Qleanair AB

STO:QAIR

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Sebastian Lindstrom, executive]

Hi, and welcome to the QleanAir Investor Presentation for Q2 2024. 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 go through the presentation and then open up for Q&As towards the end.

Starting off with the numbers for Q2. In short, we closed the quarter with a lot of activity but where the numbers were weak. Remembering that we in Q2 in comparison to last year, meet our strongest quarter in 2023. We delivered SEK 115 million in sales, which was 14% behind last year and currency-adjusted, 10% below last year.

The main reason of the decline in revenue were the low base of renewal contracts to be sold to finance companies in Japan and the weak Japanese yen versus the Swedish crown. The yen versus the Swedish crown was down 11% in Q2.

For Q2, these 2 things affected us roughly with SEK 16 million in revenue. Our recurring revenues remained strong at SEK 74 million and amounting to SEK 304 million by the end of the quarter.

Our gross margin and EBIT were hurt in a significant way in the quarter. This is a direct consequence of the lower renewal sales to finance companies in Japan and the weak Japanese yen affecting the gross margin, but as well higher service costs in Germany. These 3 aspects had a strong negative effect on the quarter of roughly SEK 14 million on the bottom line.

Our EBIT, therefore, landed on SEK 1.4 million versus SEK 15.6 million last year. The yen, we can't do much about. And we know, as we've reviewed our Stockholm contracts that 2024 is a low mark for renewals for finance companies in Japan.

We have already launched and implemented cost-improvement initiatives across all regions and are pursuing a number of initiatives to improve the service costs in Germany.

Cash flow was stable and strong in the quarter, but EPS naturally very low. Summing up the quarter, we still have work to do, and we'll keep our focus on our 3 objectives towards the long-term profitable growth.

Looking at looking at it from a regional perspective, APAC, we can clearly see the effect of combination of lower renewal stock and weaker Japanese yen, SEK 47 million in the quarter versus SEK 63 million last year.

In the quarter, SEK 6 million is related to currency on the sales side and SEK 10 million because of having fewer contracts towards finance companies being up for a renewal in the base, so to say.

Important to note is that we continue our growth in air cleaners and that our new cabin sales are on track and on par with last year and will be further strengthened by a new cabin tailored to the expansion to medium and small-sized customers in the HORECA segment being launched in Q3 in Japan.

EMEA almost matched the strong Q2 of last year. And apart from Germany, we grew in both air cleaners and Cabin Solutions in the quarter. Our focus market in France is developing in a very strong way, growing 40% overall for the first half and close to 150% from air cleaners. In the quarter, we needed to handle the return of units related to the COVID-based school orders from 2021.

This has also led to increased costs on the service side as we take these back and refurbish. Americas were a bit lower than last year, but we have continued to improve our presence and speed on the sales side. We do see a bit longer sales cycles in the past 6 to 9 months, possibly relating to a certain level of caution given the political situation at hand.

I would also like to mention that we today received info on that Curexa is postponing the project we announced in May. We don't know exactly what that means, but we'll, of course, work together with Curexa to understand what this means in time and so forth. Given the numbers we report in the quarter, we will continue our short-term midterm focus of cost control, sales efficiency, and customer focus.

The inside of our wheel, the left-hand picture, relates to our ongoing operational improvements. And in the quarter, we have, on the cost side, launched cost improvement projects across the organization. We have renegotiated our bank agreement, improving our cost of finance, and administration going forward. And we've been revisiting the service set up in Germany.

We have consolidated our filter production and supply chain in Europe. And on the sales efficiency side, we continue our investments in sales and product development, increased our sales team in the Nordics and Germany. We've made a number of replacements in Germany, which set us back in the short run that will support our growth in the mid- to long term.

We have, in Q2, launched our first solution targeting secondary filtration of oil mist and done our first implementation of measurement lead air cleaning projects with the Pan-European client.

On the more strategic product side, depicted on the right, despite on our wheel that provide traction to our plan, we have a strong pipeline of completed product developments being launched in September, covering all 3 product areas: Cabin Solutions, air cleaners, and clean rooms, and all of them addressing a broader application areas within existing customer base and their peers.

We have started 3 further exploration areas as a result of this year's workshops with our teams to drive sales for the longer term. We stick to our plan of developing our company, both operationally and strategically. As we keep doing the right things following a very structured approach, we're convinced financial results will follow.

So, to provide a little guidance on what we view as the right things to do right now. Maybe needless to say, we continue to hunt to remove non-value-added activities and spend to allow for investments in value-added activities, consolidating our filter production and supply chain, renegotiating our financing agreement are good examples of this.

From a market perspective, we remain very focused and selective when it comes to our own market expansion with our own sales team, carefully picking a few markets that could really shift the scale rather than investing a little here and there. France is a good example. We selected France in 2023 and expanded that team from 2 to 5 people.

We know it has the potential to become a SEK 100-plus million business in EMEA for us, just like Germany. Growth has been very satisfactory since. For further and smaller market expansion opportunities, we will rely on a partnership model. When it comes to products or product development, our immediate focus is to broaden our sales to existing customer base and their peers.

We know them well. We know what they're looking for and the flexibility of our products and technology allows us to quickly expand into new application areas to solve further challenges on their side. Oil mist is a great example. It's a well-known issue in the fabrication industry with negative impact on product quality, process quality, and workers' health.

We picked it up in our first round of client and regional workshops in 2023 with did months of serious testing of different concepts in very challenging environments and have already, within 12 months, launched our first phase of solutions with more to follow in the next 6 to 12 months. Our longer-term technology investments are, of course, targeted at the air cleaning side.

We want to balance our dependency to cabin solutions for the long term. The solutions launch to the space industry is a good example of this, where we provide a clean room-like environment for the assembly and storage of sensitive and high-value satellites at a much more cost-effective way through our clean zones.

And this is an area where we take both our experience from clean rooms and air cleaners. When we look at our medium-to-long-term technology development, we're looking for areas with high requirements where our specialist knowledge and breadth of technology comes in use for a broader customer base. We want to be a must-have rather than a nice to have.

We have the knowledge and experience. We've been dealing with indoor air quality for the past 30-plus years. We understand the complexity of the indoor environment, whether it's an office school, within health care, or industry, we understand that there is a combination of solutions that are required. One solution won't fix it all.

In principle, you need 3 things to complete a solution. In the background, you need the HVAC, 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, of course, 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 people, products, and processes themselves are particle sources and generate particles from inside the building. To support the HVAC in dealing with the people, product processes inside, you need primary and secondary filtration.

Primary filtration captured particles directly at the source, but they can't capture it all, and that's where the secondary filtration comes in. At QleanAir, our focus is on primary and secondary filtration. Our cabin solutions are primary solutions, capturing the smoke straight from the source and thereby preventing any secondary smoke air.

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 a person working with the product process that otherwise could be harmful.

Our clean room solutions are secondary filtration. They provide 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 particles in a certain area or, for instance, improving recovery time in something like 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, for instance, have been purposely designed to handle a variety of tasks. It can be used to create positive pressure in the room, safeguarding the integral relief of this room against activities outside the room.

It can also be used to create negative pressure in the room and thereby protecting the outside from the activities within that room. FS 70 can also be used and is often used to provide a clean zone by blowing particle free air over a certain process or over an operator in a process to safeguard work safety. And, of course, we can do a combination of this with one and the same product.

This versatility of our products and the knowledge of our teams put in use is what makes QleanAir truly unique and it's something that we will secure going forward when expanding our portfolio of products and technologies.

And to sum it up, before handing over to Henrik and the financials, we delivered great value to our clients. We operate across 3 regions in our 3 top geographies, Japan, Germany, and the U.S., all rank among the global top economies of the world. We work through 3 product categories with air cleaners and clean rooms showing good growth.

We have a very low customer dependency serving over 3,500 customers around the world. Our regional supply chains have provided us protection against logistics disturbances in the world and also allow us to respond quickly to market needs. We have a strong base of recurring revenues, over SEK 300 million as we close the second quarter.

And to add, maybe the most important, we've communicated we're on a journey. We have a structured and systematic approach, and we keep our focus on the right things, and we are convinced it will yield financial results in the long term.

With that, I hand it over to Henrik to take you through the financial update.

[Henrik Resmark, executive]

Thanks. Moving to Page 12, QleanAir by region. We are present in 3 geographies with 3 different product categories. In QleanAir Group, both EMEA and APAC are strong contributors to sales, representing approximately 90% of total sales. EMEA accounts for 48% of QleanAir Group revenues, solid performance in the second quarter, even though Germany did not reach our targets.

Other European markets are contributing to a higher extent. APAC accounted for 41% of QleanAir Group revenues. There's 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.

We had a strong growth with air cleaners in the second quarter, and Americas represent 11% of QleanAir Group total revenues. Higher contract values for Cleanrooms takes more time for customers to decide on longer sales cycles than before.

Moving into Page 13. Weak net sales. We had a negative growth of 10% currency adjusted in the second quarter, reached the sales of SEK 115 million. There are 2 main reasons why we have a weak second quarter. First, the portfolio of contracts that were up for renewal in Japan in the quarter was smaller than last year, resulting in less sales and resulting in less operating profit as renewal contracts sold to finance companies in Japan are highly profitable.

Secondly, the Japanese yen has weakened by 11% towards the Swedish krona and results in less sales, in SEK and in lower operating profit. In addition to that, our service costs were higher in Germany, both related to a change in service partner, but as well due to costs related to reclaiming the canceled school orders.

The recurring revenues accounts for 65% of total revenues and amounts to SEK 74 million, a relatively stable quarter. The gross margin was 63%, down from 68%. The gross profit is SEK 20 million lower in the second quarter. And, as a consequence, the operating profit is down from SEK 21 million to SEK 2 million.

Page 14, stable rental revenues. This slide illustrates the relation between the book values of units in QleanAir balance sheet and the revenues stemming from such units, including service. That is the recurring revenues. The recurring revenues was SEK 304 million on a rolling 12-month basis. The recurring revenues are a solid base of revenues that to a larger extent of predictable in the future.

The book value is relatively low, SEK 50 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 revenues of approximately SEK 63,000 with a book value of SEK 10,000. We experienced a high profitability on renting out the units over time.

Page 15, revenue split and installed base. In the second quarter, we saw a decline in the installed base. School orders of air cleaners in Germany were not prolonged, resulting in fewer installed units.

However, going forward, we see a growth in air cleaners in both EMEA and APAC. We have 3 different revenue streams, the mix of recurring revenues, sales to finance companies, and product sale to end customer.

As described in the second quarter report, there were fewer contracts after renewal that, hence could be sold to finance companies, resulting in lower sales to finance companies in the quarter, down to SEK 25 million versus SEK 39 million last year.

Next slide, long cycle of revenue split. The nature of our business is that we have recurring revenues as a foundation of the total revenues. On top, we have product sales, and that is customers that do not want to have a rental setup, we offer them to buy the units. And we also have revenues stemming from sale to finance companies.

That is long-term rental contracts that are sold to finance companies, and that is primarily in Japan. The number of contracts that can be sold in each quarter depends on the number of contracts that are expiring that quarter. To be able to understand each quarter, there is a guidance to analyze what it looked like 3 years ago. Most of the contracts are 3-year contracts.

Balance sheet and cash flow. The cash flow was strong even though the decline in operating profit, favorable changes in working capital compensated in the second quarter. We continue to amortize according to plan every quarter. The net debt equity ratio improved down to 0.8. And we paid out a dividend in May of SEK 8.9 million.

Having said that, I hand over to Sebastian for a summary.

[Sebastian Lindstrom, executive]

Thank you, Henrik. And to close out the session in front of the Q&A, what we do at QleanAir is 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 clean rooms.

Looking at the amount of QleanAir that is delivered through our solutions, we estimate that we clean 7.1 billion cubic meters of indoor air by the end of Q2 and it is important 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 life in indoor environment. And indoor air quality can often be more polluted than outdoor air.

With that, I would like to open up for questions.

[Operator]

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

[Anders Roslund, analyst]

Could you describe a little bit about the Japanese development? You make an outlook here saying that the '24 will be the trough for the renewal, the share of renewals of large 3-year contracts. My question is, are you losing any of the renewals when they are coming up for renewal?

[Sebastian Lindstrom, executive]

No. I'd say in general; we have a very good rate for renewals, and there is no change in that. So, we are continuing at the same level as in the past. And I would also like to, maybe add to it that when we look at the new cabin sales that we do both to existing customers and to new customers, we are on par with last year.

And if you look on the same way on the air cleaning side, so new sales to existing customers and to new customers, we're actually growing that with 28% in the quarter. So, there is no sort of negativism in the market, and we have lower successful renewals, so to say.

[Anders Roslund, analyst]

So, when is this trough in Japan, you say it's for '24, but could we say something about the quarterly development? Is it at a trough level now in the second quarter? Or will it be even worse here in the second half?

[Sebastian Lindstrom, executive]

So, we don't make forward-looking statements, right? You find some guidance, of course, in looking in the past, as Henrik was alluding to when you look at how there is a fluctuation between the quarters and what we can say is that it is lower than it was for 2023. And we are also saying that, yes, 2024 is a low point when you look at it. So, I don't want to break it into quarters too much.

[Anders Roslund, analyst]

Then the next question is about the service costs in Germany. How do you see upon this? Are this, you call it, a change of supplier, but I assume it is that you didn't fully cover the cost increases in '22 and '23 in your presence contracts?

[Sebastian Lindstrom, executive]

So, when you look at our service agreements across Europe and in Germany in particular, we've been working on sort of 3-year service agreements. And in those, of course, that we have had benefits in the past as there's been cost. We all know there's been cost inflation.

As you can imagine when it comes to service work, the price of diesel and so forth are key things. And we have to renew towards the end of 2023 or service contracts. And, of course, in that, we get some of that cost inflation that's been going on for the last 4 years. So, that's true. It's also a matter of the COVID-based school contracts, where, what you call some subsidies from the German state disappeared.

When we take those back, of course, we have some cost of taking them back and doing refurbishment on them. So, it's a combination of those 2 things. And we have had some challenges, and we've alluded to that in earlier calls that we've had some challenges on the service side in Germany. I think now we are in a much better position, but we're also, since a couple of months revisiting that whole setup and how we can better mitigate the increased service costs.

[Anders Roslund, analyst]

Does that mean to some extent, you are stuck with those present contracts? I mean the service contracts are included in your previous contracts in the rental contract. So, you are not able to push forward that to clients, except the new rental contracts, of course. So, you will remain in this high-cost situation for some time now, I assume.

[Sebastian Lindstrom, executive]

Yes, that's true. But we can also work on the total setup to mitigate as far as we can. And one of the things we did was to consolidate both the production and the supply chain on filters because, of course, tilts is a key component in the service cost, right? And rightfully, as you say, we enter into contracts and we're stuck with it.

But it doesn't mean that we can't do improvements of that setup. And one of the things we've done, as I said, is consolidate both the production and the supply chain to take back some of that disadvantage. We are stuck with it. I think we have ways to move on it.

[Anders Roslund, analyst]

And to look at the, we could call it the industrial sales of air cleaners, which is the future growth area. How do you see that development in Europe and Germany specifically?

[Sebastian Lindstrom, executive]

So, of course, it's clear that the German market as such is struggling a little bit with its growth overall. But I think from our point of view, we are launching more application areas, as I have alluded to before. We're right now or in the past quarter, we launched our first solution towards Oilmist, for instance.

So, I think as we grow, our application areas to that existing customer base and their peers, that shouldn't hold us back so much. But it is clear. We've done some reshaping of the German sales organization, and that has meant getting new salespeople on board. And we all know that when you get new people on board, it takes some time to get them up to speed. But I view that more as a short-term setback and rather support for the more medium-term growth.

[Anders Roslund, analyst]

If we look at the clean room business, you just received here this morning information that your U.S. order will be delayed. I guess you have no further information about that.

[Sebastian Lindstrom, executive]

No. So, of course, this was an important order. It's an important break into the private compounding area. And therefore, as we got this message from them really today, we thought it was important to at least make an announcement that we know there is a delay, but that's actually all we know from the client.

Our work together with the client since signing the contract has been very positive and very collaborative. So, this is more something that we need to understand on their side.

[Anders Roslund, analyst]

But it means that the deliveries may be somewhat delayed here. During the meantime, what do you sort of business do you have left in the U.S.? It seems to be in a rather low level now. Do you have anything other covering for this delay than in the U.S.?

[Sebastian Lindstrom, executive]

So, for sure, when you get in front of a big project like this, and it was on a quite tight timeline. If, again, remembering, we don't know exactly what this means, right? But with the delay, it's going to be hard for us if they delay in a major way. It's going to be hard for us to fill up with other projects.

We have our pipeline, and I didn't mention that, but that is stronger than ever, right? But we do see, as I alluded to, that the final decision is taking a little longer time, and whether that has to do with the overall situation in the U.S. right now, I don't know. But for sure, we feel that the demand is absolutely still there. But depending on what this delay means, it may be hard for us to mitigate that, that we have planned our installers and a number of things, right?

[Anders Roslund, analyst]

You mentioned the order pipeline here and that you may get another order from the same Curexa but first, you need to know what their intention is for the #1 order here.

[Sebastian Lindstrom, executive]

So, rightfully, as you say, the agreement with Curexa actually covers both this Arizona location that we communicated around now and an additional location in the U.S. And they were very specifically in the information that we received today are commenting on that Arizona location.

So, we have no information on any changes as it relates to the next location. But we are already working with among that location. I really would before saying too much, I'd really like to get with the client and understand the situation.

And, of course, a lot of information at the same time, our report, 2 press releases in one IDN, and then the delay on this one. Maybe it feels like a lot of different intonation, we're just trying to be timely towards the market with respect to the market, so to say.

[Anders Roslund, analyst]

I had one question, though. You are very successful in the Japanese air cleaners business. And that is, you talked about 36% up even if it's from relatively low levels.

[Sebastian Lindstrom, executive]

No, I think we have a lot of traction in Japan.

[Anders Roslund, analyst]

What sort of equipment and clients are you talking about in Japan for industrial use?

[Sebastian Lindstrom, executive]

Well, it's very similar to Europe. So, it's manufacturing, it's a lot of food service, of course, we're hygiene, and that whole aspect really brings our solutions in the must-have role with the client, right? So, it's very much the same industry. So, we have a lot of benefits and a lot of sharing between the European region and Japan and have benefit of that.

I would like to mention that we've continued also in Japan on the air leaning side, maybe more so than in Europe on the office side. So, the cross-selling where our strength in Cabin Solutions have been in the past and being able to sell air cleaners into the office environment. Of course, not for the COVID-related reasons, but for allergies and all these type of things.

[Unknown Attendee]

We have one question from the web, whether the German school orders were terminated in the first or the second quarter. And the answer to that is really it was a combination, and we dismantled several units in the second quarter resulted in a lower installed base. So, it was both the first and the second quarter.

[Sebastian Lindstrom, executive]

I should mention that we already mentioned this in last year's quarter that we saw this.

[Operator]

There are no more questions at this time. So, I hand the conference back to the speakers for any written questions and closing comments.

[Sebastian Lindstrom, executive]

All right. So, if there are no further questions, let me reiterate our communicated financial targets remain delivering a 7% to 13% organic growth annually and building up our EBIT margin into the range of 15% to 20% in the medium to long term. It remains fixed.

Taking our company to a new level is a journey. We have a very structured approach. And in this that we stick to what we are convinced are the right things to do. We are convinced that this will yield financial results and allow us to meet our communicated financial objectives in the mid- to long term.

And with that, I'd like to thank you all for your participation and interest in QleanAir, and I wish you a great continuation of the day. Thank you.