CleanSpace Holdings Limited (CSX) Earnings Call Transcript

Thank you for standing by, and welcome to the CleanSpace Full Year Results briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Graham McLean, Chair. Please go ahead.

Thank you very much, Darcy, and good morning, everybody, and welcome to the CleanSpace Holdings Limited Annual Results Webinar for the year ending June 30, 2025, or FY '25. My name is Graham McLean, and I'm the Chair of CleanSpace. Joining me this morning are the CEO, Gabrielle O'Carroll; and the CFO, Bree Greeff. I will make a few introductory remarks and then hand over the meeting to Gabrielle to share the key results and highlights for the year. She and Bree will provide detailed information and perspectives on the company's performance during the 2025 financial year just concluded. At the end of the presentation, there will be time for questions from the audience. Firstly, I would like to say on behalf of the Board that we are very pleased with the continuing progress of the business in FY '25. Our strategy over the last 3 years has been clear and consistent. And during this time, it has developed more focus and delivered greater impact. The growth in the revenue line every half year period over the last 3 years shows a clear upward trend in performance and a growth rate significantly ahead of industry peers. We believe that CleanSpace has some unique assets and capabilities that can sustain the growth path that we are now on. As Gabrielle will highlight, there were some important milestones achieved in FY '25, and this gives us quiet confidence going forward. We achieved all this whilst making a seamless CEO transition from myself to Gabrielle at the midyear. I believe the leadership team that is now in place is stronger than ever and is complemented by our founder and R&D leader, Dan Kao, and many other talented people in the broader leadership group. I would also like to thank the Board for its continuing support and recognize the leadership of former Chair, Bruce Rathie, who stepped down during the year. Lastly, thank you to all our shareholders and supporters, many of whom have been extremely patient over the years as we sorted through some significant challenges to rebuild CleanSpace with solid foundations for growth. I'm pleased to report that these challenges are now behind us, and we're now firmly focused on driving sustainable growth over the long term. And now I'd like to hand over to Gabrielle.

Thank you, Graham, and good morning to everyone joining the webinar today. I'm excited to present an overview of the company's performance, my first such presentation of annual results since joining CleanSpace in January. For those of you on the call today that may not have followed the company until recently, I'll start with a summary of the company and the market. CleanSpace is a Sydney-based designer and manufacturer of powered air purifying respirators known as [ Pappers ] or PAPRs for short. The devices provide the highest level of respiratory protection to workers who would otherwise be exposed to dangerous levels of particulate gas or vapor. We have a global strategy with a specific focus on Australia, parts of Europe and the U.S.A. We have salespeople in these markets who are supported by our team here in Sydney that includes an experienced engineering group. We work with customers and distribution partners in industrial sectors, including mining, quarrying and manufacturing, where there is a need for respiratory protection of workers. Independent industry research forecasts that the global market for PAPR will grow by a CAGR of 6.75% over the next 5 years to USD 3.8 billion. Today, CleanSpace has an industrial portfolio built around innovation and market-leading designs that includes 4 PAPR models with new models in the pipeline. As a result, we've been able to grow significantly faster than the market over the past 3 years. We strongly believe our new product developments will, in the near future, position CleanSpace to capture an even greater share of this growing market. For FY '25, I am pleased to report a strong set of financial results. Revenue grew 26% to $19.8 million, marking our third consecutive year of growth. This performance reflects both the resilience of our core markets and encouraging progress in emerging ones. By being disciplined about where we compete and maintaining a global approach, we've been able to deliver consistent growth across multiple geographic regions. Our success has come from strengthening the way we go to market. We've built stronger sales capability by recruiting experienced industry experts in priority regions and purposefully expanded our distribution network to reach more customers worldwide. Our global distributor network increased by 15% over the past 3 years to 236 active partners and will continue to expand further in FY '26. We have also raised our visibility through trade shows, industry forums and digital channels. This combination has reinforced our brand, driven demand and validated that our strategy is working. In FY '25, we also delivered meaningful margin and earnings improvements. Gross margin rose to 75%, up 3 percentage points on the prior year, driven by ongoing disciplined cost management and efficiencies in production and stock control. Operating expenses were held flat year-on-year, reflecting our continued focus on operational efficiency. These initiatives translated into a significant improvement in earnings with EBITDA turning positive in the second half, a major milestone on our path to sustain profitability. For the full year, EBITDA loss was just $400,000, a substantial improvement from a loss of $3.9 million in the PCP. Cash flow was another highlight with the second half FY '25 delivering a positive $2.2 million of operating cash flow. This was underpinned by strong sales, higher margins, tight operational controls and support from the R&D tax incentive. Our overall cash at bank position strengthened to $10.5 million at 30th of June, up from $9.8 million at year-end FY '24, further strengthening our balance sheet and underpinning our ability to reinvest in future growth. Finally, we remain committed to innovation as a key driver of long-term value. A major highlight in FY '25 was the successful launch of CleanSpace Work in the U.S. market in February, marking an important step in expanding our product portfolio and geographic reach. In parallel, we partnered with leading universities to independently test and validate the performance of our equipment, further reinforcing confidence in our technology and its industry-leading capabilities. In FY '25, we delivered against our objectives by delivering attractive revenue growth, strong gross margins and keeping our operating expenses flat, we were able to achieve positive EBITDA in the second half and on a full year basis when adjusted for one-off costs. Our global industrial market strategy is proving effective with performance balanced across regions. Consumable sales, which include masks, filters and charging stations, grew at 27% and now make up 40% -- 47% of group sales. Consumable sales will continue to be a source of consistent, stable and high-margin revenues for the company. While we took a careful and measured approach to expenses, we did purposefully strengthen our sales team in key markets by adding staff with industry expertise. This has further enhanced our market penetration and relationships with key distributors, which positions us well for ongoing growth. As we approach EBITDA breakeven, we are beginning to see our high gross margins and stable OpEx, combined with our low capital intensity model, begin to translate into significant operating leverage going forward. As a result, we are confident FY '26 will be our first year of sustained profitability and positive cash flows, allowing for some variability month-to-month. The above bar chart illustrates a clear positive trend over the past 3 years with strong revenue growth, consistent and disciplined cost reductions, which are driving us rapidly towards sustained profitability. As mentioned earlier, our operating EBITDA turned positive in the second half FY '25 at $260,000 and was positive for the full year after one-off costs, underscoring the progress of our strategy to accelerate sales in industrial markets. We are implementing our strategy consistently across all regions, but it is important to emphasize that each market is at a different stage of development. In Europe, our most established market, our strategy has already proven highly effective. We delivered strong growth, up 18% overall, led by Western Europe, U.K. and the Nordics region. We believe there is still significant opportunity to expand sales here given the total size of this region by selectively adding more salespeople and distributor partnerships to further penetrate the market. In contrast, Asia Pacific and rest of world are in earlier stages of development, but momentum is building with significant growth potential. These markets grew 36% in FY '25, supported by increasing brand awareness and early traction in key industries such as mining, where our global operations give us a strong advantage. In North America, growth was even stronger at 45%, reflecting the successful rollout of our industrial strategy and the expansion of our sales presence. This has allowed the company to actively pursue new distribution agreements, which has enabled further market penetration in this key region. With the right investments and disciplined execution, we're setting the momentum for long-term growth while managing the complexities of scaling globally. A key element of the company's strategy is ongoing research and development and commercialization of new products in the market. We've demonstrated consistent capability to bring new solutions to market since our beginnings as a respirator manufacturer. A standout innovation for us in FY '25 was the CleanSpace Work, the newest respirator in our portfolio. The work was launched in late FY '24 in Europe and Australia and more recently in the U.S. market in February 2025. As our lightest industrial PAPR, the work is purpose-built for high dust environments and was designed with simplicity and ease of use in mind and utilized at CleanSpace's patented air sensor technology. The work makes up 20% of our global respiratory revenue for respirators, and we'll see continued growth with this product as a heightened focus on respiratory protection continues to drive demand for an affordable entry-level PAPR solution that offers the highest level of protection to users. This capability to develop solutions to the market will be a key enabler for growth over the next few years. There are development projects underway currently and a healthy R&D pipeline for future years. I will now turn it over to Bree to take you through the financials in more detail.

Thank you, Gabrielle. In FY '25, revenue grew 26% to $19.8 million, driven by strong performance in Europe, the U.S. and rest of world markets. Gross profit increased 30% to $14.8 million with gross margin improving these 3 points to 75%. This improvement reflects the successful implementation of our industrial market strategy with savings delivered through lower freight costs, improved quality, reducing write-offs and efficiencies in sourcing. Operating expenses were essentially flat, rising just 0.5%, while supporting a 26% increase in sales, highlighting the operating leverage in our model. Importantly, these results were achieved despite $0.7 million in one-off costs. Underlying marketing spend remained focused on priority markets and R&D costs were phased in line with project milestones. As a result, EBITDA improved significantly, narrowing the loss to $400,000 compared to $3.9 million in the prior year, a clear step forward on the path to profitability. As mentioned, we had $700,000 of nonrecurring expenses last financial year. In a normal year, if we did not have these expenses, our net profit would have been positive. However, these expenses are aligned to our ongoing industrial strategy, and we will have future benefits from these. At year-end FY '25, our balance sheet remains strong and provides the flexibility to self-fund investments and capture new market opportunities. Cash increased to $10.5 million, up $0.7 million on the prior corresponding period and $2.2 million on the half year, supported by positive operating contributions and the R&D tax incentive. Receivables rose in line with the timing of sales, while disciplined inventory management reduced working capital requirements by 21% without compromising on our ability to meet customer demand, thanks to robust supply chain processes. On the liability side, borrowings remained stable, reflecting the new South Wales Health Administration funding agreement. We also renewed our lease from 1 July, which is expected to deliver cost savings over the next 5 years. Overall, total equity strengthened to $19.2 million, reinforcing our financial resilience and giving us the capacity to invest in growth initiatives while maintaining operational discipline. In FY '25, we delivered a significant turnaround in cash flow from operations, generating $1.1 million compared with an outflow of $1.7 million in FY '24. This improvement reflects strong underlying growth in the business with receipts from customers up 24% year-on-year. As our position strengthened, we were able to reinvest $0.8 million in term deposits. Financing cash flows were minimal, primarily related to renegotiated lease payments. Importantly, we continue to run a low capital intensity model with no requirement for major CapEx in the foreseeable future. Overall, our cash balance increased to $10.5 million, up from $9.8 million last year, reinforcing our financial strength and ability to self-fund future growth initiatives. In the appendix section of this presentation, you will find a copy of the statement of profit and loss, statement of financial position and the cash flow statement. And on that note, I'll turn back to Gabrielle.

Thank you, Bree. Our FY '26 strategy is about disciplined, sustainable growth. CleanSpace is a low capital intensity business, which allows us to scale the business efficiently while investing in the right areas, namely people, marketing activity and product innovation. By focusing on industrial sectors and high potential geographies, expanding our sales and distribution reach and accelerating our R&D pipeline, we're positioning CleanSpace to capture market share and deliver long-term value. Looking ahead to FY '26, we remain focused on delivering strong financial performance. First, we're targeting continued top line growth of more than 20%, which will drive further operating leverage and demonstrate the scalability of our model. Second, we expect gross margins to remain in the mid-70% range, underpinned by disciplined pricing, mix management and ongoing efficiency improvements. Third, we are confident in achieving positive EBITDA and positive cash flow for the full year, reflecting both revenue growth and cost discipline. We will continue to enforce rigorous cost control measures, ensuring that operating expenses remain tightly managed even as we scale. Finally, we intend to reinvest surplus cash into growth initiatives, expanding our sales and marketing efforts and accelerating R&D innovation. In short, FY '26 will be about translating momentum into sustainable, profitable growth with a clear focus on delivering value for our shareholders. That concludes our presentation. I'll hand you back to the moderator. Thank you.

[Operator Instructions] I'll now hand back to Mr. McLean for any questions.

Great. Thank you very much. And yes, we do have some questions. So thanks, everyone, for submitting those questions. It's great to be able to answer those. So I'll take you through some of these questions and ask Gabrielle to comment on most of them. So the first one is from Sam Pittman of Taylor Collison. Could you talk through how the European market performed? Any particular comments on France and the growth rate there? Gabrielle?

Yes. Thank you for the question, Sam. We were very pleased with the performance of our -- of the European market for our business. France continued to perform very well. We have a very well-established network of distribution partners in that country and as well an established base of end-user customers in attractive end user markets with whom we continue to work to develop the business. So it is our most established market in Europe, that is France. And so it's very important for us to continue to drive penetration into that market and as well to replicate our efforts and our model into other European countries such as the U.K. and Germany. I spoke as well of the Nordics having performed very well. So overall, we're very pleased. We continue to execute our strategy. Additional resources in Europe as well will continue to drive some growth for us in the oncoming period. Thank you.

We have 2 more questions from Sam, which I'll put into one, I think. So first element is, could you talk through where you think extra sales staff will be added geographically? And then how do you manage the distributors that you have to make sure they're doing a good job? Gabrielle?

Sure. So thank you again, Sam. I think I partially answered the first question initially. So we will be adding some sales resources in Europe. These are very large markets, for example, in Germany, but also in France to strengthen our market coverage there. And I suppose that leads to answering your next question with respect to our distribution partnerships. Many of our distributor partners, for example, in Europe, are long established with us. And it's part of our model to create relationships with channel partners that are able to extend our coverage into the market and reach end-user markets that are particularly suitable for clean space. And so it is a critical part of our strategy as we roll out as well as what we nurture in our more established markets as well. Our sales responsibilities, and we have a leader in each of our key markets is twofold essentially is to work with our channel partners with whom we have agreements. We may also have sales growth or marketing programs that we partner with them for growth in the market. And so our salespeople on the ground work with these channel partners as well, they have support here from our marketing and commercial solutions team to help support those relationships even from Sydney, regardless of where the distributor partner is located. And so what we want to do moving forward really is look strategically at our distribution network, ensuring that we have the right level of coverage in each of the markets that are of focus to us. And there's many different types, of course, of distributors -- some of our generalist sort of maintenance and repair organizations. Others are more specialized and target specific end-user markets. So we're constantly looking at what is the best market coverage for CleanSpace and how do we develop those relationships to expand our coverage and therefore, be able to expand our share in the market. Thank you.

Thanks. So we've got a couple of people asking about the U.S. market. So we've got Anoop Kalra and Nick Maxwell. What are the kind of indicators of early success in the U.S. market?

Yes, we're really pleased with what we've been able to achieve in FY '25 in the U.S. market. It's obviously a very large market, an attractive one from an end user market perspective. In the last year, we've established an entirely new team, all of whom have come from -- with industrial backgrounds, with industrial expertise and having worked in the area for a number of years. And so bringing that level of expertise to our strategy has been absolutely critical. We also have them geographically located across the United States. So it's a team of 5, led by 1 regional Vice President, 3 territory sales manager and sales support resource as well. And it's a very very dedicated focused team that are executing our strategy, laying down the groundwork to make sure we have the right level of distribution coverage in each of their territories and working directly with the end users, say, with the mining companies, fire services, construction, et cetera, to build the awareness of CleanSpace, understand the product, the brand, the portfolio, the benefit and then to specify it into their organizations. So that's -- those are the early outcomes. We're building a pipeline. We're building our network of distribution partnerships, but we're quietly confident that we have the right strategy, and I'm very pleased with what we've been able to do in a short time.

Okay. Thank you. So talking about FY '26 guidance. This is Brian Bowes. Any particular assumptions or any industry focus around the guidance for this year?

So we'll continue to focus on core markets, which you might see on one of the first slides in this presentation. So very much focused and sort of regionally will shift a little bit, but certainly, mining, infrastructure, heavy manufacturing, welding and fire services will continue to be areas of focus. We know that within those industries, there's a rising awareness for the need for respiratory protection that will, I believe, only continue to be very strong and to unfold across different sectors. And so as a result of that, we'll continue to focus in these areas where we know the portfolio can be successful, where we know that there's a growing demand and where the awareness for respiratory protection for those workers is particularly relevant.

Okay. Thank you. I will come back to some of these other questions about quarter 1 seasonality. So maybe, Bree, you can answer this. Do we expect to have positive free cash flow in FY '26?

We expect to continue the current positive cash flow trend, notwithstanding some external market events, even saying that even during COVID, the company was able to secure its supply chain, and we have good liquidity reserves as well.

Okay. Thank you, Bree. Thanks for the question. Brian Bowes again. How do you see CleanSpace's competitive advantage evolving over the next few years, particularly as global safety and sustainability standards continue to tighten. Gabrielle, a quick comment on that?

Sure. So our portfolio, the innovation of the CleanSpace PAPR units are so well differentiated in the market. There is no other competitor in the market today that can offer the type of product, very lightweight, no belts and hoses, much more comfortable for the user to wear, much more flexible in terms of the environments where it can be worn effectively while offering still the highest level of respiratory protection. So from a competitive differentiation standpoint, I'm very confident that we have a very interesting portfolio that will win share in the market. And this is the platform against which we will continue to innovate in the future. As I mentioned in my previous answer, awareness for respiratory protection is still growing. There's still a growing understanding of the health impacts of different types of particulate or gas contaminations, the need for levels of protection for workers in different sectors. And certainly, the markets where we are focusing have regulatory bodies that help to set the standards for the level of protection that's required for workers and also drive enforcement at the organization level. So these are the markets where we want to continue our efforts. These are organizations where we want to partner with to help them meet those standards of protection for their worker. Thank you.

Okay. This is a question from Sean Rapley about our warehousing footprint. Is there any impact on costs for next year? And do you expect inventories to remain flat or continue to fall?