Qleanair AB

STO:QAIR

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and welcome to the presentation of QleanAir's Q2 results. [Operator Instructions]

Today, I'm pleased to present CEO, Christina Lindstedt; and CFO, Henrik Resmark. Speakers, please begin.

[Christina Lindstedt, executive]

Thank you very much for that, and very welcome to our Q2 presentation.

Next page, please. Overall, Q2 was a mixed quarter for us, with a mixed development in our markets, with investments for future growth and an increase in our installed base and recurring revenues. We delivered a very strong quarter in Japan, where the fact that society remained open after long times of lockdown during the pandemic had a positive impact on customer demand and we grew both our sales and our order intake.

In Europe, we had a softer quarter where we've seen that the uncertainties in the global economy linked to the war in Ukraine has impacted customer decision processes, especially in some larger projects.

In Americas, we had a soft second quarter, both in sales and in order intake. But during the quarter and after the closing of the quarter, we're starting to see strong signs of recovery in the U.S. market and an increased activity level in our U.S. team.

We continue to deliver a strong underlying profitability in our business with high gross margin. We've continued with our investment to drive growth according to our plan to develop our sales organization, investments in marketing, in innovation and in business development. In the quarter, we do not yet see the results in terms of growth for all of these initiatives. Some of these investments are more mid to longer term. The lower sales level in combination with the increased level of variable operating costs led to a lower EBIT margin in the quarter.

We continued to increase our installed base of air cleaning solutions, which drives our future revenue generation and also how much clean air we deliver. And we increased our clean air delivery rate of 23% in the quarter compared to the same quarter last year.

Next page, please. Moving into summarizing Q2 in numbers. We saw a decline on the total sales level by 4% compared to last year, leading to a sales level of SEK 108 million. We saw a decline in order intake by 2% compared to the same quarter last year, leading to SEK 89 million in order intake. Then one should bear in mind that this figure can vary to a larger extent in between the quarters.

In the last quarter, in Q1, for example, we had announced a large order in Germany worth over EUR 2 million, which had a very positive impact on the order intake in that quarter. An increase of recurring revenues by 9% led to SEK 69.8 million in absolute numbers of recurring revenue. And this was based on the growth in rental agreements, which led to the growth in recurring revenues, which is one of the strengths of our business model which provides us with a good visibility into our future revenues. On the other hand, it also means that we have a slower growth pace since the revenue level generated upfront is lower.

We delivered gross margin of 71.8%. And the combination of the lower sales level and our investments for growth led to an EBIT margin in the quarter of 10.4%.

Next page, please. At QleanAir, we have a strong customer base of more than 3,000 customers globally. We have long-term relationships with our customers and our solution to remain on site with our customers for a very long time, and that some of our rental agreements are either extended or renewed. And we have strong opportunities to cross-sell our different solutions to our global customer base.

We have 3 main markets. Americas with the U.S. is our smallest market at the moment. It represents 5% of sales and order intake due to what was a softer quarter, but it was also a quarter when we started to see good signs of recovery with an increased activity level through our local team, leading to higher order intake towards the end of the second quarter and going into the third quarter.

In addition to that, we've recently communicated 2 signed letters of intent for lower the clean room projects for hospital pharmacy systems was USD 1.8 million. Our focus in the U.S. is to broaden our customer base and our network for leads and sales generation. We have a stronger pipeline. And we look positively upon our ability to get to growth and profitability in the U.S. with our current U.S. team, even though it has taken us longer than projected initially.

In Europe, we had a softer quarter. We had a decline in order intake by 6% and in sales by 8%. This was partly linked to a change in mix, where we had a lower contribution from clean rooms, both on the order side and on the sales side. On the cleanroom side, we do not work to the same extent with rental agreements as we do on Cabin Solutions, for example, which means that the cleanroom sales and orders usually have a faster contribution to the growth pace.

And secondly, we also saw delays in some decision processes linked to the macro situation. We also had -- when we compare our air cleaner sales with the 2021 quarter, we had a very tough comparison quarter because we increased our sales on the air cleaner side with more than 100%. And we also incurred in the quarter some delays in one of our cleanroom projects in Europe.

In Europe, we communicated 2 important launches for us in the second quarter, and these launches will be important vehicles in our future growth. We continue also to gain larger orders in our core segments on -- especially warehousing logistics side and in the Nordics on the air cleaner side, which will be installed and sold towards Q3 and Q4 in the quarter. We continued in the quarter to add sales resources in Germany to our successful team there in order to be able to cover more ground in the very important German market. And we see very good possibilities for us to continue to grow our business significantly in Germany going forward.

We had a strong quarter in APAC and then Japan, a positive effect on demand from the open society. We have a strong contribution to the group profitability from Japan. And we had strong renewals, leading to an increase in sales of 11.5% in the quarter and an order intake of 21%. We also continue to see a positive development on our launch on the air cleaner side into the industrial segment, which is our core segments -- one of our core segments in the European market. And we continue to add sales resources to our Japanese team to drive further future growth.

Next page, please. In the quarter, we had 2 important launches. The first one was QleanAir Connect, which is our cloud-based IoT solution, where we can connect our air cleaners, we can monitor the air quality and optimize the operations of our units. And we can manage a fleet of air cleaners in a hazard-free way through a customizable portal. This solution is especially suitable to larger industrial installations with many air cleaners, whether it's a need for our customers to optimize the fleet. And the initial focus in terms of which customer segments we address is on the industrial and warehousing logistics segments with a larger fleet of units and where we see a strong demand for these types of units. And we see our QleanAir Connect solution as one important vehicle for growth.

Going forward, we also see great opportunities for us to continue to develop the content of QleanAir Connect in order to continue to deliver customer value, but also to continue to optimize the efficiency of our own service processes. We have already had a positive impact in terms of order intake in Q3 from the QleanAir Connect. So this will be one important tool for us going forward.

Next page, please. The second important launch was to launch VDI-compliant solutions. There was a new norm coming out last year from VDI, which is the association of German engineers, with new requirements for mobile air cleaners focusing on schools and offices. In Germany, very early on during the pandemic, there was a very high awareness that advanced air cleaning solutions can contribute to reducing the virus concentration. And that was also at an early point in time a strong focus from the German state to invest in air cleaning solutions for schools. So to be able to comply with these new norms, it's very important in order to be competitive in the future opportunities within this segment. So this has been a very important focus area for us.

And in terms of content in the norms, they are about reducing the aerosol concentration in the air. It's about maintaining a very low sound level. It's about quantifying a minimum number of air exchanges per hour in the room together with the ventilation system. It's about not generating discomforting turbulence in the room, and it's also about not producing any byproducts like ozone. And it's also that the units must be possible to resist vandalism.

And we feel that by living up to these norms, we increased to a large extent our competitiveness in the German market for these customer segments, but also for markets outside of Germany given the importance that Germany has in terms of acting as a role model when it comes to quality standards. And also the VDI launch has already contributed in a positive way to our business. At the very end of Q1, we announced a very important renewal for us with a school system in Ludwigshafen in Germany worth EUR 425,000. And there, it was a prerequisite that the unit would be VDI-compliant.

Next page, please. With that being said, I hand over to Henrik Resmark, our CFO.

[Henrik Resmark, executive]

Thanks. So let's move to Page 10, please. The order intake was down by 2% in the quarter. Japan had a strong quarter with an increase by 21%. EMEA was down by 6%. And also, the U.S. was down. However, in the beginning of the third quarter, we have seen some recovery in the U.S. Sales was down by 4% in the second quarter. We continue to see growth in Japan, plus 11%. EMEA was down by 8%. And the U.S. was also down.

Operating margin of 10.4%, which decreased from 18.5%. We have continued to invest in measures for future growth, marketing, sales promotion, product management and also business development.

All in all, it's a mixed second quarter. The investments for growth did not pay off in the second quarter, but our measures that we assume increase growth over time.

Page 11, please. QleanAir continues to deliver strong gross margins. And rolling 12 month, the EBIT margin is approximately 16%. The cash flow is weak January to June. This is partly because of the larger cleanroom in Sweden, where we have increased trade receivables and also increased inventories.

Page 12, please. This slide illustrates the relation between the book values of units in QleanAir balance sheet and revenue stemming from such units, including service. The book value is relatively low compared to the recurring revenues, and this is a contributor to our gross margins. The recurring revenues were up by 9% in the quarter. And recurring revenues are a solid base of revenues that, to a larger extent, are predictable in the future. Now SEK 272 million on a rolling 12 month.

Page 13, please. Quarter-by-quarter, we continue to increase our installed base. We see a growth in air cleaners in Europe and also in cabin solutions in Japan. And also, the cabin solutions in Europe is in a very solid market for us. The number of installations is increasing more than the revenues, and this is partly because of the fact that the average price for a Cabin Solution is considerably higher than for an air cleaner. We are now lacking primarily product sales. And once we get U.S. up to speed, we anticipate an improvement in sales growth.

And then finally, Page 14, please. We continue to amortize every quarter. The net debt-to-equity ratio is 1.0 and the equity ratio is close to 30%. We paid out a dividend of SEK 22 million during the second quarter, and that was equal to 38% of the 2021 net profit.

Having said this, I hand over to Christina for the final word.

[Christina Lindstedt, executive]

Yes. Next page, please. Moving from financial update to ESG update. We measure since several years every quarter how much clean air we delivered through our installed base. And we are very proud to see that we, every quarter, deliver an increased volume of clean air. And at the end of the second quarter, we delivered a volume of 5.88 billion cubic meters per hour, which represented an increase of 23% compared to last year.

Next page, please. The next step for us, we have an overall strong focus on profitable growth. The current market circumstances has impacted our short-term growth capabilities, and that also means that we have tight cost control. We will continue to prioritize selective investments in growth, in sales driving activities and the development of our sales team and in innovation. And in the medium term, we still see good opportunities to grow. The air cleaning problems that we sold are global, and our solutions are global. We have good opportunities to scale our customer segments and do that in more of the markets where we already have a presence. We have good opportunities to leverage our product portfolio and innovation and the investments we've done in terms of marketing tools and platforms. And we will continue to develop our sales organization and our cooperation in order to increase our reach. And we have the ambition in the medium to longer term to deliver 10% in average annual growth at an EBIT margin of 15% to 20%.

With that being said, we would like to hand over for Q&A.

[Operator]

[Operator Instructions] The first question comes from Anders Roslund at Pareto.

[Anders Roslund, analyst]

Yes. I have a couple of questions here. And I just picked up Henrik's last comment here that the better growth scenario in the U.S. will show up in better sales here. Is that already short term? Or is it longer term? It sounds like an outlook.

[Henrik Resmark, executive]

Yes, yes. Good question, Anders. No, the fact is that, as I said, we see a slight recovery in the third quarter when it comes to order intake. And of course, that will materialize also in the P&L over time. I will not guide in what quarter and how this will affect the P&L. But given the size of the recurring revenues and the solid ratio we have, if we can get the U.S., we'll have to speed here with primarily product sales. That would, of course, boost our P&L over time. But I'm reluctant to guide on any certain quarter here. But over time, we assume that U.S. will come up to speed and contribute to a much, much larger set, of course.

[Anders Roslund, analyst]

Yes. Just coming back on this U.S. scenario here. You have recently reported LOEs of some SEK 20 million. When you talk about the recovery now in the U.S., is that excluding those large orders? Is it also other activities that are showing up now?

[Christina Lindstedt, executive]

Yes. I think as I mentioned in my part also, it's a combination. We saw -- with the increased activity level in our U.S. team, we saw an increase in order intake towards the end of Q2 and going into Q3. And in addition to that, we have those -- these 2 higher letters of intent signed. So it's a combination. It's firm orders as well.

[Anders Roslund, analyst]

That's interesting. Is it the same type of clients as before? We have talked about hospitals, pharmacies. Or are there new client groups?

[Christina Lindstedt, executive]

The letters of intent are -- it's the same type of customers, and it's also solutions for hospital pharmacies. But what we are doing in the U.S. team is to broaden our customer base. So on the one hand, to continue to address pharmacies and hospital pharmacies, but not only government alone, but also moving into the private sector where we experience faster decision processes, that's one part of the strategic developments we're doing. And in addition to that, we are also addressing other types of customer segments, more similar to the customers we sell premiums to in Europe within net arena, for instance. Yes.

[Anders Roslund, analyst]

Okay. I continue with Japan. It seems that you have seen now a sequential growth here since the second quarter -- the first quarter that it is recoveries. Is it part the Japanese recovery from the COVID? Or is it -- how do you explain the market growth in Japan?

[Christina Lindstedt, executive]

Yes. I mean, given that our current business in Japan is very much focused on the office environment and its -- to a large extent, Cabin Solutions to the office market, which was negatively impacted by the lockdown in the society and the fact that people were not in the office, and we saw that coming back towards the end of the first quarter. Early in the first quarter, there were still periods of, as they call it, emergency lockdowns. But in the second quarter, we haven't experienced that at all. So then that we continuously see an increase in demand on our Cabin Solutions.

[Anders Roslund, analyst]

I mean this is sort of a new scenario now after the new legislation was implemented in April 2020. So what sort of market conditions are you seeing now in Japan? Is it an improvement of existing equipment? Or is it new clients coming in? Or what sort of...

[Christina Lindstedt, executive]

It's a combination. And we had very, very strong renewal rates in our Japanese business. So that is one important contributor. We have many larger customers where we continue to add installations within the same customer. But then we also address new customers. And going forward, we are also broadening our scope for the Japanese market, introducing more products to target different parts of the market, more of the medium part of the market in the Tokyo area and also focus on geographies outside of Tokyo. We already have a branch, for instance, in Osaka. So looking at the growth path of QleanAir going forward, Japan will very much continue to be one of our most important countries.

[Anders Roslund, analyst]

And how about the launch of the air cleaners in Japan? Have you started to see any improvements there?

[Christina Lindstedt, executive]

Yes. We launched part of our air cleaner range towards the end of 2020. We've had a number of larger businesses and also ongoing business to the office market, partly to the same customers where we already had presence with Cabin Solutions. But partly, we'll also open up new customers, which have brought us also new cabin sales to the customers where we sort of entered with air cleaners. But in addition to that, what is more recent is that we are developing the industrial segment, so production areas, benefiting from what we developed in Europe to the Japanese market.

[Anders Roslund, analyst]

I mean that should be quite a tough new market segment as you've been almost entirely dedicated to the office segment in Tokyo, and I guess the industrial segment would be widespread outside other parts of Japan.

[Christina Lindstedt, executive]

Yes. It's a longer buildup to build that market. When it comes to air cleaners to the office market, that was the pass, their entry. But that has been our core business in Europe in both Sweden and Germany during a number of years. So we have great opportunities to build on our knowledge and experience in Europe for the Japanese market, but it will be more an important growth vehicle for the medium to longer term. But for the short term, we see great opportunities to do more on the cabin side.

[Anders Roslund, analyst]

Excellent. Okay. Going over to Europe then, you've seen weaker sales in the air cleaner segment. And of course, I'm afraid of that the COVID-related space is sort of leveling off now while hopefully the industrial or the original business segment in air cleaner is starting to grow. But how do you see upon those 2 market segments, the more virus-related office segment and the more industrial-related historic product segment?

[Christina Lindstedt, executive]

Yes. I mean the industrial segment and warehouse and logistics have been a core segment for us during a number of years, and we see good opportunities to do much more there. To some extent, we are working with large customers where there is good opportunities to scale within that customer, but also to do more of what we do in certain application areas in more markets. And although we have grown a lot in Germany during the last years, there's still a lot of unaddressed market in Germany. So we have good opportunities to grow.

In -- on the more COVID-related opportunities, like the big deals in Germany, for instance, that has been going back and forth a little bit. Unfortunately, there might be reasons why that will come back again given the current numbers of Corona. So there might very well be those bigger opportunities again going forward.

Now there's been a period of not having those big tenders government subsidized, but that might very well because of the picture going forward. And on an ongoing basis, we capture opportunities for the office segment related to the COVID challenge -- in especially Germany. It's been where we've been more successful in Germany out of the European markets.

[Anders Roslund, analyst]

You don't present any exact outlook. But your forward-looking statements, you talk about that the existing uncertainty in the global economy will sort of be present also in the short term. Is that mainly European? And is it both regarding -- especially air cleaners, we are talking about that. So this positive development you've seen in air cleaners, is that something we have to wait for? Or is it -- what sort of scenario do you have here?

[Christina Lindstedt, executive]

Yes. I mean we remain as optimistic when it comes to the growth opportunities in the medium to longer term. We experience in the short term that there are parts of the market circumstances that we cannot influence when it comes to the global uncertainties. So for customers that are able to wait and not have any sense of urgency and so on, there might be longer decision processes also in the short-term future going forward. But that varies. I mean, at the same time, we have closed a number of larger contracts in the quarter. So -- but it's, of course, related to the customer situation and what the market conditions, how that impacts them.

[Anders Roslund, analyst]

So there will be a little bit of wait and see in the air cleaner area in Europe for -- you also mentioned here that...

[Christina Lindstedt, executive]

Yes?

[Anders Roslund, analyst]

Sorry. You also mentioned that you had...

[Christina Lindstedt, executive]

Sorry. Go ahead, Anders.

[Andreas Göth, executive]

Go on. No, no. Go ahead, continue.

[Christina Lindstedt, executive]

No. It's not a wait and see on a sort of a total level on the air cleaner side. I mean we continue to scale big customers in the industrial and warehousing and logistics segments. And we have a strong pipeline. And in addition, with the recent innovation we've launched, we have good opportunities to scale that. Then the timing of the potential government subsidized tenders, that is more difficult for us to influence. But what we can influence, there we are having good opportunities to win more business also in the short term.

[Anders Roslund, analyst]

Excellent. Okay. Coming back then to the EBIT development. It's mainly a cost-related lower margin in the sense that you invest in sales admin and R&D. How will that progress? Will you continue to be on the same level? Or is it onetime effect? Or how do -- how should we see from this?

[Christina Lindstedt, executive]

No. A big part of this is variable expenses, and that we will monitor that tightly also in combination with how we see the short-term outlook in terms of growth opportunities. And we will prioritize and have a selective approach in terms of growth investments going forward with continued focus on innovation and continued focus on sales driving activities and the development of our sales teams. But we will follow the short-term market conditions and evaluate the timing of more long-term investments.

[Anders Roslund, analyst]

Is it a broad-based investments in all areas? Or is it specifically in the U.S. or in air cleaners? Where do you see the emphasis of those cost increases or sales and marketing and R&D...

[Christina Lindstedt, executive]

Some of the investments are global, like a new web platform, for instance. The innovation are also solutions that are global, although we launched them in Europe first when it comes to the air cleaner solution. The sales is worth it. There, we are targeting specific markets where we have strong capacity to integrate new resources like Japan and Germany and see a fairly quick impact from adding sales resources to our teams. It takes a little bit of time. Some of the investments are local. Some of the investments are global. And looking, of course, on our total EBIT level when we can grow in U.S. and start having a positive contribution from the U.S., then that will also have a positive impact on our total EBIT level.

[Anders Roslund, analyst]

Excellent. Finally, just coming back to the cash flow situation. Is that coming back during the second half of the year? You mentioned the large deliveries to Sweden.

[Henrik Resmark, executive]

Correct. We have a large cleanroom project in Sweden that are not -- that has been delayed, let's put it that way. And of course, we assume a stronger cash flow in the second half year compared to the first half year.

[Operator]

The next question comes from Oskar Vilhelmsson at Redeye.

[Oskar Vilhelmsson, analyst]

So I have just a few follow-ups here to Anders. Regarding the 2 cleanroom LOIs in the U.S., what type of gross margins could one expect of this type of deal?

[Christina Lindstedt, executive]

It's the similar gross margins as we usually talk about on the cleanroom side, so nothing different there, but plus 50%.

[Oskar Vilhelmsson, analyst]

All right. Okay. You also disclosed the sort of amount of canceled units or you name it that churn here of about 8% in your report. I think that was a bit lower than historical levels, around 10%. This rather new level of 8%, is that something you're satisfied with? Or are you going to -- do you have a target on that type of measure?

[Henrik Resmark, executive]

We don't have a target on that. But it's very, very clear that we have a very satisfied customer base with relatively few cancellations, and we continue to increase the installed base. So of course, we are happy with the number that it goes down. We have no specific target on that. And we just work on a continued basis to get additional customers and to keep our current customers. Keeping our current customers, meaning that we get renewals and extension contracts. They are very, very important for our future growth. And that is, of course, in line with the strategy we have.

[Oskar Vilhelmsson, analyst]

And just the final question here regarding sort of the use of future cash flows here. Are you planning to own more installations out in place or increase dividends or invest for future growth here? Or what are sort of your main targets to use of the future cash flows?

[Henrik Resmark, executive]

When it comes to dividend, that's a later question. Of course, the dividend ratio is part of our strategic targets. We will, of course, continue to do more specific investments where we really believe in future growth. Of course, we will continue with that. And also, the investments that we made during the second quarter that we will pay off. We still believe, of course, they are long-term investments that most likely will pay off to a growth later. But of course, we try to be as efficient as possible with the measures we take to increase our sales. That's for sure.

[Operator]

[Operator Instructions] At this point, there are no further questions. So I hand the word back to the speakers for any concluding remarks.

[Christina Lindstedt, executive]

Thank you very much for your attention, and have a good day.