diversified. And it isn’t solely throughout the 11 sectors, but additionally throughout market cap. You have about 40% in massive caps, however greater than 60% in small and mid-cap firms. And it is also diversified throughout areas, and that is a really international portfolio. In truth, you may see round 40, 45% in US shares and about 55 to 60% in one other 12 completely different nations. And the rationale I convey this up in the present day is as a result of ROBO has just about excessive publicity to Asia, at round 30%. And that is essential as a result of, first, Asia is the place we’re seeing the strongest progress in demand over the long run. And China already is the most important marketplace for robots in the present day.

And second, it is as a result of we’re seeing China reopening and stress-free, the overwhelming majority of the COVID associated constraints which were in place and actually holding again investments within the final two years. So with China reopening, we’re fairly optimistic in relation to the Asian piece of ROBO. And that’s not a lot Chinese firms, however actually, exporters into China. So we now have about 20% in Japan. Companies like Fanook and Yaskawa in manufacturing unit robots, after which you might have a very good variety of the know-how and market leaders in key elements that go into automated techniques, like excessive precision gears from Harmonic Drive or Nabtesco. You have linear movement management from THK, you might have pneumatic elements from SMC and so forth. And with the massive transfer within the Japanese yen within the final 12 months, the Japanese exporters have gained a major aggressive benefit that we expect they’ll profit from this yr.

Now earlier than I cross it on to Lisa, I need to come again to my earlier remark concerning the discrepancy between inventory costs, and the fact on the bottom within the automation trade the place demand stays very robust, regardless of all of the speak of recession. And I’m not saying it is not going to soften, nevertheless it’s exceptional how the basics have remained very robust. And on the identical time, valuations have dramatically compressed. And so in the present day, the ROBO index is buying and selling round 20 occasions earnings. That is down from a excessive of greater than 35 occasions, in 2021 on the excessive. And in the present day, we’re on the low cost to the long-term common valuation. And within the meantime, we see the earnings of these greatest in school robotics firms. They’ve remained on that basically good wanting progress trajectory. In truth, we’re gross sales progress of 11% in 2022. And the expectations for this yr, 2023, are additionally round low double digits. And that’s considerably above what is predicted from the broader market, the S and P 500 or international equities. So with that, we’ll cross it on to Lisa to debate healthcare know-how

Thank you, Jeremy. ROBO Global Healthcare Technology Innovation Index HTEC is a technique that we launched in 2019 that captures the expansion of the digital transformation that we’re seeing within the healthcare trade in the present day. It has a really robust concentrate on the following technology diagnostic options, in addition to the innovation that we’re seeing in medical IOT and data-driven applied sciences. After a number of difficult quarters, HTEC had a stable efficiency within the fourth quarter, growing 6.9%. The efficiency was pushed by robotics, medical devices, and diagnostic sub-sectors, which all gained double digits. While underneath efficiency in the course of the quarter had been in genomics and information analytics sub-sectors. Overall, 2022 was a difficult yr for HTEC index members versus a world market indices. So we had been actually inspired by the robust efficiency in the course of the fourth quarter with six of the 9 sub-sectors posting optimistic returns. HTEC index for the yr declined roughly 33% in comparison with broader market within the sea of 18% decline.

For the yr, precision medication was one of the best performing sub-sector, down nearly 10%, whereas the genomics and information analytics had been the worst performing sub-sectors. So with genomics declining over 60% 2022, we need to share our ideas on the sub-sector and spotlight just a few of our index members that drove the efficiency. We strongly consider that we’re nonetheless on the early innings multi-year cycle of genomic know-how, taking a middle stage in drug discovery, and likewise enabling that life-saving prognosis for uncommon illnesses in most cancers. The index members within the area are actually remodeling healthcare. The greatest motive for the selloff was that many of those firms had been buying and selling at very excessive valuations as a result of robust progress prospects, and buyers had been ready for the corporate to only develop into the analysis. Overall, we consider the basics haven’t modified. In truth, we’re seeing breakthroughs and acceleration investments from massive pharma to medical machine makers within the genomic area.

While we noticed steep selloff and possibly a few of the valuation resets had been mandatory, we’re already beginning to see the genomic firms recovering from a few of the deep losses that we noticed up to now yr. Companies in genomics and precision medication sub-sectors, for instance, like VeriCite, Garden Health, and Exec Sciences, are beginning to present signal of restoration. For instance, index member VeriCite beat and raised the forecast throughout fourth quarter, pushed by larger than anticipated gross sales at their most cancers diagnostic take a look at. VeriCite makes use of AI enabled genomic know-how to hurry up medical prognosis so medical doctors can present early remedy for these at excessive danger for thyroid and prostate most cancers. Meanwhile, Garden Health declined over 70% final yr, as the expansion slowed to only lower than 20% high line progress from 30% progress from the prior yr. They’re rising to be an essential participant within the liquid biopsy market within the areas of colorectal most cancers.

And the shared costs could proceed to be risky, however they do have one of the vital fascinating portfolios in most cancers monitoring, profiling, and diagnostics. They are within the early phases constructing this platform and demonstrating the facility of genomics and epigenomics, which is an space that you will hear extra about within the coming quarters. Shares of backyard are already getting a very good stability for the yr. We assume many of those transformers of healthcare are actually oversold as buyers de-risk their portfolios within the final yr. Exact Sciences, one other index member, which makes a speciality of most cancers diagnostics, have shared value achieve of fifty% in the course of the fourth quarter. And [inaudible 00:14:50] however one other 20% was a very good indication that these firms had been in an oversold state of affairs. So whereas the businesses in our genomic sub-sector did expertise large volatility up to now yr, the extreme a number of compressions have additionally supplied vital upside alternative for 2023.

Long-term drivers and demand for genomic applied sciences have solely strengthened, and we consider that our index members are very nicely positioned for remainder of the yr. Meanwhile, we’re additionally very excited concerning the medical instrument sub-sector, which holds the largest ready for HTEC at about 25%. It skilled robust positive aspects in the course of the quarter, pushed by hospital procedural restoration, and a really massive M and A deal for one in all our index members. In November of final yr, we noticed one of many greatest ever acquisition within the med tech trade, with Johnson and Johnson buying a biomed, our HTEC index member that we now have held because the creation of the technique. The biomed was acquired for 16.6 billion by J and G in the course of the quarter, a 50% upside from the closing value. The firm developed the world’s smallest coronary heart pump, and had over 18 years of revenue progress, and was nicely on its method in disrupting the 77 billion greenback cardiovascular trade when it was acquired.

While medical instrument sub-sector gained about 12% in the course of the quarter, it did negatively impression the attribution for the yr, because of heavy weighting of the index and ongoing provide chain disruptions that hit most of the machine firms. Longer time period, we’re very bullish within the medical instrument sub-sector, as many of those index members not offering simply the important merchandise for the medical procedures, however we’re seeing large innovation accelerating and environments appears to indicate indicators of enchancment as individuals are getting extra checkups, and e book their appointments for his or her surgical procedures that they’ve held off in the course of the pandemic. As we glance out into the yr, we might really feel actually strongly that our index numbers with subsequent NextGen Healthcare Solutions will proceed to be in robust demand because the world goes again to the pre-pandemic ranges. And our HTEC may be very nicely positioned to profit from a lot of the secular progress drivers on the market. Thank you. And now I’ll flip to Zeno, who will talk about THNQ.

Thanks, Lisa. Now I’m going to speak concerning the ROBO Global Artificial Intelligence Index THNQ, which offers publicity to firms world wide main the AI revolution throughout infrastructure in each broad and vertical functions which can be increasing GDP, creating new markets, and bettering human situation. We launched the index in 2018, and the area has seen unbelievable progress and progress since that point. It could be remiss to not discuss generative AI and chat GPT, however first, we are going to cowl some This autumn highlights and efficiency. The index row is 4.4%, with a continued fall in valuation right down to round 4.7 EV gross sales on the yr finish, with efficiency down 45% because the November 2021 peak, the place it was buying and selling at 9.2 ahead EV gross sales. So reported Q3 earnings noticed gross sales progress of 18.5%, which is under the long-term common of 23%. And on the flip aspect, we noticed EBITDA progress speed up to 32% progress.

So, breaking down the efficiency, we noticed eight out of the 11 sub-sectors within the optimistic territory, with semiconductor, client, enterprise course of, manufacturing unit automation and e-commerce up. While we noticed what had been a multi-year lengthy sub-sector darling, community and safety down 8.1%, with firms like CrowdStrike down 36% on conservative steering cuts for 2023. Big information and analytics was down 4.7%, and I’d like to spotlight that Ford EV gross sales have dropped from a relative excessive of 13X right down to 4.2X. An organization I need to discuss rapidly in that sub-sector, and massive information analytics. Alteryx, which is transitioning from a pure play observability platform right into a extra deployable, automation platform for the enterprise, was down 9%, even with a 12% high line beat and steering raised 14% for income and a 30% EPS elevate. We additionally noticed Mongo DB and Splunk decline, and these are all now at or under all their pandemic positive aspects.

We had been optimistic going into 2023 that that is the yr of AI primetime for adoption and deployment. From a monetary perspective, out of our 68 holdings, 90% are projected to have optimistic EPS this yr, with as many as 5% anticipated to cross that threshold within the profitability. So how we deploy and take a look at our index and allocation, we now have 54% into infrastructure at the moment. And breaking that down, we have got massive information analytics, semiconductor, community and safety, cognitive computing, and cloud suppliers. So I need to briefly spotlight SEMI, which represents the most important ready right here.

If you had been right here for our final name, you may keep in mind me speaking about SEMI being useless, long-live semi. And at that cut-off date, SEMI had been the worst performing index of the yr, everybody was very nervous concerning the area, seeing declines and stock construct up. And what’s occurred since then is, A, we had the CHIPS Act handed, which was truly within the third quarter, however SEMI was our greatest performing sub sector, and we noticed a number of firms, particularly these tied to AI, which is all of our firms, cloud and automotive, outperforming the final, exterior of THNQ, firms which have larger publicity to client markets, PC and Mobile, which is seeing a slowdown because of over-saturation, inflation, et cetera.

So we noticed some firms with some nice efficiency, and a few of that is only a rebound, however they’re nonetheless buying and selling nicely off at any form of excessive. So we had firms like Infineon up 38%, Amberella up 46%, ASML up 32%, and Nvidia up 20%. Piggybacking off that, we have seen over 200 million {dollars} in investments introduced in US semiconductor manufacturing capabilities anticipated of the following decade, benefiting from the CHIPS Act passage. A pair different highlights embody Amberella asserting a partnership with Continental for superior driverless techniques and good dashboards. ASML introduced plans to spice up CapEx to supply their flagship excessive ultraviolet machines.

And this anticipated enhance is predicted to generate further six to 10 billion {dollars} in income from their steering by 2025. So, that is a reasonably large enhance of their anticipated demand from their prospects. Their prospects being firms like Taiwan Semiconductor, Intel and Samsung and different massive foundries. Despite this information, ASML continues to be buying and selling 25% off earlier highs. Now switching over to the functions, which incorporates sub-sectors, consulting providers, enterprise course of, e-commerce, healthcare, manufacturing unit automation, client, we noticed client and e-commerce as leaders right here with client up 13% and e-commerce up 6%. The flip aspect of this additionally, we had seen these two sub-sectors additionally, the opposite greatest laggers alongside semiconductor up till Q3. So we’re seeing an indication of resurgence and reversal of oversold circumstances, with robust efficiency from Shopify, Netflix, reserving.com and jd.com. Now, I’d like to modify again over to what I previewed earlier, which was generative AI.

During the fourth quarter, we noticed the introduction of the publicly out there Chat GPT, which is from Open AI, which is partnered with and runs on index member, Microsoft’s Azure AI platform. So I feel everybody’s pondering proper now, what finish markets, enterprises, human conduct modifications could possibly be affected? And how does that change the movement of worth throughout society in organizations and governments? We count on Microsoft, for instance, to combine this tech throughout all merchandise, as they’ve unique entry to license the backend know-how versus the general public dealing with tech corresponding to Chat GPT, which is what is accessible for us to play with proper now. And so we count on this commercialization and subsequent downstream utilization to additional profit and speed up the area and adoption of AI. Core enterprise merchandise, web page and picture technology, communication, and even healthcare might be affected right here. As a reminder, Microsoft acquired Nuance, which offers conversational AI and instruments for healthcare corresponding to transcribing.

And we’re excited to see how that might assist scale back administrative burden within the healthcare area. And general, we’re excited to see what might be constructed to enhance optimistic human experiences right here. So shifting again to that Azure AI platform, which is what that is operating on, do not forget that, that itself makes use of many elements that comprise the AI stack, which many individuals do not understand or take into consideration. You see this on the floor, after which beneath is, consider an iceberg idea. So you have received different index members corresponding to Pure Storage, Arista networks. And then many different involvement software program improvement and developer operations which can be within the index, that present ongoing software program help and instruments to maintain this uptime. To be sure it is operating securely. So we count on enhance of AI community and cybersecurity spend to return from elevated utilization right here. A latest McKinsey report that got here out on the state of AI on this final This autumn, highlighted that virtually 50% of organizations that they surveyed have not less than one enterprise unit using AI, with the best share being robotic course of automation.

And they’re seeing very clear advantages on value discount and income enhance. So there is a distinction between adoption and exploring, experimenting, after which driving enterprise. And proper now, we’re in between that exploring and experimenting stage. So we’re actually within the early innings right here by way of adoption and spend within the area. And we count on, for instance, generative AI to be probably 100 billion plus trade over the following decade because it turns into extra built-in into completely different merchandise and components of our lives. And I’d like to spotlight that whereas we’re seeing report layoffs, AI spend is predicted to speed up this yr. So we even consider that, in a harsh atmosphere, this pattern will persist as the necessity for reliability, uptime, product modes, value discount will drive aggressive financial demand. With that, I’d wish to cross it again to Jeremie, and yeah.

Okay, thanks Zeno and Lisa, and now we’re going to take your questions. So be happy to sort them into the Q and A field on the backside of your display. And I need to remind everyone that on the finish of final yr, we revealed our 2023 tendencies report during which most of the extra thrilling progress tales round robotics, healthcare know-how and AI are defined intimately. So please check with that, report’s out there on our web site at globalglobal.com.