Qleanair AB

STO:QAIR

Earnings Call Transcript 2020-Q2

[Andreas Göth]

My name is Andreas Göth, CEO of QleanAir. A warm welcome to our results for the second quarter in 2020. As you heard, I also have our CFO, Henrik Resmark, with me today. So I would like to start with the the third page in our presentation. And just give you a short brief introduction to QleanAir. We are a global provider of indoor air cleaning solution. We have very diversified and large customer base with more than 2,500 customers around our market. Our main markets today are Japan, Germany, U.S. and Sweden, but we also have establishment in 10 more European countries. We have a revenue based or a rental based revenue model, which means that we are renting out a solution to our customers in the areas where we operate. We are typically signing 36-month contracts, which includes installation, preventive service and functional guarantee to our customers. We are since December last year listed on the NASDAQ first growth market in Sweden. And just a few words about our financial targets. The growth target that we have is to continue organic growth story, and the ambition is to grow with approximately 10% on an annual basis. And we want to do that in a profitable way. So our target is to have a 15% to 20% EBIT margin over the years. This is our midterm target, so meaning 3 to 5 years. We also have ambition to pay dividends to our shareholders, 30% to 50% of the net profit that we generate. So if you go to Slide 5 and give you a business update for the second quarter. We are very happy to release our second quarter today. We have seen a strong growth in the quarter and increased profitability. The sales increased by 26%, up to SEK 137 million, and the organic growth was 24%. So very strong numbers in terms of sales growth. Also, our EBIT margin increased a little bit to 23.6%, and amounted to SEK 32.4 million for the quarter. Also, it came with a strong operating cash flow, which increased to just short of SEK 35 million. So that's all very strong. However, we are affected by the COVID-19 pandemic and our order intake was affected by it and decreased with 29% for the quarter. And it's been a tough quarter in a way that it's been tough to go out to our customers, to meet our customers. We have had lockdowns in many markets around the world. So that is, of course, affecting our short-term order intake. However, we also believe that the pandemic will increase the general awareness about the need to have a healthy and safe indoor environment. And we see that already now that the interest for high-quality air cleaning solution is increasing on a daily basis. So that's in the long term, very positive for us. If we go to our different markets or geographies, we had a very strong performance in APAC, which means Japan for us; and also the Americas, the U.S. market also saw some strong increase in sales growth in the quarter. And as you can see in the graph here on Slide 5. Again, strong sales, but we had a tougher situation when it comes to the order intake, the margins -- EBIT margins stayed very stable. And so that's all very good. So if we go to Slide 6, go to -- go through our 3 product areas which we operate with. And starting with Cabin Solutions. We had a very strong quarter in Japan. And we've had a long shares -- or years of growth in Japan, and the last couple of quarters here have been exceptionally strong. We had a -- for new law coming into effect 1st of April, which has boosted our sales in Japan for the quarter here. We also have a very positive outlook for the coming years in Japan. We will continue our growth in this market. We saw a 25% increase in total for Cabin Solutions, which also includes our European markets. And the Cabin Solutions is all about protecting people from passive smoking in workplaces, in offices, in public places, but also in production sites and institutions. So if you go to Slide #7, that our second product area, Room Solutions, it's very much about our clean room installations. We build clean rooms for our customers in various segments, but mostly in pharma -- hospital pharmacist, third-party compounders and also MedTech [ producing ] companies, laboratories, et cetera. Our markets here are the U.S. and also the Sweden and Nordic markets. In terms of sales growth, we had a very strong quarter. In terms of orders, it was not so strong. We had -- we saw a lockdown in many states in the U.S., which affected our ability to do active sales work. So a little bit of a mixed situation here. But again, we have a long-term positive outlook for these product areas. So if we go to Slide 8, Facility Solutions. Facility Solutions is all about protecting people from different kind of contamination in industrial context or in health care context or now even in office context. We are operating here mostly today in our European markets, but we're also looking to establish product areas in other markets going forward. We have had -- in the second quarter, we had some really positive product launches. We launched a food graded version for the food and beverage industry, which we believe very much in. Especially now with a push from the corona pandemic, we see the increased need to have a safe and healthy environment for the food industry going forward. We also did some upgrades of our existing product range here, FS70 product, for the industrial environments and offices, with HEPA filters, also as an effect of the increased interest in high-efficiency filtration to create a safe indoor environment. So that's all very positive. And we saw a growth -- sales growth with 10%, a little bit more than 10% in the quarter. But also here in European markets, we were affected by the COVID-19 pandemic, in the meaning that it's been very tough to get out and have physical in-person meetings with our customers, and that is affecting our sales work. So go to the next slide, talk a little a bit more about the COVID-19 impact for QleanAir. And of course, we are, as many, many other organizations and companies, affected by this pandemic. Of course, as I said, the most obvious effect for us is the sales work. It's tough for us to get out to meet our customers, to understand their problem and show how we can solve their problems. And that is, of course, affecting our order intake as long as the markets are closed or semi-closed or hard to get out there. We are continuing to monitor the situation also from a cost perspective, from a cash discipline perspective. We have, of course, launched some cost-saving projects here. We are also redirecting our R&D work towards the opportunities that we see in the market here. And also from a positive perspective, I think it's fair to say that we -- with the business model that we operate with, with the rental contracts and increased amount recurring revenue, that makes us a little bit more resilient to a crisis as we all see now. So that's all positive from a risk perspective for QleanAir. And also, if we look at the long-term perspective and the opportunity here, we see that the virus risk in general and the COVID-19 specific, put the focus on having a good and safe indoor environment and a good air quality, and that will affect our business, in general, and us also. So -- and in the short term, as I mentioned, we see already now from certain segments, an increased interest in our solutions, in the health care, we talked about that last quarter, and also from the food industry more and more. If we go to next slide, I just wanted to give you some heads up on what we do and how we try to also to help our customers in the market in this very challenging time. As I said, we have all our products. Cabins and Room Solutions are already from the start equipped with HEPA 14 filtration. So that's all in the market. And now also all other products like facility products can be equipped with the HEPA 14 filters if needed or requested by customers. So what we do now here? We have, just before the summer, and we will do that again, launched a campaign what we call Back to Work to our customers and also other prospects in the market to help them create a more safe and healthy indoor environment. It could be in office space, in canteen areas, in conference rooms or public areas as well. So if we go to Slide 11, just summarizing where we are. We are extremely happy, especially in this time, about our more than 2,500 customers around our markets. They are extremely loyal, and we try to be as loyal as we can to them in these times and make sure that they get the best service from us as they possibly can. We have seen an increased recurring revenue, as I said, amounted to 47% in the quarter. So that's, again very positive for us, making our P&L more resilient to short-term challenges. And again, we have a very strong quarter in Japan from Cabin Solutions. So that is increasing. Of course, the split between our product areas, which you can see on on the pie charts on the slide. So with that, I think I'll hand over to our CFO, Henrik Resmark, who will go through the financials.

[Henrik Resmark, Chief Financial Officer]

Thank you, Andreas. Yes. Henrik Resmark here, CFO. Moving to Page 13. As mentioned by Andreas, another strong quarter from QleanAir, sales growth of plus 26%. On sales growth, we have contribution from all product categories. Facility Solutions is up 10%; Room Solutions solutions, plus 58%; and Cabin Solutions, plus 25%. At the same time, the order intake in the second quarter is clearly hit by the current situation with COVID-19. Page 14. Still more than 75% of our customer contracts are either renewed or extended. It is clear that QleanAir has had a very satisfied customer base, and the customer base is growing with increasing installed units globally. In second quarter, the recurring revenue increased to 47% of the total revenues, up from to 43%. QleanAir's recurring revenues have so far proven to be valid also in corona times. We have paying customers. Looking at the EBITDA, increased to SEK 32 million from SEK 25 million, that is an increase of plus 29% and an EBITDA margin of close to 24%. EBIT is increased to SEK 25 million from SEK 20 million, plus 28% and a margin of 18.5%. And we can move to Page 15. And here, I would like to highlight 3 items when it comes to the cash flow and the balance sheet. The equity ratio improved to 21%, up from 13%. And the net debt is reduced to SEK 223 million, down from SEK 259 million. We have a clear strategy to reduce the net debt over time. And the operative cash flow increased in the second quarter. We have a very cash-generative business model. And there is a clear strategy to pay dividends to shareholders. The dividend early this year was postponed due to COVID-19, and it's really up to the Board of Directors now to monitor the situation together with us to see if there will be a change on that decision. And then finally, Page 16, to summarize the numbers. We had a growth of 26% and the target is around 10%. We have an EBIT margin of 18.5%, and the target there is 15% to 20%. And I mentioned the dividend situation this year. But the payout ratio target is 30% to 50% of the net profit. Over to you, Andreas.

[Andreas Göth]

Thank you, Henrik. Then just summarizing the second quarter where we are and where we're going, Page 17. And I think, again, we are very proud of the very strong second quarter. And we also feel very good that our rental business model makes us more resilient to these kind of environments that we are all under right now. So that's all very good. We are continuing to invest in our products, especially in the new product areas, Facility Solutions and Room Solutions. That's also very important for our long-term term growth opportunities. And again, a special thanks to our customers in this time. We are, again, very proud of our 2,500 customers around the globe. And they stay -- they keep the relationship with us, and they've been very loyal and they like what we do and what we offer them. So a big thanks to our customers. And again, for the long-term growth, we will continue to invest in our markets, in our products to continue the growth strategy here with -- in a profitable and responsible way. So with that, I think we are open for questions.

[Operator]

[Operator Instructions] Our first question is from Anders Roslund from Pareto Securities.

[Anders Roslund, Analyst]

You reported a very impressive sales development, but the order intake is significantly weaker. How should we interpret that going forward, given the fact that the order intake doesn't reflect the sales development. What is the leading indicator here?

[Andreas Göth]

Yes. Hello, Anders. As I said, yes, we are affected in order intake, and that's basically all our markets, we see lockdowns in the quarter, and that makes it more challenging for us to go out to meet our customers and have active sales work. And what we also have seen now is that the market is gradually opening up of course. And -- but we will have to look and be a bit humble here for the market conditions going forward. It's still very uncertain how the markets will act now in the fall here that we go into. But in general, you can say that our order intake is affecting our sales quite short-term because normally, in Facility Solutions and Cabin Solutions, where we have an order, it's not more than 4 to 6 weeks until we have an installation that thereby can recognize the revenue. It's a longer period of time when it comes to premium installations, then we have a longer lead time from order to installation and recognize revenue.

[Anders Roslund, Analyst]

Yes. Could you describe a little bit the outlook for Facility Solutions and Room Solutions, given that it seems that there have been more impact by the COVID-19 than Cabin Solutions?

[Andreas Göth]

Yes. For sure. We also -- in terms of order intake, we were affected also in Cabin Solutions in Europe and north in Japan. But we -- in the longer term, what we see is the underlying market drivers are still there, very much in all our markets. So that hasn't gone away. It's even so we see, especially for Facility Solutions, that the longer-term opportunity could be even higher, as I said, because of the general awareness that we now see in the market, the COVID-19 pandemic is kind of educating the market in the need to have a safe and healthy indoor environment. And that is increasing the interest for air cleaning solutions. However, in the very short term, it's still, for us, it's very much -- we need to have the possibility to meet our customers and to understand their problems in person and also to match our solutions. So in the short term, yes, we are very much dependent on if our markets are open or close. But in the longer term, we see increased awareness, leading to more opportunities in many segments. But we see already now in the health care a little bit, also in the food industry and also increased interest from the office environment and workplaces, in general.

[Anders Roslund, Analyst]

I mean you haven't given any specific outlook for Q3, but shouldn't we expect an order intake that is improved, given the lockdown that at least there are no specific lockdowns left.

[Andreas Göth]

Yes. Well, again, we don't give any forecast about that. But we -- of course, we are -- markets are opening up for sure, and we are also looking for new opportunities that arise in the short term. So we do -- we will do, of course, as always, whatever we can to help our customers in these times. Exactly how that will land in the third quarter and the fourth quarter, it's really too early to tell. Because again, it's very much -- it's a lot of uncertainty in the market still, so we don't give any specific forecast, even though, as you said, the markets are more open now than it was in April and May, for sure.

[Anders Roslund, Analyst]

Specifically the Room Solutions, you address hospitals and pharmacies. And how is that area developing in the U.S. short-term now?

[Andreas Göth]

Yes. Same thing there. The market opportunity and the market driver is still very much there, stays the same. There is still a high need of Clean Room Solution for the hospital pharmacy market in the mid-to-long term. However, these customers, the hospitals and their pharmacies, they are -- also of course, redirected our focus to treating COVID-19 patients here. So that's a bit of a challenge in the short term. That has clearly affected our order intake in the second quarter here in the U.S. But again, in the long term, we are continuing to build our pipeline. We still have our customer. It's not like the customers go away, do something else. They are just refocusing under what they believe more important [our] topic in the short-term right now.

[Anders Roslund, Analyst]

Yes. And finally, coming back to the Cabin Solutions, the impressive development in Japan, how is that proceeding now after April 1 when legislation was launched.

[Andreas Göth]

A very good question, Anders. And again, we see now for the last 6 to 9 months, very strong growth -- exceptionally strong growth, and that's, of course, a little bit boosted by the launch of the regulation from 1st of April. So yes, it will not stay on that level of growth going forward. But still, we are on the growth story here in Japan, continue to be that. And we see a lot of opportunities. We still have a very low market penetration. So there's a lot of opportunity for us in the long-term in Japan, both in terms of CapEx, but also in terms of -- in the longer term, our different products here. In the short term, yes, we also saw some lockdowns in Japan, in Tokyo. So also that is affecting us from order intake perspective here. And also there, we will see how Japan is acting now going forward.

[Anders Roslund, Analyst]

Okay. Have you -- how is the development outside Tokyo? Has you succeeded getting in other cities?

[Andreas Göth]

Yes. We have a sales office in Osaka with 2 sales persons, and we also do business in other cities. However, we continue to focus on the premium [ Solution ] segment in Tokyo. We believe that's a very, very, very strong market for us. We have a good brand recognition now after more than 10 years in that market. We have a fantastic list of customers, and we still have a quite low penetration rate here in that. So we will continue to focus on that. However, we also see -- looking forward to build our Osaka office going forward. And we are doing installations in other countries -- in other cities as well outside of Tokyo and Osaka, mainly on the Eastern part of Japan, yes.

[Anders Roslund, Analyst]

Okay. And now for the plans for opening up in China or Shanghai or something like that?

[Andreas Göth]

No actual plans today. But of course, we always look to -- for new opportunities, both in terms of market establishment and product development and so on. So -- but no concrete plan for that right now.

[Anders Roslund, Analyst]

So when it comes to the growth parts of your business, the Room Solutions and Facility Solutions, you mentioned our new products launched for the food and beverage industry. Could you discuss a little bit more about future plans in both those areas for product development or entering new market niches?

[Andreas Göth]

Yes, absolutely. Yes, we will continue to focus on the food industry. We see there are more regulation in that market. And it's all about consumer safety at the end of the day. So it's that -- we like a high degree of regulation. And also, the demand from this size of customers are higher in terms of our product quality, in terms of filter efficiency, et cetera. And that's what we like as a premium provider of air cleaning. Now -- we now have a very strong product to address that market, and we will continue to drill down that segment in all our European markets, I would say, with a special focus on the Nordics and Germany, Austria and Switzerland. And in other segments, we will continue our -- we have a pipeline of product development. And as I said, we are focusing product development on our new product area, Facility Solutions. We also see now this increased interest from the health care industry. So that's -- again, it's a little bit early days for us, but we will continue to look for opportunities in the health care industry going forward. And also the office market, we also see increased interest for our products now. So that will also be affected in our R&D work going forward. In terms of Room Solutions, I think we have a very, very strong product today in a modular Clean Room Solution. We are continuously developing or fine-tuning that product to make it even better for our customers, even more efficient for ourselves in terms of installation work, et cetera. And -- so that investment focus will continue for Room Solutions. And also, we are looking to, of course, IoT solutions going forward, which is important for all product areas. Yes.

[Anders Roslund, Analyst]

And also comments about the cash flow. You were a little bit afraid of that clients were going to be impacted by COVID-19. That rental income could be postponed or so on. Have you had any payment difficulties from rental clients?

[Henrik Resmark, Chief Financial Officer]

Of course, we have had some few customers coming back to us with certain comments depending on how the economy in the different countries who are closed down. But on a general level, we have seen no big variations in the cash flow coming in from current contracts. So as I said and stated, we have paying customers also in these difficult times. So no, not really. It looks very stable, I had to say.

[Operator]

And at the moment, there are no further audio questions. So I will hand the word back to the speakers.

[Andreas Göth]

So Henrik, do we have any questions from the web?

[Henrik Resmark, Chief Financial Officer]

We have no questions from the web, through the e-mail. No, we don't.

[Andreas Göth]

Okay. Good. Then I thank you all for attending this second quarter presentation by QleanAir. And again, we're very happy to report a very strong result for the quarter. And looking forward to continue our growth journey going forward. So thank you, everybody.