Airthings ASA

OSE:AIRX

Earnings Call Transcript 2022-Q4

[Oyvind Birkenes, executive]

Hi and good morning. Welcome to our fourth quarter presentation from 2022. I'm Oyvind Birkenes, the CEO of Airthings. With me today, I also have our CFO, Jeremy Gerst. Please send any questions in the chat. There is about 20 seconds of delay so to ensure that we get the questions at the end, please send them in. So I just want to remind everyone about the purpose of Airthings, it's really about empowering the world to breathe better. And air has much bigger impact on energy consumption, on our health and well-being than most people think. And we are super focused on our purpose and we use this to really steer our businesses and strategies around the Consumer segment and for Airthings for Business. So Airthings, we have been growing fast over many years. 2022 has been a challenging year with limited revenue growth. We went into 2022 with high inventory at our Consumer channel partners.Inventories at our channel partners has had a major decrease during 2022 and this had a significant revenue impact as well during 2022. It has also created very high inventory levels for Airthings so we have higher inventories now. But we also see this as an opportunity going into 2023. We are currently aggressively selling down inventories and converting it to cash. And we are super focused on our long-term ambitions with Airthings and I'm going to talk more about that later in the presentation. So the fourth quarter ended at $9.5 million. This is the lower side of our guiding range and we were hit by some canceled orders late in December. A gross profit margin of 59%. And so far this quarter, we see great progress in the Consumer segment with some of the campaigns we're running, but still a bit slow start on Airthings for Business as we see companies are taking longer to make investment decisions with that.We keep a fairly wide guiding range for the first quarter, but it's narrower than the last quarter. So we guide for the first quarter of 2023 with a revenue of $8.5 million up to $11.5 million. If you look at some of the highlights from the fourth quarter, it's certain that we see continuous growth in consumer device registrations for our smart products. We had a really great show at CES and get lots of attention at CES. We've been there now many years and we released our new Consumer app. We also secured now an RCF credit facility with Danske Bank of $8 million that's going to help us moving forward. Also we just got a Gold Medal from EcoVadis, which I'll talk a bit more about, and we were just also certified with ISO27001, which is very important for security and Internet security for Airthings. It also really is an important step as we grow and sell more into big enterprise customers around the world.We just launched this week our Energy Efficiency Toolkit for facility managers and building owners around the world. It's our first step here to really ensure facility managers and building owners can save a lot of energy by running their buildings much more efficient. What we see on the lower side is really that distribution partners have been reducing their inventories and they are demonstrating cautiousness under difficult market conditions so this impacts both our Consumer segment and Airthings for Business. And we are taking steps to improve our balance sheet through working capital improvements, selling down our inventories, doing sales and cost initiatives and we are doing some financing alternatives and we'll also talk more about that later in the presentation. So our brand awareness is continuing to increase. Web sessions is up 48% in 2022 versus 2021. This is the last time we will report on web sessions specifically.But for sure brand awareness and what we do in the upper takeover funnel is going to be important also moving forward, but we'll report it differently from the first quarter of 2023. So EcoVadis is 1 of the world's most trusted business sustainability rating companies. They have rated over 100,000 companies. We received our first rating with a silver rating in 2021 and we have really taken some big steps and was rated as gold now already in 2022. We are now scored among the Top 3% of the companies globally within electronics. I'll do an update by the segments; the Consumer segment, Airthings for Business and also the Professional segment. So for the fourth quarter in the Consumer segment, we had revenues of $6.2 million, which is down about 5% year-over-year. For the full year it's about flattish revenue growth for the year, but certainly our inventories at our channel partners has decreased significantly throughout the year.We see that global uncertainties are continuing to affect the market visibility and so far with the campaigns we're running in the first quarter of 2023, we see a good uptake on Consumer. The gross profit margin was 57.2% in the fourth quarter, which is a bit down from the third quarter, but it's also driven by promotional activities with Black Friday and the holiday season. When you look at device registrations, we see continuous good growth. This is a leading indicator and a proxy for the true end demand for our smart consumer products. For the fourth quarter, it was up 22% and pretty much aligned with the year-over-year for the full year growth which was 23%. Airthings for Business ended up with a revenue of $2.8 million, which is down 14% year-over-year. For the full year of 2022, Airthings for Business is up almost 50%. What we see in Airthings for Business is that we're very dependent on few very large contracts and that underlying business has not grown as we expected. I will come back more on that.We see also now with the current market environment that some of the Airthings for Business deals are being pushed out in time as companies are more cautious with their investments. So the devices in the field has grown more than 150% year-over-year in the fourth quarter compared to the fourth quarter in 2021 and this is a driver for underlying growth in our annual recurring revenues. So Airthings for Business has been a start-up in Airthings since about 2020. We have experienced very fast rapid growth, but certainly with growing pains. We have had an opportunistic approach to win business and we ended up with manual processes and inefficiencies in the way we go to market and in the way we operate this business. So this has not worked out as we intended and this is something we are currently fixing. We are sharpening the strategic focus and direction of Airthings for Business and we are enhancing its value proposition.So we'll have more discipline and focus on what we do moving forward as we have had a very broad outreach. We will narrow the focus on target geographies and target segments that we are selecting and we will also be much more targeted when it comes to the product and the service offering we'll go after with these customers and market segments. And then we are taking steps and spending more internal resources to get operational excellence and scalability so that we can be much more efficient going out in the field meeting customers. We are also strengthening the value proposition of Airthings for Business. We had a very boost with COVID and now getting people back to the office and that people wanted to ensure that the health risk of being in office is good. Now we're coming with an energy optimization offering with our Energy Efficiency Toolkit that we just launched at AHR early this week. AHR is the largest trade show within the HVAC industry worldwide and we had a really great show there.We see that we can save about 20% of the energy consumption in buildings utilizing the Airthings solution, many times much more than 20%. The solution will provide actionable insights and analytics on how facility managers and building owners can run their buildings optimally so that they can provide fresh air, heat and cooling when needed and where needed. We're getting lots of attention from customers on this and we see this as a new beginning and a new era for Airthings for Business. For the Pro segment, I'm not going to spend so much time on that. We still see a challenging home inspector market in North America. We had revenues of about $0.5 million in the fourth quarter, but with very high gross profit margins of 85%. Our annual recurring revenues ended at $3.6 million in 2022 and this is really driven by the growth of Airthings for Business. Airthings for Business part of the ARR has been growing by 43% year-over-year.Then I'll set it over to Jeremy who will talk more about the financials.

[Jeremy Gerst, executive]

Thank you, Oyvind. So beginning with the inventory situation. The inventory levels at Airthings remain high and actually increased in the fourth quarter so up to around USD18.7 million. This is in part because of the muted revenue results we experienced in the fourth quarter as well as continued production due to purchase orders that were placed earlier in the year and in 2021. So because of that, we've seen an increase in the average days of inventory from 370 up to 466 and obviously we're working to get this down. Aggressive steps are being taken over the course of the first half of 2023, including promotional activities and campaigns, to bring the inventories down and return the capital back into cash. We're also doubling down our efforts on pushing out supply.In addition, as Oyvind mentioned, we secured the USD8 million revolving credit facility from Danske Bank and this will help to augment the operational efforts that are in place to improve the working capital situation. In addition to that, and as Oyvind will mention and go into more detail later, we're also proposing a capital share issuance. If we turn to the income statement. As Oyvind mentioned, revenues for the fourth quarter were $9.5 million, which is down 10% year-on-year whereas revenues for the full year came in at USD35.4 million, up 5%. For the fourth quarter and for 2022 overall, gross margin came in at 59%. And for the fourth quarter, we saw EBITDA of minus USD2.8 million with reductions in both payroll and operating expenses together around $1 million from the fourth quarter last year.EBIT came in at minus $3.1 million and reflects depreciation of right-of-use assets for leases primarily under IFRS 16. And then the financial income and expenses are due to currency fluctuations. So we saw a weakening of the U.S. dollar towards the tail end of the fourth quarter. In terms of the balance sheet, when we look at the significant changes in assets, there's obviously been an increase in the deferred tax asset due to the losses experienced over the course of 2022. It's also inventories have increased significantly over the course of 2022 over $7 million. Other receivables have also increased and cash has decreased due to profitability, working capital and exchange rates. In terms of major changes in liabilities, equity is obviously down partially driven by the losses to the tune of around $10 million and then also because of currency fluctuations to the tune of around USD7 million.We've also seen a decline in long-term liabilities, a slight decline in trade and other payables and lower provisions due to the segment mix. Turning to the cash flow statement. The cash flow from our operating activities was minus USD6 million. A good portion of that was driven by the losses in the quarter, the operating profit and then also because of net working capital due to the increase in inventories. In terms of investment activities, it's fairly similar to prior quarters where it was minus USD0.5 million and this is largely driven by internally generated intangible assets in the form of R&D activities. Cash flow from financing activities was minus $0.1 million and we saw a positive net unrealized foreign exchange difference in the fourth quarter given the currency fluctuation between U.S. dollar and the Norwegian krone, which is a reversal of what we've seen in prior quarters.Turn it back to Oyvind.

[Oyvind Birkenes, executive]

Thank you, Jeremy. So we'll provide a summary and an outlook. So we did a revenue of $9.5 million and gross profit margin of 59% in the fourth quarter. We see this as muted results in both the Consumer and Airthings for Business segments and also due to distribution partners lowering their inventories during the year and we also see uncertain market conditions where some of the Airthings for Business deals are being pushed out in time. Given the overall market uncertainties, Airthings is intensifying its focusing on optimizing the business operation, reducing inventories and improving the cash position. And we're really sharpening the strategic direction of Airthings for Business and enhancing its value proposition. The focus areas are expected to enable Airthings profitable long-term growth ambitions. And we acknowledge that it's unlikely to fulfill our ambition to reach revenues of $100 million already in 2024. We will come back more on our long-term goals later in the Capital Markets update this fall.Despite the overall uncertainties, we believe we can get back to strong growth later this year. So given the market uncertainties and the company's financial positions and to remove any uncertainties about the company's liquidity position for the foreseeable future, we have secured the credit facility with Danske Bank of $8 million to strengthen our balance sheet. We're also proposing a private placement of new shares to raise NOK75 million of new capital. Our largest shareholder Firda together with A management is committed to subscribe for NOK50 million and to guarantee a full subscription of NOK75 million and this is to be decided on Monday on February 13. Outlook for the first quarter is revenue range of $8.5 million to $11.5 million and we expect our annual recurring revenues to grow to somewhere between 3.7 and $4 million by the end of the first quarter. Our long-term outlook are supported by lasting factors and megatrends. This has not changed and we are fully committed to provide great results over the coming years. Fresh healthy air and energy optimization will still be very important for companies and people in the future.With that, I'll say thank you and I'll open up for any questions and Jeremy will support me in answering.

[Unknown Executive]

Due to the macroeconomic headwinds, can you help us understand a bit better your visibility for 2023 in both Consumer and Airthings for Business?

[Oyvind Birkenes, executive]

So we don't guide for the year. Did everybody hear the question then? So we don't guide for the year and certainly there is uncertainty in the market. We believe that we're going to come back to strong growth in 2023. The Consumer segment has had a strong start as we are running some campaigns and promotional activities in the first month here now. We also have the Radon season now in January and February for the Consumer segment, which we have seen very big attention in. So we're also now running Airthings Masters, which has also brought a lot of attention. So we see a lot of good activities now in the Consumer segment and we believe this is going to continue. For Airthings for Business, we see that some customers and companies set the bar higher to make decisions on investments. Many companies out there are looking for ways to save money and we see all the reduction in force for many companies around the world. So with our enhanced focus on energy efficiency and the way companies and enterprises can save also money utilizing Airthings, we see this as a big opportunity and we also believe that the market environment will improve over time. So we still foresee also strong growth for Airthings for Business in 2023.

[Unknown Executive]

Next question. What was sell-through growth to end customers during full year 2022 and fourth quarter?

[Oyvind Birkenes, executive]

In the Consumer segment, our device registrations grew by 23% for the full year of 2022. So this is for our smart products and that's the dominant part of the Consumer segment.

[Unknown Executive]

Okay. While you have been talking about cash preservation initiatives and ended up not growing your talent pool by end of 2022, your annualized cash burn is still more than $10 million and you are now raising capital. How should we think about the cash burn into 2023? Is the capital raise an indication you will be less focused on profitability? Help us understand the shape of the profitability curve.

[Jeremy Gerst, executive]

No, the capital rate shouldn't be interpreted as less focus on cost optimization. We're, if anything, going to be doubling down our efforts on that. I think you can continue to assume that personnel expenses will hold relatively constant and then we're going to be focusing a lot of our efforts on the variable cost drivers that impact other parts of the other operating expenses and finding reductions there. So we believe we can grow the top line without corresponding increases in other operating expenses.

[Unknown Executive]

Is all of the delta ARR into first quarter of '23 expected to come from Airthings for Business?

[Jeremy Gerst, executive]

Yes. We're expecting the increases in ARR to be coming from Airthings for Business and Pro to remain relatively constant.

[Unknown Executive]

Given you have to make some structural changes to Airthings for Business, is it fair to assume the targets for 2024 are delayed?

[Oyvind Birkenes, executive]

So what we said is that our target of $100 million in 2024 is not likely to happen. So we will come with updated goals later in the Capital Markets update this year. But we foresee strong growth for Airthings for Business in 2023 and 2024.

[Unknown Executive]

You mentioned channel inventories are now mostly depleted. Does this mean that the sell-in growth is a lot higher than the sell-through in first quarter?

[Oyvind Birkenes, executive]

So we see that there's much more orders coming now in the Consumer segment like weekly orders than what has happened earlier. We still see that some retailers and channel partners are willing to go to -- to be empty before they reorder. So it's also we see that these retailers and channel partners are very cautious. But we certainly see that there's opportunity to grow more now as we kind of have depleted a lot of this inventory.

[Unknown Executive]

Could you give an indication of the relative development in inventory among your biggest customers? Example, how many fewer SKUs are they holding now compared to 1 or 2 years ago? Also can you please be a bit more granular on the actions you will do in Airthings for Business? Are you dropping some partners and/or geographies? Are you making bigger alterations to your go-to-market strategy?

[Oyvind Birkenes, executive]

When it comes to the Consumer for example, some of our large partner in the Consumer segment have had a lot of inventories for example of some of the Wave products through 2022, which has been depleted so Wave Plus and Wave Radon. The View products, we couldn't really get hold of in the beginning of 2022 so those kind of started to ramp more during 2022 and has had relatively low inventory throughout the year. When it comes to Airthings for Business, some of the changes certainly is also around partners and finding the right partners to go with and we need to work with partners that generate value for us. So that's certainly part of the enhanced strategic focus in Airthings for Business.

[Unknown Executive]

Do you believe that demand from Amazon as a partner has been permanently lower following the introduction of their own device? Could you please explain a bit more about the long-term competitive dynamics with the Consumer segment?

[Oyvind Birkenes, executive]

So we see continuous growth on Amazon. We are performing very well on Amazon both in U.S., in Canada and in Europe. We see that some big corporations like Amazon and IKEA are coming in with air quality monitors as well. It's not really competitive with our devices if you start to look at the features and feature sets. But what we see is that this heightened focus on air quality and we see it like even what we reported last quarter with the Indoor Air Quality Summit at the White House for 4 hours that yes, these big corporate starts to go into air quality. That is an opportunity for us. We see that that's a growth opportunity for Airthings. And we will continue to be super focused on creating the best products and best solutions within indoor air quality both in Consumer and Airthings for Business. So we see that this is a market, it's a new megatrend. People are getting more and more interested in this as they're getting more interested in health and well-being. So we are for sure seeing that this is a good opportunity and it's a natural step that big companies will also go into this market.

[Unknown Executive]

What are the covenants on the debt facility?

[Jeremy Gerst, executive]

So I'll share some details there. It's primarily connected to working capital. It's a facility for working capital so there's covenants placed on the usage of it in terms of the size of our inventories and in terms of the size of our trade payables -- trade receivables, sorry.

[Unknown Executive]

How will you work to decrease your inventory levels going forward?

[Jeremy Gerst, executive]

I think we've communicated that earlier in the presentation there's promotional activities ongoing especially on the Wave Plus and Wave Radon. You can see that both on our website and in other retail channels. And then in addition, as I mentioned, we're working on pushing out supply to avoid additional inventory coming in.

[Unknown Executive]

How do you work to increase your brand awareness globally?

[Oyvind Birkenes, executive]

So we have a very professional marketing team that are doing amazing things. Right now there is Airthings Masters going on and we're getting a lot of attention due to that. We are working in big media around the world. We have interviews all the time because we are seen as 1 of the leaders within air quality worldwide both for Consumer and in Airthings for Business. We are at the largest trade shows around the world. We are very professionals like we talk to the real big companies now at AHR early this week within the HVAC industry and I think what we hear is they're very impressed of Airthings and what we're doing. And of course we're doing a lot of performance marketing on the Amazon platform and also for our own web shop and channel marketing with our retail channel. So marketing is going in many layers and many ways to build Airthings as a very strong brand.

[Unknown Executive]

You said you are performing well on Amazon in U.S., Canada, et cetera. Could you please quantify this? What was sell-through to end customers in these geographies in 2022?

[Jeremy Gerst, executive]

Yes. We don't break that down in that level.

[Unknown Executive]

Payroll expenses have been on average between 45% to 50% of revenue. Are you planning to reduce this for 2023?

[Oyvind Birkenes, executive]

The Consumer revenue?

[Jeremy Gerst, executive]

Yes. I think the absolute level is expected to remain relatively constant. But as a percent of revenue, obviously we're striving to increase revenue. So as a percent of revenue, we would expect it to fall.

[Unknown Executive]

No more questions.

[Oyvind Birkenes, executive]

No more questions? Thank you. Thank you, Jeremy.

[Jeremy Gerst, executive]

Thank you.