CleanSpace Holdings Limited (CSX) Earnings Call Transcript & Summary

Thank you very much, and good morning, ladies and gentlemen. My name is Graham McLean, and I am the Chairman of CleanSpace Holdings Limited. I welcome all those attending this presentation of the CleanSpace financial results for the half year to the 31st of December 2024. Joining me today are Gabrielle O'Carroll, the recently appointed CEO; and Bree Greeff, the CFO of the company. I propose to make some introductory comments, and then I will provide an overview of the company's key highlights and the financial results for H1 FY '25, as this was during my period of responsibility as CEO. I will then hand over to Gabrielle to make some introductory remarks, discuss the company's strategy and the market opportunity and provide some high-level comments on our expectations for the remainder of the year. After this, we will give attendees the opportunity to ask questions. Gabrielle and I will speak to the presentation that was lodged with other documents at the ASX this morning and which can be viewed online during this presentation. I would like to just take a moment to say how pleased we are as a Board to have Gabrielle as our new CEO. Her CV and impeccable track record in the global personal protective equipment industry, or PPE for short, is outstanding. And she has impressed everyone at the company in her first 6 weeks with her understanding, her drive to win and her alignment with the values of the company. We look forward to many years of success together. I would also quickly like to pay tribute and thanks to the outgoing Chairman, Bruce Rathie, who navigated CleanSpace through 3 years of fairly choppy waters. So thank you, Bruce, if you're listening today. Moving to the financial performance of the company, we are really pleased to report that H1 FY '25 revenue is up an impressive 26% against the prior corresponding period, or PCP, with expenses again being reduced. This continues a 5 half-year periods trend of growing revenue in a meaningful manner every half year whilst also significantly reducing expenses during that period. This has enabled the company to be in far better shape than it has for many years with, we believe, a sustainable and profitable growth trajectory ahead of us. Key to this turnaround have been four factors. Firstly, the clarity and consistency of strategy into the industrial sector in a few key priority markets; secondly, a focus on building on the many strengths of our leading innovative technology; thirdly, a discipline around delivering on our commitments in a competitive marketplace; and fourthly, I would highlight and probably most importantly, the great depth of talent and experience that we now have assembled across the organization, what I would call a winning team that really understands how to win in the premium respiratory protection business. In the first half of FY '25, the company was very close to achieving a breakeven EBITDA result. Given that CleanSpace was losing $1 million a month just 2 years ago, we have made significant progress in transforming the company. Sustainable change takes time, but we are confident that we are on track to deliver positive profitability and cash breakeven in the near future. This would also be a very welcome outcome for the company and shareholders, and we appreciate your patience as we work hard to achieve this milestone. I'll now talk through the presentation on operations and financial performance during the recent half year in more detail and then invite Gabrielle to make some introductory remarks. So if we go to the presentation, the summary is that we have continued our strong revenue growth momentum, and we are delivering against our objectives for FY '25. So as I mentioned, our revenue growth was 26% against PCP with revenue of $9.2 million in the half. We also increased gross margin by 3% to 74% and at the same time, reduced expenses by 6% versus PCP. Our operating EBITDA improvement of $2.1 million took us to minus $0.4 million for the half, and that number included $350,000 of one-off personnel exit and hiring costs, and we'll talk more about those later. We did have a positive quarter 2 EBITDA result. And what's really driving this growth is the new innovative products that we have launched over the last 2 years in the 6 priority markets that we are operating in, including the launch of CS Work in Europe and Australia. From a cash point of view, we are fully funded as a business with cash of $8.3 million, noting that the R&D tax refund is expected in H2. And we don't expect any capital requirement to be required. And as I mentioned, we have the new CEO now onboard. On the next slide, we highlighted in the August full-year results for FY '24, what our objectives were for FY '25. I'm pleased to say that we have green traffic lights against virtually all of these at the half year. Revenue growth was just below the 30%, but industrial growth was actually 32%, which was very encouraging. Underlying EBITDA was very close to breakeven for the half, and gross margin was up 3% at 74%. We have had good growth in all our priority markets with the U.K., U.S. and Nordics, all the highlights. And we did grow nicely in all 3 regions around the world, showing what a diversified growth model we have going forward. Our long-term aim is to build consumable revenue streams once we have built the respirator installed base over the next few years. And I'm pleased to say that consumables did grow 26% in the first half. Our other long-term goal is to self-fund investments to drive growth. So in other words, once we get to profitability, we will try to reinvest that excess cash back into growth activities for the business. Now it's really too early to assess how that's going because we're not quite yet at profitability. But once we do, we expect to better do that investment. From a P&L leverage point of view, clearly, we're managing the leverage very carefully. We're very prudent about how we manage our costs and invest very carefully. Expenses came down whilst revenue went up. So clearly, we're continuing to find that leverage in the P&L. And we have the new CEO successfully onboard. Moving to the next slide, you can see the trend over the last 6 half-year periods. The blue line is the expenses, which have come down significantly over that period and have now stabilized at around $7 million to $7.5 million per half year. The green bars are the revenue numbers, and they are now growing well ahead of expenses, which is what we'd expect to see. So there's been a significant turnaround in the balance between expenses and revenue over time. And as a result, the yellow bars, which is the EBITDA loss, has shrunk from about $7 million in 2022 to a very small number in the last reporting period. So you can see the trends here moving very closely to profitability in the very near future. On to the next slide, just a little bit more detail with some of the key stats. From a sector revenue point of view, clearly, our focus now is all around the industrial sector. That is where we believe our products are very well suited for sustainable growth. And very pleased to see 32% growth in the industrial sector in the first half. We still do sell healthcare consumables and respirators. The consumables revenue remains stable. So we do have an installed base with customers that use the product. And we do have some sales of respirator units from time to time as well. So healthcare is being maintained, and we could turn it on should the need arise in the future. From a regional revenue point of view, as I mentioned, we grew in all regions, which was very pleasing to see. Europe remains our biggest region, over half our sales in the first half, but it was really encouraging to see the share from Asia Pacific and rest of the world grow significantly. And we believe that we have turned the corner with North America, and we expect to see growth in the future there as well. We appointed 22 new distributors in the half, and that reflects our go-to-market model, which is to work closely with and partner with distribution networks in our key priority markets. And our top 4 markets accounted for 71% of revenue. So we are building strength in some very key markets around the world, which is part of our strategy. Consumables remain an important part of our business, just under half our revenue, and that was consistent with last year first and second half. And I've already mentioned gross margin, so I'll move on to the next slide. So next slide is a quick update on our portfolio and a bit more flavor around the regional performance. From a portfolio point of view, we have been working hard over the last 2 years to upgrade and fill out our technology platform and extend our portfolio. And our R&D team are working very hard at developing further products that we can launch over the next few years. We launched CS Work in April in Europe and Australia, and we're very pleased with the progress of that launch. We're now 8 months in, and we sold 2,200 units in Europe and Australia. And as we're speaking, we are launching in the U.S., where the certification is slightly different, so it took a little longer to get the launch organized in the U.S. But we are launching in February right now in the U.S. Our core new technology platform of CST Ultra and Pro, which we launched 2 years ago, continues to go from strength to strength with significant growth for both those products in both respirator and consumable sales, and we expect that growth to continue going forward. And it's really pleasing to see that the consumable sales of the older-generation products, CS2 and CS Ultra, continue to be stable. So it's good to see that installed base continuing to be used by customers that are loyal to those older products. If I look at our revenue by region, led by Europe, we had 11% growth in the half. That was led by continuing growth in the U.K. of 44% and the Nordics at 28%. And we appointed some new distributors in those markets over the last 6 months to help broaden our growth and our coverage in those markets. France remains our largest country globally, but we had a relatively slow half at 2% growth, and that was really impacted by the Olympics and Paralympics, which meant our business was very slow in the first 2 to 3 months of the half, but we finished the half much more strongly. Turning to Asia Pacific, we now include Rest of World in the Asia Pacific region. So this is all countries outside of Europe and North America. And the reason for this is we do sometimes get occasional but meaningful sales in other countries where we don't currently have resources employed, but there may be customers that have gone to a global trade show or maybe mines that are part of a global mining organization and they hear about CleanSpace through those kind of avenues. So we're including Rest of World as part of the Asia Pacific region going forward. And these were really the highlights for the half. We sold 2.6 million with 69% growth against prior corresponding period. And that growth really came from a number of sources around the region. We had some growth in Asia of $400,000 against a very low prior year number. So the percentage growth wasn't really very helpful. But we are focused on launching our products in a few key industrial markets in Asia. And whilst that's taken a bit longer than we expected, we are on track to get certification and launch at some point during 2025 in those markets. So that's an encouraging opportunity for us going forward. And Australia is our #2 country. It's a very important country for us. We had 8% growth, which was very solid, bearing in mind, it's a pretty stable market. And we have a very good pipeline in Australia, so we can expect a pretty good second half as well in this part of the world. And lastly, North America grew 31% over last year off a relatively small base. And as long-term investors will know, we've had some [ force ] starts in the.S. over the years, but we feel that we now have a completely new team with some very deep respiratory protection experience and a very experienced new Regional Vice President, who joined us in August. And we feel that we now have a core team that is very well placed to successfully execute our strategy in North America going forwards. We will do this in a prudent, cost-controlled way to make sure that we do continue to make a profit in the U.S., which is very important to us. So actually, we were very pleased with our first half results in the U.S., bearing in mind the significant transition that we had with the team movements in the U.S. Moving to the next slide, let me talk about R&D costs and cash for a moment. Really essentially, our key initiatives that we've had in place for a while continue to deliver good results for us. We are very proud and pleased of our R&D capability. We have world-class engineers working for CleanSpace. We have some excellent innovation coming through in our pipeline, and we expect further product launches during the remainder of 2025 and into the outer years as well. More to come in later periods reporting on that. As I mentioned at the beginning, we expect the R&D tax refund of about $1 million to be received during H2 FY '25. So we're very confident in expecting that to happen over the next few months. We have a strong focus on reducing back-office costs and making our manufacturing footprint simpler and more efficient. And you can see in the gross margin results and the back-office costs that I think we're making very good progress around that, and we will continue to focus on that going forward. As we make gains from productivity improvements, that will release cash that we can invest into sales and marketing and growth activities in the future. Our working capital did increase versus June 30, 2024, but that was really consistent with our revenue growth. So there was a little bit of consumption of cash to fuel our growth going forward. Our trade debtors were up 21%, but we have minimal bad debts. And in fact, collections are very, very healthy. We continue to drive down inventory, and our inventory came down in the half again by over $200,000, and we will continue to work on reducing inventory going forward. And payables continue to be well managed, and we'll make sure they are optimized for the end of the financial year. So cash flow for H1 was minus $1.5 million, which was a little higher than we were anticipating, but there were some one-off or annual items of cash outflow in the half that are unlikely to repeat in the second half. And examples of that would be the annual insurance payments and some annual bonus payments, particularly to our sales teams, which occurred during H1 and won't recur in H2. We also had quite a few staff termination and recruitment costs during the first half, particularly in the U.S. and also associated with the new CEO, which will not repeat in the second half. So we're expecting the second-half result to be a better result than the first half from a cash point of view as it was in the last financial year as well, and that will include the benefit of the R&D tax refund. Moving to the next slide on leadership. We continue to strengthen our leadership as an organization. I mentioned our new RVP, Regional Vice President, in the U.S., but obviously also delighted to have Gabrielle onboard as the new CEO, bringing her credentials and experience to the organization. As we've already announced, I became Chair in November after the AGM. I'm very thankful to the Board for your support. And again, I want to thank Bruce Rathie, who was the previous Chair, for his service over the last 3 years. So with that, I'm going to now transition over to Gabrielle and invite her to make some introductory remarks. Thank you, Gabrielle.

Thank you, Graham, and good morning to everyone. Thank you again for joining us today. I'm delighted to be here. I'm very excited to be a part of the CleanSpace team and to lead the organization on the next step of its journey. By way of introduction, I'll share a few observations of my first weeks in the job. Over the last several weeks, I've been meeting with the team, immersing myself in the operating rhythm and discussing the priorities and strategy with Graham and the leadership team. I've been impressed by the strength of the organization across all the functional teams from marketing and sales to finance, engineering and production. It is a lean organization, yet there is immediate potential to develop the commercial capabilities, the customer-facing activities to be equal to any organization in this industry. The portfolio is truly innovative with a value proposition, which sets it apart from others in the market. This is one of the main reasons I decided to join CleanSpace. And in these first weeks, I've observed a culture of excellence, accountability and a deep passion and care for customers and the workers who wear the CleanSpace PAPR units. Moving forward, here is a recap of our current strategy and how we're positioning the company for continued growth and success. We're committed to driving sustainable revenue growth, underpinned by strong foundations and a fitter, leaner organization. Listed here are the key elements of our strategy. Firstly, we're focusing on industrial and mining sectors. These are large growing sectors that include manufacturing, oil and gas, construction as well as emergency services. They are sectors that also have favorable trends, including heightened awareness about the need for respiratory protection and the increasing usage of PPE across different industries. Secondly, we've identified specific priority markets where we already have a strong presence and a foundation for growth. These markets include France, the U.S., Australia, the U.K., Germany and the Nordics. Our emphasis on these regions ensures that we're concentrating our efforts where we can achieve the greatest impact and growth potential. Now that we've realigned our resources towards industrial sectors, we're focused on how we execute commercially in these priority markets through sales, marketing and channel management activities. To further capture growth, we're continuing to invest in innovation to expand the portfolio. This will allow us to address additional customer sectors, meet evolving customer needs and drive recurring revenue through innovative services and solutions. Finally, we remain committed to managing costs and cash, ensuring that they align with our business revenue. This way, we will ensure that we operate efficiently while continuing to invest in growth areas that will deliver long-term value. In summary, the objective for the remainder of FY '25 is to deliver 25% to 30% growth and to achieve breakeven EBITDA. To achieve this, we're doubling down on the growth drivers we've listed here. The first of these, as I've said, is focused on industrial sectors in priority countries. Secondly, there's a real opportunity to raise awareness of the brand and the unique value proposition of the CleanSpace technology. We know the portfolio is truly differentiated from others in the market and that this difference resonates very well with workers and organizations. This goes hand-in-hand with how we optimize our sales and marketing efforts, ensuring that we're identifying opportunities, reaching the right customers with the right messaging and effectively converting these opportunities into long-term partnerships. Key to our growth is innovation and developing a robust innovation pipeline, along with effectively launching new products and services that will strengthen our competitive positioning in the market. Our people are critical to our success. We have invested in the team to ensure we have the right talent and expertise to drive the business forward, and we want to create a positive and empowering work culture, which is key to achieving our goals. And finally, while we are committed to investing in growth opportunities, we'll remain disciplined in managing our cash flow and achieving cash breakeven or better, ensuring that our operations are financially sustainable while we continue to scale. At this stage, I'll hand it back to Graham for any questions.

Great. Thanks so much, Gabrielle. And once again, great to have you onboard. So that concludes our initial remarks. I'm very confident that we've had a very good half, and we are continuing the momentum that we have built over the last 2 years. And hopefully, you will have heard from our commentary that we believe there's plenty of growth opportunity for CleanSpace going forward. We're very focused on a clear and simple strategy for growth, and we are very focused on delivering our commitments as a company. So with that, I will hand back to the moderator and invite any questions that anybody has whilst you're online. Thank you.

[Operator Instructions] There are no questions at this time. I'll now hand the conference back to Mr. McLean for closing remarks.

Great. Thank you very much. We really appreciate everyone's support and interest in CleanSpace, and we look forward to engaging you at the next opportunity. Thank you very much for dialing in today, and have a good day. Thank you very much.