CleanSpace Holdings Limited (CSX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the CleanSpace Holdings Limited Full Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Bruce Rathie, Chairman and Non-Executive Director. Please go ahead.

Good morning, ladies and gentlemen. Welcome to the CleanSpace Holdings investor call regarding its financial results for the year ended 30th of June 2023. My name is Bruce Rathie, and I'm Chairman of CleanSpace Holdings, and I'm joined this morning by Mr. Graham McLean, the CEO of the company. We also have Bree Greeff, the company CFO joining us for the call. I'll [ show ] a few words of introduction regarding the results, then hand to Graham, who will take you through the presentation, providing detailed information and perspectives on the company's performance during the 2023 financial year just concluded. There is no doubt the performance of the company has been disappointing, but I and the Board believe there is a basis for optimism for performance going forward. Before I explain why, let me deal with some governance, strategy and management issues. Firstly, Graham was appointed interim CEO in January this year and then full-time CEO in March, immediately on assuming this role and with the support and encouragement of the Board, he adjusted strategy to shift emphasis of the business from health care, which remains challenging as post-pandemic inventory levels reduce to industrial and mining sectors, our traditional strength, offering considerable opportunity for CleanSpace. This shift in emphasis also prompted the reorganization of senior management across all markets to better reflect and align with this focus, as well as to better address our target markets. Graham will further reflect on these initiatives as he goes through his presentation. The Board also is currently looking at bringing industrial and mining industry skills on the Board to add further capability to these efforts, an announcement in this regard is imminent. I should say at this point that the Board acknowledges Graham's management experience, maturity and skill in the role of CEO, and this has been a major factor in making these important strategic and organizational adjustments in response to difficult market and business conditions. Regarding performance, our revenue is down 9% PCP, which is disappointing as stated earlier. When looking more closely, we believe there is a basis for optimism for the business going forward. Looking at the last 2 financial years in quarters, i.e., the last 8 financial quarters, revenue bottomed in the last quarter of the prior financial year, i.e., financial year 2022, 5 quarters ago. Revenue went down each quarter, say for one in financial year 2022, whereas revenue went up in each quarter, say for one in financial year 2023. Further, revenue for the second half 2023 is up 1% on PCP, but a much stronger 11% versus the prior half. All this data indicates a build in revenue momentum, which augurs well for the current financial year. This positive revenue momentum, coupled with aggressive cost reduction initiatives, offers the prospect of profitability emerging during the course of financial year 2024. The cash burn rate is likely to diminish further and potentially turn positive in some months during that year. The company has a strong balance sheet to support its business plan going forward and no capital raising is currently required nor contemplated. I will now hand to Graham to take you through his presentation. Graham?

Great. Thank you very much, Bruce, and good morning, everyone. Welcome to our 2023 annual results call. My name is Graham McLean, I'm the CEO, and I'm delighted to be presenting the annual results for CleanSpace Holdings for the first time as CEO. I'm joined by our Interim CFO, Bree Greeff, who's just taken on the role. She replaces Elizabeth Harvey, she was stepped down after 5 years in that role. And I want to thank Elizabeth's time for her contribution during a challenging period for the company. I will talk through the highlights and key commentary for the full year results in the presentation now, and we're very happy to take any questions at the end of my presentation. We released a PowerPoint summary of our results to the market this morning, and I propose to talk you through that. We also issued our annual report to the website this morning for your reference. This provides additional color to the strategy, performance and financial results during the year. So moving to the first slide, the key points. I want to provide some comments on the status of the business today and our aspirations for FY '24. During the second half of FY '23, it was clear that we needed to spend time resetting the strategy for the business now that the pandemic disruption is largely behind us. We recognize that we need to focus on industrial sectors as this is our core business that we have known very well for 12 years. Health care remains an important market for the company over the medium term. But we see in the short term that we should focus on selecting winning more targeted opportunities. We still see that significant amounts of PPP inventory in market generally. And note that this has affected many suppliers around the world. We sell into over 30 countries, but around 90% of our revenue is actually in 6 priority countries. We'll focus our growth investments on resources in these markets where we believe there is significant growth potential in these developed countries. These include the U.S., Australia and 4 markets in Europe. We also recognized in this year that the business was carrying too much operating costs for the size of our revenue. So we've taken the difficult decision to rightsize and rebuild the organization with a reshaped smaller but talented leadership team and the elimination of spend that was not productive or did not align with our new strategic priorities. I'm pleased to report that we have seen encouraging signs with results from Q4 and also the first 8 weeks of FY '24. For example, revenue grew 31% in quarter 4 versus PCP, and that excellent momentum has continued in the first 8 weeks of FY '24. We have already implemented $8 million of annualized cost savings, and this is now baked into the monthly operating cost run rate that is going forward. And as a result of these actions, the quarterly cash flow outflow for quarter 4 was just minus $1 million. This is significantly lower than the large outflows of several previous quarters. Lastly, the new products that were launched in quarter 3 have underpinned much of the commercial momentum that is now building. We believe there is significant growth potential for these products going forward. Turning to FY '24. We are not proposing to provide any detailed guidance at this early and uncertain stage in the year. However, I can share some key objectives that we have for the year. Firstly, we see potential for continued 30% revenue growth, assuming the current trends continue. Secondly, we expect some gross margin uplift above 70%. This is due to higher prices for the new products and also some COGS efficiencies. One element of the favorable gross margin that we aim to achieve will be to increase the sales from recurring revenue streams. This includes accessories, consumables and smart insights, which all have a higher gross margin. We will also continue to identify cost efficiencies across the P&L and drive for better cost optimization. In terms of cash flow, we anticipate that there will be months where the business is cash flow breakeven, that it may take until FY '25 for this to happen on an ongoing sustained basis. And finally, given these objectives, we do not expect to raise further capital in order to fund the current business operations. So in summary, the business has been rightsized, and we're seeing early signs of solid sales momentum driven by our focus on key industrial sectors in the 6 key priority markets and with the new product launches. On the next page, turning to expenses. Turning to the next page, if I turn to FY '23, sorry I missed the page there. There are some key points behind the headline numbers, I would also like to highlight upfront. Firstly, our industrial sales were up 41% globally versus prior year, which is a very encouraging sign for future growth. Health care sales were significantly down as described on PCP. We had $4 million of pandemic-driven sales in the prior year, and they did not recur in FY '23. Gross margin was held at 70%, which was down on PCP, which was 73% last year. And that was because we had more direct health care sales in the prior year. I anticipate that this is now the low point for gross margin, and that will begin to recover to the low 70% in FY '24. And as mentioned, the cost reduction program has already implemented about $8 million of annualized savings. From a leadership point of view, as well as my appointment, that was appointment of Bree as Interim CFO. So bringing her on board. And the transition with Liz has been extremely smooth, which is great to see. And as Bruce mentioned, we anticipate the appointment of a Non-Executive Director with mining and industrial experience during the next period of time. If I move to the next slide with a summary of the financial results. FY '23 was disappointing, a challenging year, as Bruce mentioned. Sales for the full year were $12.1 million, which was down 9% from prior year. However, H2 was up 1% on prior year and 11% higher than the previous half. And quarter 4, as I mentioned, was 31% higher than last year. So we feel that momentum has been building during FY '23. Operating expenses were down 20% on prior year for the year and also 25% down in H2 at $8.6 million. This reflects the implementation of those significant cost reductions. The bulk of these savings were in employment costs, but we also made savings across many lines of the P&L in the year. Largely as a result of that cost management program, the loss at EBITDA of $10.8 million for the year was $3.3 million better than PCP and $3 million of that was delivered in H2. Finally, our cash of bank was $12.2 million at the end of June 2023. Although the cash flow was $12.1 million negative for the year. This actually reduced markedly in H2 to minus $4.3 million and also was much lower in quarter 4 at minus $1 million. If I turn now to regional sales. Europe was a standout with 59% of our sales last year, and Europe overall grew by 28%. North America grew by 10% and Asia sales were down 53% driven by the health care declines in the region. 4 of our countries sold 79% of sales, that's the U.S., France, U.K. and Australia. And as mentioned, Europe had 59% of our business. 93% of the sales for the year were from the industrial, and that is up from 60% in the prior year. And consumable sales were 48% of the total, and that follows a similar pattern to recent years. So just moving to the next page, I'd just like to make some more comments about our strategic priorities. As the post-pandemic environment has become clearer, we have taken the opportunity to reset our strategy. As a leadership team on board, we had several detailed discussions about our aspirations to become a fast-growing premium respiratory solutions business during the year. I would say that the most important change we have made is to transition from being very much a technology-focused business to one that is driven to serve customers and our distribution partners with innovative products and solutions. We are focused on growth, and we will achieve this by being a fitter and leaner organization with a clear focus, supported by a talented team. Firstly, we know that our core strength and our customer base is in industrial and mining clients, and we know them very well. So that will be a core basis for our future. Secondly, we understand that the dynamics of the health care sector are currently challenging, and you have seen that in the results of other companies also impacted by the pandemic. We remain committed to investing and winning in the health care sector, but acknowledge that right now is not the time to be overweight with our resources there. We'll continue to target prioritized opportunities in the health care during FY '24. Thirdly, the priority markets, CleanSpace [ sells ] over 30 countries all over the world, which we see as a great strength. However, we have not seen the depth of resource -- do not have the depth of resources or the market presence to adequately support our business in all these countries. So we will concentrate on building momentum, where we are already well established and have people on the ground. There are 6 priority markets that generate 89% of our revenue in FY '23. So these will be our core areas of focus, and there is plenty of opportunity for growth in those large markets. I would also add Japan to that list as a potential #7 as it is actually a very important market for CleanSpace, but we had low health care sales in FY '23 due to higher inventory in the market, and that is still being depleted. But over time, that market will come back. Fourthly, we want to build recurring revenue streams that will add to our growth in the future. We already sell consumables and accessories and will add further solutions and services to this capability during FY '24. Lastly, we need to rightsize the business to reflect our current sales run rates and [indiscernible] the cash loss from the business. We've made significant progress in this regard, whilst also focusing on building our commercial and selling capability to accelerate growth. It is really critical that we grow the top line whilst also optimizing our OpEx and cash management. So in summary, I believe we are already in a much stronger financial and commercial position as a result of implementing the strategic priorities, and we're now building good momentum as we implement and optimize these opportunities going forward. Turning to the next page. I'd like to just give a bit more color on some of the highlights from our operational achievements in FY '24. Firstly, we launched our 2 new products to CleanSpace PRO and CleanSpace Ultra in quarter 3. These products further our technology leadership position with enhancements to the battery life, filter effectiveness, respirator size and [ weight ] reductions and many other benefits as well. We have introduced Bluetooth connectivity, which is the first paper to have this future, along with the CleanSpace Smart App, which provides real-time performance startup of the unit, as well as the CleanSpace Smart Insights reporting and monitoring tools for a business that has a fleet of respirator units. Pricing on these models will also be approximately 20% higher than the old models that they replace. We have also spent a lot of time on strengthening our go-to-market model in each of the priority markets. In FY '23, we added 28 new distributors and several new sales partners to give greater coverage and/or penetration in the key sectors and [indiscernible] which is in plan. As previously announced, we also signed up 2 GPO or group purchasing organization partners in the U.S. and also 2 smaller regional GPOs. The company has also commissioned independent studies to assess the performance of our respirators in real-world conditions. The results were extremely favorable, including users with facial hair who experienced outstanding protection factors in those studies. And those studies have now been published and are available. In our 3 regions, we also simplified our organizational leadership based on 1 Vice President per regional geography rather than having a specific health care and industry leaders in each region. This enabled clear accountability, more efficiency and a broader utilization of some of our most talented people. Now, turning to the next page, our commercial progress. I'll probably cover most of this at the beginning or the comments are self-explanatory, but I'll just highlight a couple of words on this slide. I would highlight the 3-year pharmaceutical company deal that we've recently signed in the U.S. It is an example of the long-term key account relationship that we will deliver recurring revenue to the company over time. We will also seek to build similar key account relationships like this in the U.S. and other countries as we further develop our customer proposition. In Australia, our industrial business is building some nicely with key distribution partners and discussions with a number of large corporates in the industrial and mining space, and we expect to announce some good results on that over the next few months. In terms of cost and cash, the bulk of the $8 million annualized savings have been in headcount reductions. These occurred progressively during the year and the savings are only partially reflected in the FY '23 results. Other savings in FY '23 were in consulting and professional fees, in administration and R&D. And the R&D were really around timing of projects rather than ceasing activity. We also reduced our manufacturing footprint at our [indiscernible] site in Sydney by 50%, but we still have significant capacity to respond to future sales volume growth. Lastly, we focus on optimizing working capital in order to release cash flow for the business. As the supply chain risks subside post pandemic, we anticipate reducing inventory levels over time. And we will also more manage our debtors and payments initiatives more effectively as well. So just wrapping up with the outlook slide. A reminder of the many key drivers that we have for growth in our business. Firstly, we have innovative new premium products. Secondly, we have a clear focus on the industrial sectors in the short term. Thirdly, we'll focus on the 6 large priority countries where we're very well developed. Fourthly, we will have higher margins and higher prices going forward, which will drive additional margin. We will also develop the current revenue streams. And we will make all this happen with a new talented leadership team. From a cost and cash management point of view, we now have rightsized the cost base for FY '24 leverage, and we'll continue to optimize that going forward. We've also very carefully managed our cash whilst finding money to invest the growth initiatives that we have in place. So in summary, our early FY '24 trading trends we see continued momentum in our business from quarter 4 last year. Our revenue growth in the first 8 weeks of this year has been over 30% versus PCP. And the cash flow, we expect to be approximately $1 million outflow per quarter going forward. And with that, I will pause the presentation and return to Bruce.

Thanks, Graham. We'll open up now for questions. Are there any questions that you'd like to ask of us at this point in time.

[Operator Instructions] Your first question today comes from Peter Gregory, a Private Investor.

And the optimism it gives us for the future. I'd like to ask about the consumables and accessories revenue. And ask if you could give me an indication of what proportion of that relates to continuing use of respirators versus purchases of new respirators?

Yes. Thank you, Peter, and thank you for joining the call. Yes, that's a good question. I don't have the specific split between new product, new units and ongoing. But we do have a substantial base of units that are in the market and operational, we believe it's about 30,000 units. So there are many purchases that are related to ongoing use of the products. But we've also had plenty of purchases during the year of new units. And when those new units are bought generally, consumables are bought as part of that initial purchase as well. As a rough guess, I would say it's roughly half and half, but I don't have specific numbers to give you. I don't have as a base of unit growth over time. We would expect to see more consumable usage and that recurring revenue strategy is a key part of our strategy going forward.

[Operator Instructions] Your next question comes from Anoop Kalra from Kelly and Partners.

Graham, just a couple of questions for me. Could you just confirm what the exit run rate is on the cost side, noting it obviously stepped down from half 1 to half 2, but what was kind of the exit run rate?

We're not going to give specific monthly run rate. You can see from the prior year OpEx numbers, which was the baseline where we've got the $8 million of annualized savings from. So you can probably get -- as what that...

So it would be implied from that would be like $15.5 million, $16 million on an ongoing basis?

Probably something like that, yes.

Okay. And are you -- can you give us a feel for what sales were Q3 to Q4?

I don't have the specific number in front of me. But they were certainly quite significant growth in Q3 and Q4. So one of it that's in the annual report where we talk about the new products in quarter 3. And that actually was a bit of destocking going on with distributors. So sales were a little lower in quarter 3 and quarter 4. Growth, I would say, was about 20% from quarter 3 to quarter 4.

Thank you. There are no further questions at this time. I'll now hand the conference back to Mr. Rathie for any closing remarks.

Thank you very much. Thanks, everyone, for joining the call. Really appreciate you taking the time to listen to the company's story. So we'll finish it up here. Thank you very much for your support and your time. Goodbye.

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