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

Good day, and welcome to the Aquaporin Half Year Interim Report 2024 Conference Call. [Operator Instructions] And finally, I would like to advise all participants this call is being recorded. Thank you. I'd now like to welcome Matt Boczkowski, Chief Executive Officer, to begin the conference. Matt, over to you.

Thank you very much. Hello, everyone, and, welcome to this half year interim report for Aquaporin for 2024. We're very happy to be here with you. As was introduced, my, name is, Matt Boczkowski. I'm the CEO of Aquaporin, and I'm here today with Klaus Juhl Wulff, our Chief Financial Officer. In the presentation that follows, you will see, there will be mention of different strategic and financial aspects. So please be aware that some of them may constitute forward-looking statements. And so this is just a disclaimer to keep that in mind. A brief introduction to Aquaporin and to who we are before we get to the business highlights and the financial highlights. Aquaporin has a purpose to rethink water filtration with biotechnology. Our headquarter is in Denmark, and we have operations in Singapore, Turkey, China and the United States. We're listed on the Nasdaq and Copenhagen under ticker AQP. We have 77 employees and a very broad cultural background. We have one core technology, which we call Aquaporin Inside. This technology is based on combining biotechnology with standard engineering. And with this, we create products that we apply to 3 different business areas. Those business areas are Residential Drinking Water, Industrial Reverse Osmosis, so industrial water, and Forward Osmosis, which has some niche applications, primarily in food and beverage for us. So these 3 areas is what drives the revenue for Aquaporin, and we will walk through some of the details in the coming slides. Our strategy is anchored in a key account approach, which means that our solutions are offered globally. We have customers on practically every continent. And this is a strategy that we've implemented a couple of years ago, and we're going to continue on that strategy for the second half of the year and the years to come. Now switching to our business highlights. I want to start by saying that we just released, of course, the results this morning. We've demonstrated a 44% year-over-year growth compared to the same time period last year. We're very pleased with these results. We'll dig into this a little bit more and what this means for our respective business lines. Some of the other highlights that are really notable from the first part of the year is that we've raised proceeds of DKK 172 million through rights our issue. This capital increase fuels the growth of Aquaporin for the foreseeable future, and it paves our path to breakeven within a few years from now. We have also strengthened the executive management team and the Board of Directors with the appointment of Torsten and the addition of Peter, our Founder, to our Board of Directors. So we're very pleased to have them on board in those roles. We believe that this really strengthens our executive management team. We've improved our supply chain, particularly in reverse osmosis. We've been talking about a dual supplier strategy. We work a lot through collaborations. And now we have 2 suppliers that we can leverage to make our final products. They're also located in different geographies, which mitigates any geographical risks. So that is, respectively, the United States and China. We've launched our CLEAR series. These are our brackish reverse osmosis membranes. We launched those in China, where we introduced 5 brackish membranes. The Chinese market is particularly important to us, and I'll touch on that in the next slide. We've secured repeat orders of flat sheet for our key account AquaShield, who is the distributor or the brand owner for Philips Water Solutions in China. We've achieved repeat orders -- repeat milestone payments, actually, with Gallo, one of our key accounts. With them, we are developing a membrane for the wine industry. So that project is ongoing and going very well. We've opened a new polymer lab at Aquaporin. This is in line with our strategy to keep that core component of the Aquaporin protein within our control, and that drives actually the further development of our next-generation of the Aquaporin protein technology and also it's something that we're going to be touching on towards the end of this presentation. We've entered into EU funded project, KitNewCare and RESURGENCE. KitNewCare is in the dialysis industry, RESURGENCE is all about circular solutions and energy efficiency. In both of these, Aquaporin is providing consulting services as well as membranes of different types. Now just a word about China. Why is China important to us? Well, China is the largest market in the world when it comes to brackish -- actually to any reverse osmosis membranes. It has a projected growth of about 10% year-over-year. The overall market is growing at that pace. And you can see here that it's meant to almost double from '23 to 2030. This is why this is a segment in which we're actually investing resources, both marketing and sales. And you see -- you will see the result of that when I speak about this segment in our numbers a little bit later on. This is also an area that the industrial segment that accounts 2/3 of the total market size, which is again why we're pushing in that industrial segment. China, of course, also has a strong local supply and a lot of price competition. But we do believe that Aquaporin's positioning in China allows us to win projects by having an industry-leading OpEx membrane and also now be able to offer it at competitive prices. Shifting to Drinking Water. The Drinking Water business continues to be the dominant revenue generator for Aquaporin. It's contributed to 58% of the total revenue in the first half of the year. You can see this is roughly DKK 17 million, and that is a 60% growth compared to the same time period last year. The growth with Philips continued in China, but we have also made good progress with new key accounts, both in China and in the United States. And these accounts, we are looking at offering to them the flat sheet, which is the core membrane that we produce, but also looking at some options with purifiers. We've initiated conversations as well in India. That is also very important, since in India everybody actually uses purification in their homes. It's a very, very widespread technology. So we have initiated conversations with companies also for supply of flat sheet and purifiers. So expect to hear more on India from us in the coming -- in the second half of the year. We've delivered the Rafine PRO units to our key account in Turkey, Vestel. You see the picture here of this unit. It's under the same filtration unit that can be installed in different geographies in Turkey. This is important because it's a unit that has a pump and that means that it can be used on many different types of water qualities. And what you can expect in the second half is a continued strong flat sheet orders and deliveries scheduled in Q4, especially in November and December. This is no different from what we've had last year where our second half of the year was quite heavy in terms of activities in the Drinking Water segment. Moving to Industrial Reverse Osmosis. This contributed to 13% of the total revenue, so DKK 3.7 million. What I would really like to focus your attention here is the growth. Of course, 1,000% growth means that in the same period last year we had limited revenue. But this is a segment in which we've actually focused quite a bit on introducing new products, on launching new products. And I'm really pleased with what we've seen in the first half as we really see that commercial traction that we've been seeking to get through the introduction of those products. So we continue demonstrating OpEx savings. This is primarily driven by the energy efficient nature of our membranes. We are launching those membranes in both municipal and industrial customers. And as mentioned before, the supply chain that we have optimized is really allowing us to also be competitive on the sales price. So we are striking a sweet spot with our customers, and we also expect that to continue in the second half of the year. In addition to launching the CLEAR series in China, and you can see on the right-hand side, the photo of WATERTECH, which is one of the leading conferences in China for industrial water. We also signed a memorandum of understanding with a company called Waterlux. So with Waterlux, we are co-distributing each other's products, and that's something that we're going to be also looking at in China. We expect strong growth in this segment to continue. We've had approximately 5,000 membranes sold in the first half of the year. We expect that to continue in the second half. It is, as I mentioned, one of the segments in which we really see a lot of sort of positive momentum for the company. A quick update on PUB. This is something we mentioned previously as one of our large references. Our -- we are at the fifth month of the test with PUB. Everything is going as expected. So we are very, very pleased with the progress so far. And with half-a-year in operation, we are really excited that we are having these large references that we're building and continuing as this is going to also serve as a really important selling tool for Aquaporin, not just with the PUB and in Singapore, but also globally, given that the PUB is one of the most recognized water utility boards and water operators in the world. What do you expect next? We're going to continue expanding our distribution network. You should be hearing about this from us as things become more concrete, but this is a way in which we sell in many different countries. We sell our membranes primarily through distributors. We're going to continue our growth in China. So we're really participating in additional conferences. There is one coming up in November in which we will be present in Shanghai. And so strong growth is expected in the second half of the year in this segment. Now continuing with FO market development. And as I mentioned before, this is predominantly in the food and beverage industry, but I'll also touch on a couple of other segments in which we're seeing some nice traction. This contributed to 39% of our revenue number, so DKK 8.5 million. Compared to the same period last year, it's a slight decrease. Actually, that being said, the way in which we generate revenue in FO market development, one of our big revenue generators is the development project that we have with Gallo, so that is on track. That is going really well. In addition, we've actually have increased the number of repeat orders in FO market development, and that is driven by the sale of our ESSENCE go unit, for example, which is the ESSENCE go unit, that you can see here on the picture. That is a small unit that is used for testing of our membranes. So a lot of customers who are interested in Forward Osmosis would be purchasing this first to evaluate how they can add value in their project. So we've sold a few of these in the first half of the year. And it's also the unit that allows us to then convert pilots to projects. And this is also something that you can expect to see from us in the second half of the year. We hope to convert one pilot unit to a project. Another big -- I guess, another big achievement that I wanted to communicate is that we have a food contact compliance in the U.S. for FO modules. We also have received Kosher certification for the FO modules too. This is important for some of our customers. So we're quite pleased with the certification, which, again, is important for us to continue with the sales of these units in the American market. We have an exclusive agreement in the flavors and ingredients segment with a company called Flavourtech. We have expanded our pipeline of projects with them. We have projects that are being tested on this ESSENCE go unit. So again, we expect that pipeline to start converting in the second half and in the beginning of 2025. So what's coming next. I think we are targeting some repeat projects, of course, in the segments I've mentioned, but also in medical device segment, we have had one successful achievement with FO in the medical device industry, so that's something that we want to grow on and potentially turn into a business segment for us. So again, something to keep an eye on and when it becomes concrete, we, of course, will communicate about this some more. We've evaluated produced water treatment as well with some key partners, so as well a segment that we are gaining more experience in and working with key industry players, key leaders in the industry to see if we can have that as one of our leading segments. Now I also wanted to say a few words on what we do in research and development. R&D and innovation is really at the core of most of the things that we do at Aquaporin. We innovate our products through R&D. We also have innovative business models. But here really I want to stress some of the things that we've done at the level of our Deep Tech department, which is the core protein development basically. So we've made really significant progress on how we visualize proteins on the surface of membranes. And you see here this image, it's really not art. This image here is actually illustrating how we see proteins under fluorescent technologies, and these are transmembrane proteins that we can see on the surface of the membranes. We also developed -- we are developing the next generation of the Aquaporin Inside formulation and the combination of this ability to visualize those proteins together with our ability to have now our own polymer synthesis lab is what allows us to file some IP in the second half of 2024. And when that is complete, we will, of course, communicate on some of those technological advances that we're doing. In parallel with those technological advances, we are participating in conference. As I already mentioned, we will be in China. This specific conference is the CIIE, which is a China International Import Export (sic) [ Expo ] conference. We will be demonstrating at this conference the future potential of using advanced filtration techniques that leverage Aquaporin protein molecules. Why we want to do this in China? Well, this conference is one where a lot of international companies exhibit their progress that they make. And the goal is to also entice companies in China to do business with Aquaporin not just for the products that we can offer today, which I already talked about, but for the future potential that we have to offer. And last but not least, I talked quite a lot in the past that one of the things that I would like to see Aquaporin accomplish is a step change in filtration. Now this is, of course, a really big and ambitious goal, but I'm really happy to share with you today that we have accomplished this step change in filtration in a lab setting. So the next steps that we have is to evaluate how can we accomplish this at the pilot stage? And this is, of course, a really big deal for us if we can get this at the pilot stage, because then it means that we are getting one step closer to figuring out how we can do this with industry standard products. So something, again, to keep an eye out for as we communicate. Of course, everything is going to be communicated through company announcements and press releases on our website. But again, just wanted to share this that it's some exciting developments that we have had in the first half of the year in our R&D department. So that completes the strategic business highlights overview that I wanted to share with you, and I will pass it now to Klaus, who's going to walk us through the results and outlook for the year. Thank you.

Thank you, Matt. I mean, as Matt kind of alluded to in his opening remarks here, I mean, this is really a half year that's in line with our expectation and also in line with the full year plan. If we go through some of the financial highlights. For the first half, we have reported, as Matt mentioned, a 44% growth on revenue. This is a revenue of DKK 29.2 million versus DKK 20.2 million, same period last year. As we enter into the second half 2024, we actually have a very strong order book. But Q4 once again looks to be a very strong and busy quarter for us. And we, of course, like all the years before, working on managing how do we make sure that we can deliver all of this and revenue not slipping into the Q1 2025. So far, we are positive about this. So we're on plan in terms of revenue. If we look at H1, we had a gross profit margin of 36.7%, which also confirms us on the full year guidance on gross profit. The guidance we have, as you may recall, is 30% to 35%. So you could say why we're below in second half? This is due to product mix. We do have products with different gross margin levels, so they will -- it will vary from quarter-to-quarter. Our EBIT before special items in the first half was a loss of DKK 42.2 million versus a loss in the same period last year of DKK 45.1 million. Our fixed cost base, I mean, the operating costs we have in the first half of 2024, was 6% lower than it was in same period of 2023. This is a result of that we really are demonstrating strong cost control in all parts of our business, and we continue -- we expect to continue to see positive impacts on our cost base also in the second half of 2024 and moving into 2025, really also demonstrating that we can deliver growth without adding cost to our cost base. As communicated earlier this year and also mentioned by Matt, we've raised a gross amount of DKK 172 million in April 2024. This came from both existing and new investors and secures us funding until profitability and cash positive. And we are really, really happy and proud about the continuing support from both new and existing shareholders that have been with us on the journey for a long time. Really nice to see this support, and I wanted to express a thank you to all of those. Looking at the half year results, we closed the half year with cash of DKK 103.6 million. I just want to kind of bring this up as there is a slight impact by timing on cash as we had a relatively large invoicing in Q2 as well, so a lot of the revenue that we're reporting now to you here in this H1 will turn into cash in second half of 2024. Likewise, we do -- we have a big second half ahead of us, and this will also mean that we will see strong revenue -- strong cash inflow in the coming quarters, helping our cash balance going forward as well. Looking just briefly on the more detailed income statement. I mean revenue-wise, Matt gone through. We have seen growth in 2 out of 3 areas. And the third one is really on plan and with a strong finish ahead of us in the second half. So we feel that we are in a good position and we have a strong P&L that we actually got of H1 with. I want to allude to just one item. We have a special items reported of DKK 2.376 million in the first half. This is part of -- this is for restructuring cost. And this is actually helping us reduce this part of some of the actions we've taken to reduce our cost base, both for this year, but also going forward. So that's relatively undramatic as such, and really helping us. If we shift to -- go to the next page with our outlook. As I kind of already alluded to in my commentary here, I mean, we are on track for the year, which also means that we maintain the guidance for the full year. The guidance being revenue of DKK 90 million to DKK 110 million, it's a gross profit in the range of 30% to 35%. It is an EBIT before special items of minus DKK 75 million to minus DKK 85 million. So just to summarize, first half, we believe we are reporting a very solid first half that we are happy with. It's in line with the plan and it continues our growth journey. We believe we are coming out of H1 with good commercial development in all areas where we see positive development with several key accounts across the world. At the same time, as I also mentioned, we're keeping cost under really close control and really tight. So we will see lower operational costs for the year compared to last year, which I think is a really significant achievement in a growth company like ours. So with that positive note, I'll pass it back to the moderator, and we will open it up for questions.

[Operator Instructions] Currently there are no questions on the phone. So I'll hand back to questions for the webcast.

Thank you. I'm reading. There's a question on -- here coming on the webcast that talks about news from TV2 recently. Does it have the potential to reduce the potential of Aquaporin? Or is it just another competitor or not even at all? So basically, this -- just to make the question shorter here. The question here refers to the ability to eliminate and clean PFAS. I think PFAS has been identified in the news and also, of course, in scientific journals as molecules that are bad for the environment, of course, but also bad for human health that endanger different types of activities or people and so on. I think -- so for -- in my opinion, there are many different solutions for PFAS. There are industrial solutions that -- like the one for -- that is mentioned here in the question that looks at things like coagulation, aggregating PFAS molecules and separating them out. There are solutions like we offer, which are basically reverse osmosis membranes that are used to eliminate PFAS from the water stream. And then there's also solutions that are meant for destroying PFAS, and these are the ones that are more difficult to develop, because destroying PFAS is really sort of the ultimate goal. So in my opinion, this solution doesn't compete with what Aquaporin offers as this solution is really meant on the industrial [ sites ] of the segment. Our solutions are really for household use. They are purifiers that eliminate a lot of different things. They eliminate viruses, bacteria, they reduce water hardness. So things like when you iron your clothes, you see that white stuff that comes out of your iron. Or when you use a coffee machine, you see this kind of calc, this white substance developing. Our membranes allow you to remove that -- all that in addition to removing PFAS from the water stream. So not a competition for us, as it's in different segments. I'm actually really pleased to see technologies appearing that can help us to deal with the PFAS situation. I think everybody has to pitch in, in that solution and no one company holds the answer. It's going to be really the combination of technology for many different providers. So thank you for the question. There's another question here that says, how dependent are you on China? And what do you think of the ongoing decoupling of China and China geopolitically? So how dependent are we for -- on China? I think today, a big revenue in drinking water for Aquaporin comes from China. Now for that reason, we'd also wanted to establish our production facility in China because that also derisks this ability of this movement of material from the U.S. or from Europe to China. We're able to produce material locally in China today. So that is one way to -- for us to derisk. I think our -- when I was talking about the launch of the products that we're doing in China. Again, we launched in China, but it's also because China is a big market. However, we are selling brackish water membranes globally today. And so the growth that you saw in industrial water does not actually happen -- it's not fueled by China. So when we look at 2024, in the industrial water segment, China is a very, very small part of that growth. The majority of the growth is coming in Europe. And one of the big geographies that we're targeting is actually also the United States. So that's something that we would like to develop even further in perhaps the first half of 2025. So I would say that China is important to us, but it's not crucial. I mean, we have ways to grow the company even if the situations with China become more restrictive than they are today. Also India, for example. I mentioned India briefly, it's a geography that we're looking at as well. So I hope this answers that question. Now there's another question. Actually, it's a really good question. I'm happy to address this one as well. Looking at fixed costs, how come R&D is nearly double the cost of sales and marketing where the situation with revenue is a must. So maybe I'll just address this, and I'll see if Klaus you have anything to complement. So when we talk about research and development, a big part of our research and development costs actually also includes what we call commercial engineering. Our commercial engineering cost is very much key to driving sales activities and development projects. So R&D costs are inclusive of product development and core technology development. And so that is actually really important for us to -- in order to continue driving sales and supporting the sales team. Any…

No. That's very spot on. And there's also a question to why sales and marketing not high? I mean, I do believe we spent the right amount. We have in this -- as Matt mentioned to in his opening remark, we have a very much a key account sales structure. We don't have hundreds and thousands of customers. We're really selling to a few number of customers. So also it doesn't require a sales force of magnitude. There's a question also on -- by this gentleman about, what about admin being 21%. I mean, in admin, we have everything. We're a relatively small company. We don't have a big cost base. It looks big with 21%. But I mean, we are really running the company as lean as we believe we can. It's -- it does have a cost to be listed. It does have a cost to operate a business and so on. So I mean, we -- every day, we're looking into what can we do to reduce this? And we have -- so this is -- predominantly in this area were actually done reduction in cost and that also will have an impact on the full year. So it's a continuous quest for us as well.

Okay. And just -- this is probably maybe more of a comment for the operator or the moderator of this call. The gentleman that was writing the question is indicating that he was not able to put the questions verbally. So again, this is something that perhaps…

Feedback, yes.

Yes, we need to be reconsider. Okay. I think this closes the questions here that we have.

Unless somebody else is online has a…

Yes, unless there's any other questions that are coming in the live Q&A. So I'll pass it back to the operator here just to check.

[Operator Instructions] There are no questions from the phone at this time.

Okay. So thank you very much. We will close it then. Before closing, I just had some final closing remarks. We are really excited about the first half of the year. I think we put a key account strategy in place. We see that key account strategy delivering. We said that we were going to be focusing in Forward Osmosis on key applications in order to drive products that can make a really, really big difference for our customers. We are seeing progress in that way as well. We have promised a strong cost control. We are delivering on this cost control, too. So I think overall, when I look at the first half of the year, there's been a tremendous amount of effort put in by everybody at Aquaporin. But also, of course, our partners that need to trust us as well. We're relatively -- we've been around for a while, but we're relatively a new company that is commercializing products today. And so, we are extremely thankful to our customers and our partners that are giving us this chance to prove that we can make a difference. And we know that there's going to be more and more customers coming on board in the second half of the year. So we're, again, very excited about that. We, of course, thank our employees who dedicate their time to the company, our shareholders and our customers one more time. So we're very excited about the first part of the year, equally excited about the second part. And we're looking forward to communicating to you on this in the coming future. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.