Qleanair AB

STO:QAIR

Earnings Call Transcript 2023-Q2

[Sebastian Lindstrom, executive]

Welcome everyone to the QleanAir Investor Presentation for Q2 2023. My name is Sebastian Lindstrom, I'm the CEO of QleanAir. Joining me in today's call is Henrik Resmark, our CFO at QleanAir. Henrik and I will run through the presentation and then towards the end, open-up to Q&A, as mentioned in the automatic talk in front of the call.So with no further ado, starting off with the numbers in Q2. In short, as I've highlighted in light green on the slide, we're back to growth, we're in a good profit mode and our EPS is greatly improved. So great work of the entire team. We delivered a very strong quarter with sales of SEK 135 million in the quarter, which means a growth of about 25% over last year. And it's also the strongest quarter over the past 2 years. So this also means that we meet our targets for the first half sales growth of above 10% in constant currency. So great work of the team and as they manage not only to grow at this rate, but also grow across all 3 regions and across all 3 product categories. Cabins grew 11%, Air Cleaners, 40% and Cleanrooms, 147%.Our recurring revenue continued to grow in the quarter, growing quarter-over-quarter actually and is at SEK 78 million at the end of Q2. Our gross margin remained strong and stable at 68%. It's a bit behind last year, but it's mainly due to some product mix and also that we've seen some higher cost on the service side in the quarter. Our EBIT margin has been brought back to where it should be, so above 16% in the quarter. Thanks to the reductions we made early on in the year on the overhead side and of course, some leverage of the increased volume. Our operating cash flow is well improved over last year. Henrik will talk more about that in the financial update. Our EPS earnings per share greatly improved over last year. Order intake is stable at 17%, up over last year, driven primarily by Japan in Q2.So moving from that overall picture and looking a little bit from a regional perspective. It is a strength in our business that our 3 most important individual markets are as well the top-ranking economies in the world from a GDP perspective. Japan, Germany and the U.S. are all in the world top 4 from GDP point of view. So starting off in APAC. So continued stellar performance from the Japanese team, order intake up 44%, revenues up 18%. And as mentioned in the last quarter, we've dialed up our activities, pretty much doubled our presence at exhibitions and we're having the highest order backlog on the Air Cleaner sites that we've ever had in Japan. So really positive from the Japanese team.Moving over to Europe. We're not around the corner in Europe just yet, although great work of the team, delivering a 14% growth in the quarter. It is clear that our actions on follow-up and the reorganization that we've done is starting to pay-off in Germany, especially, which grew 25% in the quarter. And I'd like to mention that 8 out of 12 countries in Europe are showing double-digit growth. So really great work of the team. Main focus in the fall is to get the Nordics back on track. And I must say that activity levels have improved throughout Q2, which should be able to materialize in orders and revenues in the second half.Americas delivers as expected, a strong quarter in revenues. We've added 2 more people on the sales side, and we're looking for a third salesperson in the coming quarter to broaden our coverage of the U.S. market and thereby take full advantage of the recent update in the regulations. When it comes to order intake in the Americas, it looks a little weak for the quarter. But I'd like to point out that these are very, very large projects, and it's very easy that the signing of these projects and slip into one or the other quarter. So we have great activity in the U.S. Demand is quite strong. So worries in that from our perspective.So from that, we move to -- so in order to better bring to life what we do as a company and what problems we solve and want to continue to share some customer cases in this call. I'll start off with Europe. [indiscernible], a plastic manufacturer in Germany focused on medical and pharmaceutical sector. For [indiscernible], it's critical to limit the particles in the manufacturing process. And with the use of 15 air cleaners from our side, they are able to now comply with ISI requirements in their production. It's been a great journey with [indiscernible], and we're now moving on and introducing a cloud-based monitoring system through the QleanAir Connect solution.Moving from Germany to Japan, An example of a long-term client on the cabin solutions side that have grown into an important client within Air Cleaner segment. Our journey together with NEC on the air cleaning started back in 2020 with combat in COVID with our FS 30 HEPA machines. But it has evolved since then into a growing business as NEC saw big benefits in relation to reducing fluid transmissions, pollen sensitivity in their workforce. And during the last quarter, we doubled the number of air cleaners with them to 80 units, and we're looking to install another 30 next quarter.Finally, I want to talk about U.S. UC Davis Health, where we're in the final stages of finishing a 200 square meter room for their new home infusion center, which I had great opportunity to visit at the end of June this year. The project is exciting in many ways. It is our first team room targeted at the rapidly growing home infusion market, and it is our second room in short time in California since we achieved our California contractors license. This contractors license means that we have shown that we have the knowledge in how to handle seismic events. And UC Davis is one of the top brand hospitals in California. It's in the top 5. So it's a very important step in our expansion into this most important states from a health care perspective in the U.S. There are over 560 active hospitals in the state of California. And in July, we welcomed on board a senior account manager placed in California. So very positive.So from the exciting world or the exciting excursion of our clients back to the day-to-day running of the company, we're sticking to our short-term plan of stepping up in relation to our 3 prioritized areas to get back on track; customer focus, sales efficiency and cost control. So let's together see how we're pushing forward on these 3 priorities.First, customer focus. We have, in the quarter, continued our journey to strengthen the direct sales team in Germany. And as mentioned before in the presentation, also complemented the US team with an account manager focused on the West Coast located in Sacramento, California. Our central product team are in the process of boiling down all the great inputs we have from the commercial workshops that we did across the globe in early spring, where we had more than 100 participants and to outline our strategy for the next 3 years.Moving over to sales efficiency. We've clearly seen a pickup in activity, and we're now refining it further. In the quarter, we introduced back office sales support in Germany to ensure that we get more time of the account manager in front of clients. Separating out Germany outside of the EMEA sales managing is also starting to show results. We're now much more on top of the challenges and opportunities in the other 10 markets in Europe. The growth in Europe, as mentioned before, of 14% was a great step forward, but we still have ways to go to show growth for the year-to-date to show sufficient growth for the year-to-date.Over to the cost control. So the last point in the short term operational agenda is cost control. We will continue to review our cost structure, but it's evident that the actions that we took early in the spring have really had an effect as we're back above 15% on the EBIT level. We've seen our service costs increased a little in the last 2 quarters, and we'll put an extra eye on that going forward.Summing up and looking a little bit ahead on our continuing to further strengthening our profitable growth, I think, overall, we deliver great value to our clients, and we just need to get in a higher gear. Our commercial focus in Europe remains we must get in front of more clients and leverage our existing solutions through improving our industry expertise. We will see what the introduction of the back office sales team in Germany gives us and then see how we'll take that further into rest of Europe. APAC is on track. We're continuing to step-up our marketing activities in air cleaners further. We see that it's paying off. We see new sales resources delivering much sooner than what would have been expected. So very positive. In America, we'll continue to increase our sales coverage geographically. We just recent, as I mentioned, added a person in California, and we will, in the next quarter, continue to add to that team. Overall, we have solid products, we have a circularity built into our business model and the team that really wants to win.With that, I hand it over to Henrik to take you through the financial update.

[Henrik Resmark, executive]

Thank you, Sebastian.QleanAir by region. We are present in 3 geographies with 3 different product areas. In QleanAir, Japan is the #1 in terms of sales and order intake, the same pattern as previous quarters. Cabin Solutions is still a success in Tokyo area, and we are gaining traction with Air Cleaners through focused and dedicated work, and we are growing within Air Cleaners in Japan. We see QleanAir Japan to continue to grow 2023. Europe is also a strong Cabin solution market for the QleanAir Group, contributing with both sales and profitability. Air Cleaners in Europe is growing, and we focus on to increase that growth. We see a clear growth potential in QleanAir U.S. and the positive signs from the first quarter and the second quarter we shall continue to build upon. The order intake in the U.S. was low in the second quarter. And as Sebastian pointed out, the order intake in the U.S. is more volatile quarter-to-quarter as the orders are not always on a weekly basis, and there can be some time between the orders as the order values are relatively higher.Looking at the different product categories, we had a growth in all 3 product categories in the quarter; Cabin Solutions, up by 9%; Air Cleaners up by 40% and Cleanrooms up by 218%. Second quarter net sales. We have a growth of 25% in the second quarter and currency adjusted, the growth was 19%. Japan is up by 18%. Japan continues to deliver strong growth. U.S. was up by 188% and we continue to see a recovery from the U.S. subsidiary. Europe was up by 14%, and we start to see positive signs from the focus on sales efficiency and sales follow-up. Gross margin is still on a relatively high level, somewhat lower in the quarter due to product mix where we have lower gross margins for Air Cleaners and Cleanrooms. The EBIT margin is improving during the second quarter to 15.6%. Our clear focus 2023 is to reach our financial targets, growth of approximately 10% and EBIT margin of 15% to 20%.Page 13. 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 them the recurring revenues. The recurring revenues increased to SEK 78 million in the quarter and the recurring revenues are a solid base of revenues that to a larger extent are predictable in the future, now approximately SEK 285 million on a rolling 12 months basis, up by approximately 5%. And the book value is relatively low, SEK 56 million compared to recurring revenues. And this is of course contributed to our gross margin.Moving into next page, revenue split and installed base. We increased the product sale in the quarter to SEK 19 million versus SEK 8 million. That is one driver behind the growth in the second quarter, and all revenue types increased in the second quarter. Looking to the right on this page, quarter-by-quarter, we continue to increase the installed base. We continue to see a growth in Air Cleaners in both Europe and Japan and Cabin Solutions in Japan. At the same time, the Cabin Solutions market in Europe is very solid for the QleanAir Group.And finally, it's really important to point out that we improved the cash flow in the second quarter, up to SEK 19 million versus SEK 9 million. We are a cash-generative company, and we shall deliver strong cash flow year-by-year. At the same time, we continue to amortize according to plan every quarter and the net debt-to-equity ratio also improved in the second quarter.This is a financial summary of the second quarter. And having said that, I hand over for a summary to Sebastian again.

[Sebastian Lindstrom, executive]

So, thanks Henrik. And to close up 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 clean close to 7 billion cubic meter of indoor air per month by June 2023, and that matters because air pollution is a key challenge to human health. People die prematurely from exposure to polluted air. We spend an important part of our lives in indoor environments, an indoor air can often be more polluted than outdoor air.So with that, I would like to open-up for questions.

[Operator]

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

[Anders Roslund, analyst]

My first question would be to start off with the strong outcome for Air Cleaners that surprised me the sales outcome? And could you elaborate a little bit on what's going on here in Europe, especially because you've given your forecast a little bit cautious outlook for Europe, while obviously, the outcome in Air Cleaner was -- I see it a little bit stronger in Europe than I expected. So how come is this development?

[Sebastian Lindstrom, executive]

Well, I think it's 2 things, right? I think it's -- one is that, as we started earlier in the year and actually towards the end of last year has a little bit more focus on segments, right, and trying to carry the good cases that we have done and go to other companies in the same sector and really leverage the industry experience as we grow that. And now in Germany that grew well in the quarter on the cleaner side that we really reorganized that team and went more for a segment focus. I think that's one thing. Then of course, I think we have amazing people on board. So that is overall helping us. But then I think there is also a slight effect of the fact that we removed some resources centrally and transferred investments into the regional teams. And I can see, as an example, there was a recent regulation in Germany regarding a specific substance. And that team, just really quickly without having to go to the central marketing organization and check everything, they just sat down, decided to script something, go out with marketing, communication and so forth. And we're getting a bit faster in the regions is what I'm feeling. So I'm seeing very positive results of transferring the mandate and power a little bit closer to the customer.

[Anders Roslund, analyst]

I don't know if Henrik wanted to add something.

[Henrik Resmark, executive]

No, I think it was a good summary by Sebastian.

[Anders Roslund, analyst]

Okay. I just had a little bit follow-up here because you had the surge of sales in Europe or more, so to say, COVID-related air cleaners in '21 and '22. And I've been afraid that part of the business could fall quite dramatically while your core business be more industrial-related logistics inventory, et cetera. Air Cleaners are the ones that are picking up now or how should we interpret the strong development, with related sales or.

[Sebastian Lindstrom, executive]

No. I think if we look at our Air Cleaner sales and we said they did an analysis of it. And the majority of our Air Cleaners, both installed and sales are to the industrial sector. So I think, of course, some of the HEPA, which if I can call it HEPA-related which was really targeted at the COVID outbreak and so forth. Some of that is continuing because they see the benefit of reduction of flu transmission of sensitivity to Poland and so forth. But the majority of the business and the growth is really in the manufacturing area. So plastic industries, medical devices, all these fine mechanics. So I think we are not so dependent on that.

[Anders Roslund, analyst]

But you also are little bit cautious on your outlook statement saying that we see weakness in European market due to macroeconomic factors. Is that offsetting part of this development?

[Sebastian Lindstrom, executive]

So I think it's good to be cautious, right, somehow and we steam ahead on all the plans we have and so forth. And it's clearly so that the overall European macro situation is not -- we're not around the corner on that. But I see the teams in the industrial sector doing really well.

[Anders Roslund, analyst]

So just to have a few words on Japan where you've started your marketing of Air Cleaners as last year. And obviously, you start to see now an increase? And is it entirely than the industrial part or is it more also the COVID-related more office-related.

[Sebastian Lindstrom, executive]

So the example that I gave was, of course, still have the starting point in COVID-related combating, right, the NEC and how we can add value also in the office environment by reducing the outbreak of flus and the pollen sensitivity and so forth. So I thought it was important to bring that forward. But if I look at where our efforts and our traction in Japan, it's really also in the industrial sector.

[Anders Roslund, analyst]

Because the industrial sector, I mean, you have been very strong in the Cabin Solutions area, where you are very strong in Tokyo, which is, I guess, not an industrial area. So this means that you have been sort of widening your market presence outside Tokyo.

[Sebastian Lindstrom, executive]

Absolutely. And what I quickly mentioned in the presentation, right, we've been really astonished how fast we brought on board now some people that really have industrial background on the sales side in the focus team in Japan for Air Cleaners. And we are amazed how fast we're getting traction through those new resources on board. And I think in Japan, we are a bit opening the market on air cleaners in industrial. So compared to Europe, it's a little bit more new ground that is being opened up.

[Anders Roslund, analyst]

So finally, coming to Cleanrooms, there is more like an expected strong growth. Could you update us on the legislative scenario here? The UPS you referred to has been sort of, what you call it, delayed. And why is the demand taking off?

[Sebastian Lindstrom, executive]

Well, I mean, as I mentioned also, I think back in the Q1 report, right, there was an update to the USB chapter in the U.S. 1st of November last year, where they actually put the deadline forward, which is 1st of November this year. It's been softened a little bit. So meaning that the companies and the governing body, so to say, they expect everyone to have a plan, right, by the 1st of November. But they do realize that for all these clients that need to update their conformity to this regulation, there's not enough companies like ourselves to deliver new solutions to do that for 1st of November. But clearly, and we also see across the different state board of pharmacies that they're increasing their resources in following this up and doing the inspections and so forth. And clearly, the market is taking this seriously. And I think most importantly, what we've done in the past 6 months, and it took quite a while is to open up through our California our contractors license for the state of California. We've opened up -- I mean, California is 12% of the U.S. health, right? So it's a really important, it's probably the largest state when it comes to health with over 560 active hospitals in the region. So it's been a very important step for us that we have big hopes for into the future.

[Anders Roslund, analyst]

Do you have production capacity for delivering. It's a quite steep increase.

[Sebastian Lindstrom, executive]

I just imagine that's what we're wrapping our head around, right, making sure that our supply chain, our capacity when it comes to installers. So we've built up a network also of external companies that can come in and support us in the installation. I had the opportunity end of June to visit both on the installation underway in Long Beach, California and with UC Davis in Sacramento, California. And it's quite some teams that we put on the ground to get this. But we are able to run parallel projects and so forth. But that is what we need to spend a lot of time on making sure that we have the capacity.

[Anders Roslund, analyst]

How about acquisitions? You have never done that, and I'm talking about the cost of the company. Is that something you start to look at now when you see the growth coming back or how is that process.

[Sebastian Lindstrom, executive]

So like I've said in earlier calls, right, the first focus is on those top 3 priorities, right; customer focus, sales efficiency and the cost control. And from my experience, you have to have all those things in place and a good setup as a company before you go into acquisition. And I agree with you that we are getting faster than maybe what I had expected. The response of the team, and I'm really amazed about how the teams have stepped up during these first quarters. And clearly, to make a step change on the Cleanroom and the Air cleaner side and add on to our current company could be of interest.

[Anders Roslund, analyst]

I have just one final question regarding the gross margin here. You talk about how our services costs and I guess that's -- and you said you should look at that. What sort of costs are you talking about here?

[Henrik Resmark, executive]

I mean I can comment on that. Two things. Regarding the service cost, I mean we go through all the costs that we have, try to make it more efficient, obviously. But also the more important answer to that question is that, first of all, the decline in gross margin is not a surprise to us. We saw that coming, and that is sort of planned for. And the reason is simply that we have very, very high margins within Cabin Solutions still being 70% of our sales. We have so much renewed contracts with extremely high gross margins. That's one thing. And secondly, is now we see growth in Air Cleaners and Cleanrooms to a larger extent. And obviously, we don't have those gross margins within Air Cleaners and Cleanrooms. So the gross margin in percentage is being diluted, you can say, when we have a growth in Air Cleaners and Cleanrooms. And again, it's fully scheduled for and planned for. And we know that we will end there when also the Air Cleaners and Cleanrooms will grow even more. So it's the nature of our business. If we have slow new sales and Cabins is very dominant, then we have very, very high gross margins, and we're happy for that. But also when we see the growth, it's natural that, that gross margin will be somewhat lower.

[Sebastian Lindstrom, executive]

And of course, as we've grown rapidly lately on the Air Cleaner side, those are not in the renewal. We don't have -- as that installed base builds and we start getting into renewal of those contracts, we will again see an improvement also on the margin side on those product categories. So I just want to be transparent, right? We've seen some higher service costs, but it's not the whole story, right? It's a mix of product mix and service cost. We just want to be transparent and say that we still have things to look at.

[Operator]

The next question comes from Oskar Vilhelmsson from Redeye.

[Oskar Vilhelmsson, analyst]

I just have a few follow-ups on the previous call here. You mentioned in the report that you have a few Nordic Cleanroom projects that's been limited growth for the segment. Could you elaborate a little bit on this? And when do you expect them to be sort of out of your way to fully focus on the other projects?

[Sebastian Lindstrom, executive]

So clearly, we've had some projects that have been prolonged, and we spoke about this already when touching on the Q4 report, right? And we worked hard on that throughout the first half of the year. We've closed the main part of it, and I would estimate that we within a month sort of have closed out all of those projects in a good way. And of course, we're a small company, right? So when we have some extra work and stuff to do, that takes away a little bit of focus forward. So we're really excited to get through this in a rapid manner, rapid and good manner and to turn to the focus on growth of that segment again. But you're right in that that's something that we've been battling in the first half. But I think it's well under control from my perspective.

[Oskar Vilhelmsson, analyst]

And on Air Cleaners and the segment growth overall, could you just give us a sense of how much the APAC region is contributing right now? And what do you think for the rest of the year?

[Sebastian Lindstrom, executive]

We are not guiding on specific numbers when it comes to Air Cleaners in Japan specifically. But it's very, very obvious and clear. We have a number of salespeople with industry experience now in the Tokyo office and they are gaining traction above what we actually expected. So we are seeing a very, very high. I mean it's not double-digit, triple-digit growth within Air Cleaners, certain months by months or certain quarters by quarters and we continue to see that. And also when we started with Air Cleaners in Japan, we went quite broad, went to very many trade fairs and exhibitions and then we narrowed it down based on experience. We saw certain segments, certain industries that really required Air Cleaners, and we are more focused and dedicated work and also in combination with the sales culture that we have in our Tokyo office, that is the engine for that. And as I said, we see Japan to continue to deliver growth in 2023. And of course, Air Cleaner is a big part of that. However, still, in terms of numbers, fairly low numbers, but the growth is very high.

[Operator]

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

[Sebastian Lindstrom, executive]

I would like to thank you for your participation and interest in our company, QleanAir and I wish you a great continuation of the day. Thank you.

[Henrik Resmark, executive]

Thank you.