Qleanair AB

STO:QAIR

Earnings Call Transcript 2024-Q1

[Sebastian Lindstrom, executive]

Hi, and welcome, everyone, to the QleanAir Investor Presentation for Q1 '24. My name is Sebastian Lindstrom, I'm the CEO of QleanAir and joining me in today's call is Henrik Resmark, our CFO at QleanAir. Henrik and I will go through the presentation and then open up for Q&A towards the end.So starting off with the numbers for Q1. In short, in constant currency, we achieved a growth of 3%. But due to the weakening of the Japanese yen over the last 12 months of about 11% versus the Swedish crown, it ended up in a slight decline of 1.6%. We delivered sales of SEK 119 million in the quarter versus SEK 121 million last year. The negative currency effect amounted to SEK 6 million in the quarter related to the Japanese yen. Our recurring revenues were stable on par with last year at SEK 75 million in the quarter and over SEK 300 million by the end of March.Our gross margin achieved was 69% versus 71% last year. Main reason is the product mix between Cabin Solutions and Cleanrooms in the quarter. Our cabin sales in Japan was in Q1 still affected by the lower stock of renewals in Japan on the 3-years anniversary of the pandemic. And as we have referenced before, our cleanroom business has been weak in margin due to historical lack of cost inflation protection in our contracts. And in Q1, we still delivered on projects won back in '22. We do, however, see the numbers moving in the right direction over the course of the quarter.Our EBIT margin is an improvement over Q4, but around 4 percentage points behind last year. This is, of course, partially due to the lower gross margin and the negative currency effect in Japan of about SEK 2 million. We have continued to invest in our sales activities, but this has been compensated by lower cost centrally.Our operating cash flow was 0 in Q1. This is, of course, due to the lower EBIT, but as well the balance between accounts payable and receivables in the quarter. Henrik will expand more on this under the financial section. Our EPS or earnings per share were SEK 0.53.Summing up the quarter, we still have work to do, but the [Technical Difficulty] and we have good [Audio Gap].

[Operator]

We are currently having some issues. The conference will continue shortly. The conference will continue now.

[Sebastian Lindstrom, executive]

All right. So sorry for that, some technical disturbance. I don't know exactly where I lost you guys, but summing up the quarter in this slide, we still have work to do, but we really have a good momentum, and we have very good traction on the initiatives that we've already taken.Looking at it from a regional perspective, APAC continues in a solid way, considering the lower renewal stock of contracts on the 3-years anniversary of the pandemic and the lower value of the Japanese yen against the Swedish crown. Just as a note, Air Cleaners in Japan grew triple-digit in the quarter.EMEA continues its growth path and grew 4% with very continued strong performance on the Air Cleaners side, and this despite known cancellation of contracts related to schools in Germany.U.S. had a strong quarter, in line with growth momentum of last year, close to 50%. It is evident that our increase in sales presence is starting to pay off as our pipeline is stronger than ever before. Our focus in the U.S. is on margin improvements.We continue our focus on the short and mid-term objectives of cost control, sales efficiency and customer focus. As introduced in earlier calls, we call this the QleanAir wheel. It's a combination of operational improvement and strategic acceleration. The inside of the wheel on the left side of the slide is our operational improvement, ensuring that we grow organically and improve our profitability. This portion must spin. It is through our operational performance, we earn the right to strategic investments. In this respect, our focus in Q1 has been on securing the improvements in the U.S. that we laid the platform for during last half of '23. We can already, in Q1, see a gradual improvement. We have also, during Q1, continued our investment in improving our buildup of sales in Europe with focused training investments in Germany, France and Sweden.The outside of the wheel is our strategic acceleration. We've just completed our workshops across all geographies together with our sales and service teams to identify the next products and technologies to develop. Already in the next quarter, we expect to launch the first new solutions that we picked up from the last year's spin of the wheel.In this quarter, I have replaced the customer cases that we usually have with a little bit of a broader perspective on what we do at QleanAir. In essence, we provide the freedom of clean air, meaning we take care of maintaining people, products and processes in the best possible indoor environment. We provide, in this way, peace of mind for our customers. We do so with our positioning to be a specialized provider of premium solutions. We really go to the bottom of the challenges of our customers to come up with the appropriate solution. And we do so with the purpose of making a real difference through clean air and the promise of freedom of clean air.We really understand the complexity of the indoor environment. Whether it's an office, a school, within the health care or industry, we understand that there is a combination of solutions that are required. One solution cannot fix it all. In principle, you need 3 things to complete the solution. In the background, you need HVAC, which is the general ventilation system of any building. Its main purpose is to bring fresh air into the building and maintain the health of the building itself. This HVAC as well provides a first line of defense against particles from the outside.However, any indoor environment is connected to the outside through windows and doors and more importantly, people, product and processes themselves are sources for particles and generate particles from within -- from inside the building. To support the HVAC in dealing with the people, product and processes inside, you need primary and secondary filtration solutions. Primary filtration capture particles directly at the source, but they can't capture it all, and that is where secondary filtration comes in to capture those particles that were not captured in the primary solutions. At QleanAir, our focus is on primary and secondary filtration. Our cabins are primary solutions, capturing the smoke straight from the source and thereby preventing any secondary smoke harm. Our clean zone solutions are primary as well. They secure a low particle environment by blowing HEPA-filtrated air over a certain product or process or creating a low particle environment in protection of the person working with the product or process that otherwise could be harmful.Our Cleanroom solutions are secondary filtration, providing a safe background environment for critical processes for us, primarily in the pharmaceutical compounding area. And our Air Cleaners are often deployed as secondary filtration, lowering the particle in a certain area or, for instance, improving a recovery time in a surgery room.Through our long experience in providing specialized solutions for our clients, we have developed a strong know-how and versatile products that can play a variety of roles in securing a great indoor environment. Our FS 70 has been purposely designed to handle a variety of tasks. It can be used to create a positive pressure in the room, safeguarding the integrity of this room against activities in the outside of the room, pretty much like a cleanroom. It can also be used to create a negative pressure in the room and thereby protecting the outside from activities within that room. FS 70 can also provide a clean zone by blowing particle-free air over a certain process or over an operator in the process to safeguard work safety. And of course, we can do a combination of these with one and the same product. This versatility of our product and the knowledge of our teams put in use is what truly makes QleanAir unique.To sum it up, before handing over to Henrik and the financials, we deliver great value to our clients. The base of our business is well balanced. We operate across 3 regions and our 3 top geographies, Japan, Germany and the U.S., all ranked in the global top economies of the world. We have 3 product categories where Air Cleaners and Cleanrooms are growing steadily double-digit. We have a very low customer dependency and serve over 3,500 customers around the world. Our regional supply chain have provided us protection against logistic disturbances in the world and allow us to respond quickly to market needs. We continue to grow our recurring revenue over SEK 300 million as we closed the first quarter.Our 2024 Q1 report is not extraordinary, but it is stable in both revenue and profitability and a number of measures have already been initiated that expect to yield results in '24 and beyond. And we can see during the first quarter that figures are starting to move in the right direction.With that, I'd like to hand it over to Henrik to take you through the financial update. Henrik?

[Henrik Resmark, executive]

Thanks.QleanAir by region in the first quarter. We are present in 3 geographies with 3 different product categories. In QleanAir growth, both EMEA and APAC are strong contributors to sales, profitability and cash flow. EMEA accounts for 47% of QleanAir group revenues, revenue growth of 4% in the first quarter. EMEA is a strong and stable Cabin Solutions market. And Air Cleaners in Europe is growing by 14% in the first quarter. More and more countries are contributing with revenues to a higher extent.APAC accounted for 42% of the QleanAir group revenues. Cabin Solutions is a success in the Tokyo area, and there is a clear demand for our solutions in Tokyo. And we are gaining more and more traction with Air Cleaners through focused work on chosen customer segments. In the first quarter, Air Cleaners grew by 161% in Japan.Americas increased to 11% of the QleanAir group's total revenues. We see a clear growth potential in QleanAir U.S., and the first quarter, the revenues were up by 47%.Stable net sales and profitability in the first quarter. We have a growth of 3% currency-adjusted in the first quarter, amounted to SEK 119 million. The recurring revenues accounts for 63% of the total revenues and amounts to SEK 75 million. That are rental contracts, including service that QleanAir is renting out on a quarterly basis.The gross margin is 69%, sequentially, a slight improvement from 67% in the fourth quarter 2023. QleanAir U.S. is gradually improving the gross margins in the first quarter. Also, the EBIT margin is sequentially improving versus the fourth quarter 2023, up to 10% versus 8%.This slide illustrates the relation between the book values of units in QleanAir balance sheet and the revenues stemming from such units, including service. We call that the recurring revenues. The recurring revenues increased to SEK 307 million on a 12-months rolling basis. The recurring revenues are a solid base of revenues that to a larger extent are predictable in the future. The book value is relatively low, approximately SEK 49 million compared to the recurring revenues, and this is a contributor to our gross margins.To break these recurring revenues down per unit on an average, the revenue is approximately SEK 59,000 with a book value of approximately SEK 9,000. We experienced a high profitability on renting out the units over time.Revenue split and installed base. Quarter-by-quarter, we continue to increase our installed base. We see a growth in Air Cleaners in both EMEA and APAC and in Cabin Solutions in APAC. And the Cabin Solutions in EMEA is a mature market for us. We have 3 different revenue streams: the mix of recurring revenues, sale to finance companies and product sale to end customer. It is a strength to increase the recurring revenues on a 12-months rolling basis. And in combination, we continue to sell long-term rental contracts to finance companies in Japan, and we are also offering product sales.Balance sheet and cash flow. The cash flow declined in the first quarter, partly because of a lower operating profit and partly because of unfavorable change in working capital. On a quarterly basis, this can happen, we still believe that the long-term, we will generate strong cash flows. We continue to amortize according to plan every quarter, and the net debt to equity ratio improved down to 0.8. And today, QleanAir has the Annual Shareholders Meeting and the proposal is to pay out SEK 0.6 per share. That is equal to approximately SEK 9 million.Having said that, I hand over to Sebastian for a summary.

[Sebastian Lindstrom, executive]

Thanks, Henrik.And to close off the session in front of the Q&A, what we do at QleanAir is really important. We dedicate our work to improve the health of people, the quality of products and the performance of processes, and we do so throughout our 3 product categories: Cabin Solutions, Air Cleaners and Cleanrooms. And looking at the amount of clean air that is delivered through our solutions, we estimate that we cleaned 7.21 billion cubic meters of indoor air by end of March 2024. It's an increase of 9% over last year, and it matters as air pollution is a key challenge for human health. People die prematurely from exposure to polluted air. And we spend an important part of our lives in the indoor environments and indoor air can often be more polluted than outdoor air.So with that, I'd like to open up for questions, please.

[Operator]

[Operator Instructions] The next question comes from Anders Roslund from Pareto Securities.

[Anders Roslund, analyst]

Yes, I would like to start off with your long-term outlook. You expect 10% organic growth and to be in the margin range of 15% to 20%. If we look at the sales range, you don't give any forecast for this year, but how do you see about the growth target for this year?

[Sebastian Lindstrom, executive]

Yes. So we are sticking to the targets that we have communicated before. So we see, in our business, a good opportunity for growth also in 2024.

[Anders Roslund, analyst]

Okay. If we...

[Sebastian Lindstrom, executive]

I think -- I mean if you go listen to what we went through, right, the Air Cleaners, the Cleanrooms are growing at double-digit rate in certain markets, the Air Cleaners are growing triple-digit. But -- and on the cabin side, it is very evident and I've spoken about it through Q3, Q4, and we knew it was going to affect Q1 is this lag of pandemic effect that we have on the renewal stock in Japan. So...

[Anders Roslund, analyst]

Yes. And that's what I was going to come back to just specific area of Cabin Solutions. Do you expect that the renewal rate will improve gradually or is it a step change? Or will it still be on the more of the existing level for...

[Sebastian Lindstrom, executive]

So we've, for sure, passed the point of -- the low point sort of on the renewal stock for Japan. So now it will gradually improve. And coupled with that, we're also reaching more into a broader segment with the small- and medium-sized businesses in Japan. So there are a couple of things speaking for us in that respect.

[Anders Roslund, analyst]

Yes. I was just wondering about that because for a very long time, you've said that you should try to penetrate the market outside Tokyo, but so far -- in the Cabin Solutions area. But so far, you have been very successful in Tokyo, but you haven't really succeeded outside Tokyo. And what's the news here? Is it a cheaper product or a broader product?

[Sebastian Lindstrom, executive]

So our first approach, and I don't know if we've spoken much about it, is an addition to our cabin range that is fitting more into the medium- and small-sized company into the HoReCa segment. So -- but of course, that's not targeted specifically for the areas outside of Tokyo, but rather to reach another customer segment, if you will. We do focus also outside of Tokyo. We have our own team in place in Osaka, for instance, but we see Air Cleaners more strong in the outside areas, and we still see growth potential even within Tokyo on the cabin side, just reaching into a broader segment of customers.

[Anders Roslund, analyst]

If we continue with the Cabin Solutions, but now focus on Europe, you mentioned France as an area you have sort of started to grow again. That is on low levels, I would assume.

[Sebastian Lindstrom, executive]

Yes. So we've been present in France on the Cabin Solutions area for quite some time. But what we're really focusing on is driving the air cleaning business in France. And just as I mentioned, I think we grew 60% -- over 60% in France in the first quarter. So this is sort of a change of our approach, right? We -- as we mentioned last year is that we really want to focus on a few markets and really make a difference. And France is one of those markets where we have gone from basically 1, 2 resources in the region to 4 or 5 resources. So -- and that is paying off. And remembering that it always takes some time when you put new feet on the ground, but I think they've been really impressive in the speed of which they have started to move.

[Anders Roslund, analyst]

Yes. Good to hear. Then coming back to Air Cleaners again and this impressive 161% up in Japan, you don't disclose any absolute sales figures there?

[Sebastian Lindstrom, executive]

No, we don't. But it's -- the team has been doubling their business now for some time. So it is very positive. And I was just over in Japan on a new training session and also through workshops of -- and it was very positive.

[Anders Roslund, analyst]

Which are the primarily -- which are the clients in Japan?

[Sebastian Lindstrom, executive]

So it's actually a mix. Sometimes, we think that the HEPA-filtrated solutions for offices, as everyone forgot about the pandemic, and there is no need anymore. But actually, in Japan, we're still having customers that are looking for protection against pollen or allergic content or whatever it could be called. So that is growing, but the primary focus is actually on the industrial side.

[Anders Roslund, analyst]

Okay. And then coming back to Europe, where you mentioned that it was up 14% despite that you have a higher churn there that there are quite some orders that you got during the COVID time in Germany that are not repeated. So how come that your growth is so strong despite this setback from Germany?

[Sebastian Lindstrom, executive]

So it is, for sure, the air cleaner deployed in industrial environments. So -- and it is evident, like I said in my introduction, that we really have a truly unique approach in really understanding the problems -- the real problem at the customer site. And we are really good at providing solutions for industrial use, both to protect product, process and people and that is really paying off.

[Henrik Resmark, executive]

If I can add, I mean, we made a strategic move. And as Sebastian said, we have invested in people in France, and France particularly has really paid off. And there, we see a huge growth in Air Cleaners in the first quarter.

[Anders Roslund, analyst]

In France? Sorry?

[Henrik Resmark, executive]

In France, yes.

[Anders Roslund, analyst]

Air cleaners in France, I missed that. Okay.

[Henrik Resmark, executive]

Yes. We have a growth in Air Cleaners in France.

[Anders Roslund, analyst]

[ That for me ] -- France has been a new market for Air Cleaners?

[Henrik Resmark, executive]

Yes. I mean we are launching Air Cleaners in more or less all our 11 countries in Europe. And as I said, more and more countries are contributing with more sales in Air Cleaners. And France is one example of that. Yes.

[Anders Roslund, analyst]

I mean that's very important that you are sort of the -- the order boom you got in the Air Cleaners during the COVID [ era ] sort of boosted sales of this HEPA filter equipment. But now it's like that is coming down, but you're outgrowing that with industrial sales. It's the right way to...

[Henrik Resmark, executive]

Yes.

[Sebastian Lindstrom, executive]

Yes.

[Henrik Resmark, executive]

Yes, for sure.

[Anders Roslund, analyst]

That's much more -- it's much better for the long-term development that you have an industrial focus here.

[Sebastian Lindstrom, executive]

Yes.

[Anders Roslund, analyst]

Very interesting.

[Sebastian Lindstrom, executive]

And it goes also very well across Europe, well together with our already existing customer relationships on the cabin side, where we -- take for Germany, for instance, a lot of our cabins are deployed in industrial environments. So it is very easy for us on existing customer relations to build also upon our air cleaning business. And I think also this growth that we have turned into Europe has something to do with the fact that these are workshops that we're doing, more training activities, strengthening the sales teams in their knowledge and their ability to provide solutions.

[Anders Roslund, analyst]

Yes. Very, very interesting. So finally, we come to the cleanroom business and the U.S. You have taken away the order intake, so we can't see that anymore. So how is it going there?

[Sebastian Lindstrom, executive]

Yes. So as I at least tried to allude to, we have a stronger pipeline than ever. We've spoken about it before on the regulation and so forth, that's still providing tremendous demand, which is why we have met up with that demand by adding more salespeople. We now have people all the way from California to the East Coast. And prior to that, we only had 2 people, now we have 4 people. So very positive from a growth perspective. And through full last year, we grew about 50%, right, in the U.S., and we maintained that growth momentum throughout Q1.

[Anders Roslund, analyst]

Yes. But that's from a little bit lower level. So it's so dependent on the big orders you have got. So it's a little bit question what's in the pipeline. So -- but you say that the pipeline is stronger than ever. So let's just hope to see that.

[Sebastian Lindstrom, executive]

Yes. And as I have alluded to before, right, the challenge on gross margin and so forth, we did quite some actions and measures last year. But through Q1, we're still delivering on some of the real old contracts. And the reason why we took away the orders is that it really is -- doesn't have a good connection between revenue and orders. I mean if you present orders, there is expectation of revenues following or at least being able to forecast revenue in a way. And in the cleanroom business, it can pass more than a year between the order intake and the actual revenue. And that's the reason that we took away the order information.

[Anders Roslund, analyst]

No. But coming now to the margin development, at least my -- according to my estimates, your gross margins were quite good, given the situation you just described, but there were significantly higher costs -- other costs. But could you little bit more elaborate on that? You have several cost items here.

[Sebastian Lindstrom, executive]

Yes. So as we -- about a year ago, we made some reductions, right, on the central team. And that was really in order to open up for more investments regionally. So I think what you see in the increase on the external cost is what I guess that you're referring to.

[Anders Roslund, analyst]

Yes.

[Sebastian Lindstrom, executive]

That's quite well compensated by lower personnel costs, right? So those are planned investments into the regions. That should, of course, generate revenue as we go forward, but have some higher service costs as well.

[Henrik Resmark, executive]

Yes. But also to comment on that, I mean, also on profit level, we're hit by the weaker Japanese yen. That is, of course, one thing. But also, we are not happy with the current margins and the current contribution from Air Cleaners in the U.S. And that is extremely focused from our side to improve that. So that is the main reason why we have a decline in the gross profit first quarter versus last year. And coming back to the costs, yes, they will be too high because of certain service costs we have had in certain countries in Europe that were not planned for. But they are also higher because we have done some efforts in certain countries to increase sales, and one example is France. So in France, we have increased certain costs to increase the sales. And we believe that, that will pay off both long-term, but it's also paid off already in the first quarter. So it's really a mix of combinations. And as Sebastian stated, we're very clear, our goal is to be at 15% or above for sure. And we think that we will be able to be there long-term.

[Anders Roslund, analyst]

When you mention, I mean, higher sales staff, et cetera, that's obvious when you go for higher growth in all your areas. But those certain services costs, is that something that you catch up for areas where you -- where the quality is not perfect or whatever? What is that services cost related to?

[Henrik Resmark, executive]

The service cost is mostly related to Germany, our largest market in Europe, where we have changed the service partner way back, and we have some issues there that we are on top of. But that is the main reason why we have temporarily higher costs in Germany.

[Sebastian Lindstrom, executive]

But we've also -- as you know, we removed the marketing spend centrally and moved that more regionally. And we also -- so it's quite natural to see a transition from saved personnel, own staff centrally, to having more external cost in the profit and loss sheet.

[Anders Roslund, analyst]

Okay. And finally then the cash flow. You already described that, that will improve. Is it some specific items you're thinking about then?

[Henrik Resmark, executive]

Yes. I mean, looking at the first quarter, we made some payments towards some suppliers, both in Sweden, both in Japan and primarily in the U.S. that really affected the cash flow in the first quarter in a negative way. So -- and again, looking at the financial data that we have delivered during the last years, it's easy to see that most quarters and 12 months rolling, we are still delivering strong cash flow in relation to our EBIT and EBITDA. And for sure, we think that, that will continue. And we have had some quarters before that were more or less 0 from a cash flow perspective. But we continue to amortize the debt side. We will pay out the dividend and the financial target on the dividend and the business model based on the cash flow will continue.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Henrik Resmark, executive]

Sorry, sorry, I think there is a -- I got a question on the webcast. How come that the salary costs are going down and the average number of employees are unchanged?That is just a matter of timing when people started at QleanAir. We had some joining really late in 2023, and we had some costs in the beginning of the year. So it's -- that is the reason for that. It's purely a timing thing.

[Sebastian Lindstrom, executive]

And also to comment on that, even though the number of people are coming up, it's a totally different setup than a year ago. So we've moved from central resources more to regional resources. And any additions on the central side is purely related to support sales, so either in the product area or in the technical sales support area, all to drive sales.All right. So Henrik, no more questions on the web?

[Henrik Resmark, executive]

I can't see anymore. No, that's the one.

[Sebastian Lindstrom, executive]

So if no more questions, I would like to thank you for your participation and interest in our company, QleanAir, and wish you a great continuation of the day. Thank you.