Aquaporin A/S (00B.F) Earnings Call Transcript & Summary

Thank you for standing by. My name Ellie, and I will be your conference operator for today. And at this time, I would like to welcome everyone to the Aquaporin Half Year Interim Report 2023 Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand over the call to Matt Boczkowski. You may now start your conference.

Thank you, and hello, everyone. We will be presenting today's half year report for 2023 for Aquaporin. And I'll start by a brief introduction of our presenters. So my name is Matt Boczkowski, the Chief Executive Officer of Aquaporin. And I'm joined here today with Klaus Juhl Wulff, our Chief Financial Officer. Before we begin, I just wanted to let you know that some of the matters discussed in this presentation may constitute forward-looking statements, and you should treat this information as such. For those who are listening to us for the first time, a quick overview of Aquaporin. We are a company that has a purpose to rethink water filtration with biotechnology. We're one of the only companies in the world to do that. We are headquartered in Denmark with operations in Singapore, Turkey, China and the United States. We are listed on the Nasdaq in Copenhagen under the ticker AQP. We have 1 core technology, which is called Aquaporin Inside. This technology is applied into our standard product, into all of the products that we create. And we use these products in different business areas. We are a company, as I mentioned, headquartered in Denmark. But we work through a key account strategy, which makes our reach global. Giving a quick overview of what we are going to be discussing about today, we had a very strong progress in all areas in the first half of the year. So we will be touching a bit on the Drinking Water, where we've observed a strong momentum with a number of key accounts and where we are introducing new products. In Industrial Reverse Osmosis, we will talk a bit about the product development that we've seen and how we're converting pilots into orders and into larger demonstration cases. In Forward Osmosis market development, we will talk about a joint development agreement we've signed with Gallo and also some highlights from our product development. Deep tech and open innovation, which is what constitutes our research and development department, have also had some good traction in the first half of the year, so we will have an overview of this. And then we will talk about the financial indicators and the financial performance of the company that summarizes the activities for the first half of the year. So beginning with Drinking Water. This part of our business corresponds to roughly 1/2 our revenue in the first half of the year. We've signed an exclusive agreement with Philips Water Solutions for the supply of membranes in China with a doubling of sales compared to 2022. We will be present in more than 500,000 homes by the end of the year, which is a really significant growth for Aquaporin in that country. We've launched the A2O Series with the A2O Pure and A2O Bar. The A2O Pure is an under-the-sink water purifier, which you can see at the bottom left of this slide. It's an under-the-sink purifier for homes. And the A2O Bar is the third picture which you can see that looks like a built-in appliance, which is meant for the kitchen segment. Both of these products are going to be distributed by Danish reseller, Andersen & Nielsen. We have signed a distribution agreement with a company called EARTHY. This is a company based in India who is bringing water purification solutions powered by Aquaporin Inside to schools as well as to different type of sports facilities. We've been working with them for a number of years and they're a repeat customer of Aquaporin. And these are just a few customers to highlight how we are having also repeat business for a number of our clients. Also, one last thing I wanted to mention is that we've had a strong marketing campaign throughout the first half of the year on PFAS to inform the public, to inform potential customers of different issues related to PFAS. We are now transitioning this marketing campaign towards call to action and the purifiers that have been mentioned above under the A2O Series are our solution to help consumers take matters in their own hands and remove PFAS from their drinking water. Switching to industrial Reverse Osmosis. This is an area where we've seen growth of approximately 5% to 10%, but what is important here is that we're seeing repeat orders. We have demonstrated that our membranes can achieve an energy efficiency of 10% to 30%. And in some cases, we've even shown that they can achieve an energy efficiency of up to 60% in some water reuse cases. This, of course, has important cost implications, OpEx implications but also an implication on the carbon footprint. We've secured a very important milestone with FCC Aqualia, who is the fourth-largest water OEM in the world. We are going to be providing Aquaporin's biomimetic membrane solutions to some of Aqualia's customers, and we're very excited about this partnership which we are embarking on. We've converted a large -- a pilot to a large-scale trial with the Public Utilities Board in Singapore. This is a trial where 500 large industrial-scale elements will be tested for a duration of 12 months. And at the outset of that pilot, we expect to demonstrate we have achieved a 10% to 30% energy efficiency that we have seen at the pilot level as well. And lastly, in order to be able to meet this increasing demand, we are optimizing our supply chain to deliver on an increasing order intake and, of course, to also work on margin expansion. On the right-hand side of this slide, you see some mountains of salt. This is to illustrate the desalination market. Aquaporin is active today in the brackish segment. However, we would also like to translate those energy efficiencies that we have demonstrated to the desalination market. It is a very large market that is also growing at a double digit, and we would like to have products for this market in the foreseeable future. Transitioning to our activities in Forward Osmosis market development, approximately 45% of our revenue contribution comes from this area. This is fueled by a number of different activities, one of which is here on this slide, the joint development agreement with Ernest & Julio Gallo. This is one of the largest wineries in the world, and we are working with them together on developing a new Aquaporin Inside membrane, a new Aquaporin Inside concentration method that will reduce the transportation costs, it will allow to concentrate different types of process streams. Our Forward Osmosis modules are also slowly but surely getting improved for food contact applications. We've obtained approval in Japan and we are working on approval in other jurisdictions. We are also advancing our membrane development towards the second generation of the Forward Osmosis modules for the food industry, and that development is also on track. Lastly, we also work on other applications such as lithium, dialysis, and we will talk about those applications when we reach a commercial stage. Before passing it to Klaus for the financial numbers, I wanted to say a few words about our research and development activities as we've had some really good progress in this first half. We are developing the next-generation of Aquaporin Inside formulation. The goal that we have there is to achieve membranes that have an even greater energy efficiency, that allow us to recycle even more water and save even more water for our planet. We have been inventing new methods to identify how we can visualize proteins on membrane services. We've recently had a really nice breakthrough, where we can actually see the proteins on the membrane under some special techniques, and this allows us to now be a little bit smarter as to how they should be positioned and where. This has been a huge accomplishment for our deep tech team. We've launched a polymer lab to speed up our efforts at increasing the amount of membranes that we -- the amount of proteins that we can put on membranes. And all of this is really -- has really been a lot of the work that's been done by our team in the first half of the year. We are using open innovation and public and private partnerships, and we currently have 8 active projects. Some examples of those projects include our space collaborations, some of -- include our partnership in PFAS, another partnership is in the area dialysis. So really things that are all aligned to some of the business potential areas that we are seeing. And lastly, we're going to space. So we're all very excited about this, where our Forward Osmosis technology is going to be tested under a number of different micro gravity conditions. I will now pass it to Klaus, who will walk you through some of the results and outlooks for Aquaporin.

Thank you, Matt. I'll now take you through our financial highlights for the first half of this year. For the first 6 months of '23, we recorded revenue of DKK 20.2 million, which is a growth of 54% compared to the same period last year. Our EBIT was improved by DKK 8.6 million to a loss for the first 6 months of '23 of DKK 45.1 million. At the end of June 23, we had cash at the level of DKK 52.3 million. This include that we raised a gross amount of DKK 74 million in February '23. Our gross margin is developing positively, and we're on track to deliver gross margin for the full year of '23 of above 30% as we have guided on. Our cost base for the first 6 months of '23 is actually lower than the same period of '22 and demonstrates the strong cost discipline we have in the company. For the period of the first half, our cash position is impacted by buildup of inventory. This is necessary in order for us to service a very strong order book for H2. Looking at our income statement for H1. It really displays that we're shifting our cost base more towards commercial focus. If you look at our sales and marketing costs, here we have increased the cost spend we have had from around DKK 12 million, DKK 12.6 million to DKK 15 million. At the same time, we have a slight decrease in the research and development, which is also in line with what we said. So here, we've spent DKK 21.9 million versus DKK 24 million last year. Our overheads are kept stable. This is all in line with what we've kind of said previously that we want to be doing and really overall want to maintain now stable cost base not only this year but also aim to keep it more or less stable in the coming years. As Matt also mentioned, we've seen revenue growth within all parts of the business, and this means that revenue for both RO, Drinking Water and FO market development are up versus same period last year. So with that, I'll take us over to some of the financial guidance. So based on what we've seen in H1 that you just saw, we maintain our guidance for the full year, that being revenue in the range of DKK 50 million to DKK 70 million, which will be a doubling of our revenue we had in 2022 and really showing that we keep delivering on the growth path that we set forward. Our gross profit margin will be still above 30% as was said and we've demonstrated that in H1 as well. The EBIT before special items will be in the range of minus DKK 105 million to minus DKK 95 million. Our CapEx will be in the range of DKK 10 million to DKK 15 million as said and there's no change to what we said when we gave the first guidance for the year. And we're really happy with the results we're actually coming out of H1 with. And again, demonstrating that we are, for the 7 or 8 quarters in a row, delivering on the numbers we set out that we would have and really following the plan we set forward some time ago. So with that, we will pass it over to questions. Moderator, please take over.

[Operator Instructions] We have our first question from [ Johan Bergland ] from Danske Bank.

Matt & Klaus, congratulations on a good H1 and Q2. A couple of questions for me. Could you maybe elaborate a bit on the Aqualia partnership? For example, like when can we expect all their clients to use the membranes? And what kind of revenue could this bring in? And also on the partnership with the Singaporean water agency, you mentioned the 12 months' time line. But could you maybe also give kind of an estimate or indication of what kind of revenue it could bring in, if it were to turn into a commercial partnership?

Yes, of course. Thank you for the questions. I think -- so I'll just start by saying that we cannot comment on the exact revenue that is coming from those specific customers. That is just something we can't do for just disclosure purposes. But I can give you a bit more light on them, of course. So the Aqualia partnership, the idea is that Aqualia has an agreement with Aquaporin where they are positioning biomimetic membranes with their customers. What they're trying to do is we demonstrate with Aqualia energy efficiencies, and so they work with the end customers. And when they have discussions with end customers, they are working on positioning Aquaporin Inside products or biomimetic membranes as they've seen the benefit of that in terms of energy efficiency. So we're going to be starting with them with small-, medium-sized installations, so that can be anywhere between 10, 20, 30, 40, 100 membranes. That's the idea. And as we build the references, of course, the expectation is that in the future, more projects are going to open up. I just want to mention that this isn't like an exclusive partnership or anything like that. Of course, we are very happy to work with Aqualia, but they can work with other membrane suppliers as well. So just wanted to make sure that this is clarified. With regards to the PUB, the Public Utilities Board, I think it's worth mentioning that the Public Utilities Board is actually one of those key references that any membrane technology company wants to have as a reference. And that is really what is driving a lot of our work with them. So what's happened now is we've done a pilot with them for over a year. This pilot has converted into us providing over 500 large industrial elements. These elements, once the 12-month period is done, are going to be evaluated for their performance. And if the performance, in terms of flow, rejection and a few other criteria that the PUB is evaluating, is good, then we will be able to receive some compensation for this trial but also be on the sort of approved vendors list for larger membrane replacements. Now because the Public Utilities Board is a public agency, we, of course, are going to have to bid on request for proposals. And so that's going to be part of a normal process, like any other membrane company would do. But this is in the order sometimes of up to 10,000 membrane elements. So it is very large membrane orders. And that is what is very exciting for Aquaporin, is that we now have access -- or we will have access at the outset of this pilot to those types of projects. And I mean, again, without revealing the sort of specific value, but just to give you an indication, the market price for an 8-inch reversal osmosis membrane is somewhere in the order of between USD 375 to USD 450, USD 500 for very large element orders. But that gives you a bit of an indication of what you can expect from a growing number of membrane sales into certain segments of that size.

[Operator Instructions] We have our next question from [ Johan Bergland ] from Danske Bank.

Yes. If we could maybe just touch briefly on Q2. The revenue landed on 9.2, which indicates kind of flat revenue growth from Q1. Could you maybe -- is there some kind of revenue that was recognized in Q3 that you expect it to be recognized in Q2 that maybe caused this flat growth? And also, as you stated in the report, it is no secret that you need to raise additional capital in the next 12 months, either through share issue or debt. Have you like decided on it's going to be through a share issue or debt yet?

Thank you for the question, [ Johan ]. Firstly, yes, Q2 was somewhat impacted by some timing. I mean there's always a risk when you have shipments scheduled to go out just around the end of the month. And we did have a shipment to a large customer that was originally planned in late June that went into early July. So there was definitely some impact for that. I mean, with us stating that we feel comfortable with achieving the full year revenue numbers, it also indicates that even though we only, in practice, did DKK 20 million, we still believe we'll do in the range of DKK 50 million to DKK 60 million (sic), so that's kind of timing and also a bit with the backlog of orders being positive into H2. On the cash side, we don't have any official statement that we will bring to the market now about cash. We -- if you look at -- when we issued the annual report where we were still a going concern, and technically, that means that we have at least cash until end of Q1 2024, with nothing new to add to that. And once we kind of make a path forward or potentially take a decision on what to do here, we will inform the market. And until then, we cannot really comment on anything more.

I'll just add one quick thing. It's DKK 50 million to DKK 70 million. You said DKK 60 million.

Yes, yes, sorry.

Yes. And so just touch upon that as well, you still maintain the original guidance. Is there a reason why you haven't like narrowed it now that we're like halfway done with the year? And is there some potential risks you see that might cause you to lower it? Or...

No, if we saw a risk of lowering it, I think we would have gone out and we would have restated the guidance. We announced the remainder -- I mean, with us only in practice doing the DKK 20 million in first half and need to do DKK 50 million to DKK 70 million on the full year, there's still a lot of orders that has to go out. And we are doing everything we can to make sure that the order backlog and also the conversion of, let's say, the pipeline is going to be positive so that we will achieve that. However, the ships have not sailed yet. The orders have not been shipped yet. There's also a risk to once we kind of get to a point maybe at Q3 trading update, you could feel that we can narrow it down. We will. I mean, we feel comfortable with the range we have guided in our guidance.

Yes. And maybe just one small addition. Traditionally, our fourth quarters have often been very sort of heavy, very high in terms of revenue. And that trend is going to continue this year. So you can expect us to see -- expect to see from us an increasing number revenue in the last quarter, which is also the reason why we maintained the guidance DKK 50 million to DKK 70 million. And it's a little difficult for us at this point in time to narrow it down further.

Okay. I also have a couple of questions on the Philips Water Solutions deal. It's an exclusive agreement, but do you see any other players in the Chinese market that is interested in partnering up with you? And if so, is there a potential where you can partner up with these as well, maybe through some kind of royalty program with Philips Water Solutions?

Well, it's a super question. Yes, it is an exclusive agreement with Philips, and we've had a really good relationship with them for a couple of years now. And the idea is that as Philips grows in China, we grow with them. And we -- it's a very sort of mutually beneficial relationship that we have. Now, that being said, of course, as other competitors really are noticing the growth, there are inquiries coming for Aquaporin Inside both to Aquaporin and to Philips directly. We haven't put a time and place on what -- how to commercialize this. We have had some discussions. But again, we are in a situation where this is an exclusive agreement, so we're looking into that. But I can't say that we have an exact plan on how we would like to execute on it. But it's on our minds, for sure.

Okay. And then just a follow-up on that. Is there any indication from Philips that they kind of want to partner up in Europe or U.S. as well? Or is it mainly China for now?

We -- so there is. There is an indication from Philips that they're very happy with how things are progressing with Aquaporin. And as they're expanding geographically, we are in discussions about providing Aquaporin Inside into some of their other geographies. So for instance, you can already see, I think they have some commercial online for the Australian market, where Aquaporin Inside is already positioned for that market inside of their purifiers. And these are public commercials that are on YouTube. So we are expanding with them, but the exclusivity is only in China.

Okay. Okay. Yes. And then final question for me. Could you maybe give some flavor on the order from the Israeli customer? Kind of -- is this kind of a recurring order that we can expect every other year or -- in the same size? Or is it going to be like larger or smaller?

Sorry, just a kind of an issue with the phone here. Yes, so we have placed -- I mean, they have placed an initial order that we're looking at filling now. This is for multiple shipments for a number of their customers on their end. So the agreement with them is that this is their first sort of larger-scale order with Aquaporin. The intention is that they, of course, place future repeat orders, but as a part of the sort of commercial strategy and the commercial discussions with the team to try and develop this accounting, really in the same way that we would be developing any other distributor. So we are hopeful that this is something that we can grow in Israel.

Seems like we don't have any questions as of the moment. I'd now like to hand back to Matt Boczkowski for the webcast questions and closing remarks.

Thank you very much. So we are very excited about the first half of the year. I think we have demonstrated strong growth, a strong momentum. We have a lot of really exciting things happening, launching new products, converting on our campaigns. We mentioned the PFAS campaign now. This is really kicking into full throttle. We have -- we're going into space to test our Forward Osmosis technology. So really a lot of very exciting things that happened in the first year, and our teams are working extremely hard to ensure that we are continuing on this momentum. And the second half of the year is going to be extremely busy for us. It's -- especially the last quarter, it's always very busy. So that is what our shareholders and customers can expect. I think we are on a really nice commercial journey. We are delivering what we promised to our shareholders. We're very happy to be able to keep our guidances on all the different metrics, as Klaus mentioned. And maybe, as just the sort of last sentence to all of our listeners, remember that without the Aquaporin protein, there would be no life on Earth. So we're onto something big here. Thank you very much, everyone, and I really am looking forward to discussing with you our performance results further at the end of the year.

Thank you for attending today's session. You may now all disconnect. Have a wonderful day.