QleanAir AB (publ) (QAIR) Earnings Call Transcript

Thank you very much for that, and very welcome to the audiocast with QleanAir. I am pleased to present to you our Q3 report. Page 3, please. I would like to start with giving you a brief overview of QleanAir. We are a global provider of premium indoor air cleaning solutions. Our main markets that we operate in are Nordic Europe, Central Europe, Japan and the U.S. We have a diversified customer base with a high retention rate and more than 2,500 customers. We operate with a business model which mainly consists of long-term contracts of 36 months. This means that we have a great business model that generates strong cash flow and a high and increasing level of recurring revenues. We have certified customers and more than 75% of our customers are extended or renewed. And on average, our solutions remain with our customers for 6 years. We have proprietary technology and solutions, providing substantial barriers to entry in these areas that we operate in. Our markets have strong fundamental drivers from regulatory shifts and from increased awareness of the importance of indoor air quality. And we have large opportunities within the customer segments that we focus in on industry: food, offices, automotive and cleanroom segments. Page 5, please. Looking at our operational highlights during Q3. We have maintained a high activity level as a company in challenging times given the COVID-19 situation. We continued to serve our customers. We have also continued our path of introducing new innovative solutions in the marketplace within our product category Facility Solutions. In Q2, we launched a specific solution for the Food segment, which was followed in Q3 by a solution for larger industrial spaces, which previously has been an important focus area for us. And we've also worked a lot on a new introduction in Q4 of a solution which we have developed in close cooperation with the health care sector as a response primarily to the COVID-19 challenge. We've also taken our first order of the Facility Solutions in Japan and step-by-step plan, the introduction of facility there. We have our new marketing team in place at our headquarter in Solna. And we won a new frame agreement with PostNord, which is an important customer of ours since a number of years and a Nordic customer in the logistics sector. Page 6, please. Looking at our key financial highlights in Q3. We continue to deliver stable and good margins and an increased level of earnings per share. Our EBIT margin landed at 17% and SEK 17.8 million compared to an adjusted level of SEK 21 million last year. Our sales landed at SEK 104.9 million, which represented a decline of 4.6% compared to the same period last year, taking into account currency adjustments. Our order intake landed at SEK 54.4 million, which meant a decline of 39% compared to the same period last year. So we have had impacts from COVID-19 on our sales and our order intake level. Given the large contribution of our business from recurring revenues, it is, however, not possible to automatically translate our order intake level to future revenue generation. So we see a strong increase in recurring revenues, which land at SEK 64.9 million in the quarter, which is an increase of 35% compared to the same quarter last year. And we continue to deliver an improved operating cash flow of SEK 22.4 million, and our earnings per share amounted to SEK 0.61 per share compared to SEK 0.16 during the same period last year. Our resilient business model with a large and increasing share of recurring revenue and outsourced services in services and manufacturing serves us well during the COVID-19 phase. Page 7, please. Looking at the development in our different product categories. Let's start with Cabin Solutions first, which is the foundation of the company and complemented the product lines of smoking station towards offices, public spaces and industry. Cabin Solutions represented in the quarter 79% of our total sales, and our main markets are Europe and Japan, where the European market is more mature. And we, during the years, have seen a strong growth in the Japanese market. In Japan, during the latter part of last year and the first half of this year, we saw an exceptionally high growth in sales, which was linked to an Health Promotion Act that came into force from the 1st of April in Japan and which meant that many customers made their purchasing decision prior to that state. Now we've seen a normalization in demand in the Japanese market. And we've also seen impact from the COVID-19 situation in Japan, where the market has been largely in a lockdown phase during most of this time of the COVID-19 situation. But we continue to see strong potential in our cabin business over the medium and long term. And in spite of a decline in Q3 of 11% in sales, we are still up year-to-date with 16% in sales in our Cabin Solutions business. Page 8, please. Moving to our product category Room Solutions, which is one of our newer product categories, where we, during the years 2016 to 2019, have delivered an annual growth level of 63%. And the U.S. is our main market in this product category. In the quarter, the sales of Room Solutions represented 12% of our turnover. And there, we saw an impact both on our sales performance in the quarter and our order intake, very much related to the situation that our core segments in the U.S. market are hospitals, it's pharmacies within hospitals and independent pharmacies, and they have been severely impacted by the COVID-19 situation. So we were down in the quarter in sales 28%, but we are still up year-to-date with 24% in the Room Solutions business. We are addressing this with a strong focus on accelerating the pace of closing customer opportunities, focusing on customers outside of the hospitals and also putting a lot of energy and effort to reinforce our channel cooperations and marketing activities to increase our qualitative leads generation. And we are convinced about the opportunity in our Room Solutions business also over the medium and long term. Next page, please. Moving to Facility Solutions, our second of our newer product categories. We continue to invest in innovation and new solutions. And step-by-step, we introduced more products where we focus on real customer demand. We increased our sales compared to the same quarter last year with 14%, and we also delivered good growth year-to-date of 10%. Next page, please, Page 10. Here, I would like to show to you our family of solutions within the facility segment. Moving into 2020, we had 2 solutions. We have the AirQlean Low, and we have our FS70. Now we have step-by-step built up a family of products. We target different product segments with specific features that we know these different customers need. We started then with a food solution that was introduced in Q2, where we have learned that the Food segment is a segment with a lot of regulations given the importance to protect the consumers' health that are being produced and also to protect employees working in the food sector. And that has given us great contribution in our business in Q3. Now we are then launching what we call the FS90, which is a larger unit with the biggest capacity we have ever produced as a response to requests from some of our customers with larger industrial areas, where FS90 is a good complement to our complete installations. Then we have worked a lot in tight cooperation with the health care sector to develop the FS30, aiming for the Office segment and public places and health care where we provide HEPA 14 filtration, which contributes to reduce the risk of spreading viruses, but also with a combination of good efficiency and low sound level, which is very important to these customer segments. So we have during 2020 step-by-step built up a very strong portfolio within our facility segment when we go into 2021. Next page, please. The COVID-19 has had impact for us in the short term. On the challenging side, it has meant that it's more challenging for us to some extent to conduct our sales processes because we continue to be dependent on physical meetings. And we have seen in some segments that customers have longer decision processes related to investments. But we've also seen an increase in demand for air cleaning in some of our customer segments. And we also have seen an increase in awareness, in general, in society about the importance of clean indoor air and the fact that air cleaning solution, professional air cleaning solution, can contribute to reducing the risk of spreading viruses. And we, for instance, in Germany, a very important market for us in Europe, there's been an increased activity supported by the public to increase activities to improve the general indoor air quality in the market. So the -- mixed picture for the short term, but for the medium and long term, we see that the COVID-19 situation will have a positive impact on the demand for our types of solutions. Page 12, please. To summarize our portfolio, we have a stable and diversified revenue base from our more than 2,500 customers. We have more than 9,400 installed units within our 3 product categories in more than 20 countries. In Q3, we had 62% of recurring revenue, and a typical contract length is 36 months, and more than 75% of our contracts are extended or renewed. Then I would like to hand over to our CFO, Henrik Resmark?

Thanks. Moving to Page 14, please. As mentioned, order intake is down by 39% and sales down by 5% organically in the quarter. We are a growth company. We are launching new products, and hence, we need to meet our new customers to be able to sell. A large part of our market in Europe and the U.S. have been closed or have had restrictions, also Japan to some extent. If move on to Page 15, please. Despite the decline in order intake and sales, the margins are stable in the third quarter. When I say stable margins, I mean stable EBITDA, EBIT and gross margins. We have an increase in recurring revenues, up by 34%, increase in short-term contracts primarily within Facility Solutions. Rolling 12 months, we have recurring revenues of SEK 246 million, close to 50% of total revenues. Cash flow is improved versus third quarter 2019, and the business model is efficient also in challenging markets. And still again, more than 75% of customer agreements are either renewed or extended. It is clear that QleanAir has a satisfied customer base, and that customer base is growing with increase in installed units globally. We move to Page 16, please. On this page, I would like to highlight 3 items. Equity ratio improved to 23%, up from 14%. Net debt reduced to SEK 207 million, down from SEK 251 million. We have a clear strategy to reduce the net debt over time according to scheduled amortization. And operating cash flow, SEK 22 million, up from SEK 14 million. It is improved, and again, the business model is efficient also in these markets. Cash-generative business model and strategy to pay dividend to shareholders. The dividend for this year 2020 was withdrawn, and that question is under review by the Board. Then we move to Page 17, please. We had an organic growth, minus 5% in the quarter, but accumulated January to September is plus 15.6%. The target is approximately 10%. The EBIT was 17% in the quarter. Accumulated January to September, 19.3% EBIT margin, and the target we have is 15% to 20%. And again, the dividend was 0. With that, I hand over to Christina again.

Page 18, please. Since 2015, we also measure our performance in terms of our amount of clean air delivery, and that is based on our whole installed base over the world. And we translate that into how many Ericsson Globe Arenas we clean per hour. And there, we've seen a continuous increase. And by September 2020, the number was 8.65 Ericsson Globe Arenas per hour in terms of clean air deliveries. Page 19, please. In summary, QleanAir as an investment. We have a unique service offering based on a holistic approach to deliver clean air as a service with full-service rental contracts. We have proprietary air cleaning technology and back-office solutions, providing substantial barriers to entry. We have long contracts with a high degree of extensions across a diversified customer base, generating strong and predictable revenues. We have an asset-light business model with limited CapEx needs, providing strong free cash conversion and equity returns. And with that, we would like to hand over to the Q&A session.

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

I would like to ask question about the demand situation. Order intake was down quite significantly, while sales was held up well and also the installed base. And you mentioned in your report that short-term orders, less than 36 months, are not part of the order intake; that, that short-term order intake increased by 127% in the number of units. Could you elaborate a little bit about the order intake and this short-term demand?

Yes. Good question, Anders. First of all, how we define the order intake, it's a long rental contract with a defined end date. We now have a strong order intake on shorter contracts, shorter than 3 years. And many of those shorter contracts, they don't have a clear end date, so to speak. And that is the reason why it's not included in the order intake. And we increased our installed base, yes, because we are getting still a flow of contracts and installations, but again, shorter contracts. But that also adds to the installed base. So we are growing this company in terms of global installed base units, and that is driving the recurring revenues. And shorter contracts in 3 years, they are recorded as recurring revenues. And the recurring revenues is increasing. And that, of course, is a great contributor to our long-term revenues. And that is the reason why we have a large decline in order intake versus what we can recognize in the P&L through also including all contracts, of course. So that is the reason for that.

Yes. So we shouldn't interpret a lower order intake as that sales will continue to go down or...

We cannot translate the reduction in order intake to a projection of the revenue generation for the following quarter. As a reference point, in Q2, we had a decline in order intake of 29%, whereas we generate reduced sales level in Q3 of 4.6%. That doesn't -- that cannot be translated into Q3, but simply to say that there is not a direct correlation between the order intake level and the revenue -- upcoming revenue level.

Okay. And then the next question, what is the composition of those short-term orders? Are they found in Cabin Solutions or in Facility Solutions? And how do you see upon this potential in that area?

It's more Facility Solutions, more related to new solutions within facilities. But it's still -- the bulk is medium term, so around 12 months. But it's a good way to enter new markets with new solutions.

Okay. Coming back to Japan again. Where do you think there is some sort of a stable market demand in Japan? How do you see upon the future demand there?

The future for the medium and long term, we are very much convinced about the continued strong development in Japan. Then in 2020, during COVID-19, Japan has been in a lockdown phase during much of this time of COVID-19. And there has been a large degree of working remotely, and that has impacted companies' willingness to invest in their office environment. But that is a short-term issue related to the COVID-19 situation.

If we look at the sales development in the quarter, it seems that Europe has held up relatively well. But while the downturn was entirely in Japan, and also to some extent in the U.S., what is happening in Europe? Is it a sequential recovery in Cabin Solution? Or is it Facility Solutions coming back or both?

We see good contribution from our new solutions in the facility segment, like the food product, for instance, that we launched in Q2, but also an overall growth in facility. And we also see a continued great contribution from our installed base of Cabin Solutions.

Okay. Excellent. Then coming to your new products here. And of course, there is some attention to this indoor air cleaner, where you will start marketing that in the fourth quarter. Is it already launched? Is it possible to buy it already? Or is it something that will come?

It is launched, and we are open to take orders, but it will still take some time before we start shipping it. But we are getting prepared and geared up to introduce it in the marketplace.

And it's introduced in Europe and in Japan?

Exactly. Exactly. So this is an important vehicle for us in the Japanese market. And there, we primarily turn towards our already existing customer segment in the offices from our Cabin Solutions business.

Yes. But when you talk about the indoor market, you also mention several areas like hotels, et cetera, that you are not that present today. So how do you sort of market in those areas where you are not present with Cabin Solutions or the sales new force into...