QleanAir AB (publ) (QAIR) Earnings Call Transcript & Summary

Welcome to the QleanAir Q4 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to speakers, CEO, Sebastian Lindstrom; and CFO, Henrik Resmark.

Thank you. Welcome to the QleanAir Investor Presentation for Q4 2024. My name is Sebastian Lindstrom, I'm the CEO of QleanAir. And joining me in today's call is Henrik Resmark, our CFO at QleanAir. As said, Henrik and I will go through the presentation and then open up for Q&A at the end. Starting off with the numbers for Q4, we closed another challenging quarter. The absence of the Curexa contract and the low point of Japanese renewals to finance companies affected both top and bottom line. Positive in the quarter was that we started to ship the first of the newly launched products and that our cash flow improved both over last year and in a significant way over the previous quarter. We delivered SEK 104 million in sales, which was 16% behind last year. The main reason for the decline was the absence of the Curexa project of over SEK 30 million and lower sales in EMEA and APAC in general. Our recurring revenues remained stable at SEK 77 million, amounting to SEK 299 million on a rolling 12-month basis by the end of the year. The slight decline of 2% on a full year basis was related to the cancellation of school load orders post COVID in Germany earlier this year. Our gross margin and EBIT were hurt, of course, due to the lower sales, the absence of the Curexa contract and the low point of renewal base of contracts to finance companies in Japan. Our adjusted EBIT landed on minus SEK 2.9 million versus SEK 7.8 million last year. Adjustments made of SEK 2.4 million were related to reductions and reorganizations done at the head office in Q4 in response to the weaker sales. The cash flow was strong at SEK 17 million versus SEK 14 million last year and a substantial improvement sequentially over Q3. Summing up the quarter, we have work to do. We'll keep our focus on the 3 objectives for long-term profitable growth, cost control, sales efficiency and customer focus. To improve the understanding of our dependency on cyclical effects of historical renewals to finance companies, I added a picture available as well on Page 6 in our quarterly report. The contracts we sell to finance companies, the orange part of the bars in the chart are typically renewed on a 36-month basis, i.e., 3 years. This base of renewals we can do in any given year depends, of course, on the number of contracts we sold or renewed 3 years ago. In the graph, you can clearly see that in Q4 2021, 3 years ago, we had a real low point in sales to finance company. And that's why we talk about Q4 2024 being a low point in renewal base. On top of that, over the past 3 years, the Japanese exchange rate to the Swedish krona has worsened about 10% and the sales to finance companies are mainly done in Japan. In this graph, you can also see the absence of the Curexa project under product sales. So the light green bars at the top of the chart, exceptionally low in Q4 '24. On such short notice as in the Curexa case, we have in this kind of project business, no way of compensating in the short term. The material has been purchased, the resource has been booked. Looking at the quarter from a regional perspective. In APAC, Q4 sales came in at SEK 44 million, 13% below last year for the quarter. Japan was clearly affected by the low point of the renewal base. Japan continues their strong growth in air cleaners, which grew 55% in the quarter and 44% for the year in local currency. Japan is now tied with Sweden as our second largest market within Air Cleaners. In EMEA, we achieved SEK 61 million in sales, which was a decline of 14% versus last year. We continue to suffer the weaker economic environment with longer sales cycles. On the positive side, we see the members of the sales team in Sweden and Germany getting up to speed. The day before yesterday, I came back from this year's workshops in Germany and I was impressed to see that one of the new members of the sales teams made the German top seller Club for '24. I'm also happy to see in EMEA, in particular, how we've been able to address larger clients, both within the European food and beverage sector and the German defense sector with installations at multiple locations and a large number of units installed in short time. When it comes to America, sales of SEK 3 million versus SEK 8 million last year was a disappointment but fully attributed to the absence of the Curexa project of over SEK 30 million. This affected our top and bottom line in the region in a major way. We filed a lawsuit towards Curexa in December, seeking coverage on our damages. On the positive side in the U.S., we saw a pickup again in the winning of new contracts after a few weak quarters. We're not only seeing further demands and winning contracts for additional clean rooms with existing clients but gained a key new client in the quarter in the Northeast, exceeding SEK 10 million. We're continuing our pursuit of partnership with companies with complementary products addressing the same customer base to strengthen our offer and allow us to win more volume. When it comes to our focus, we stick to our 3 prioritized objectives: cost control, sales efficiency and customer focus. On the cost side, given the weaker market conditions, we've further reduced the central team. In Q4, we completed our supply chain consolidation and expect it to improve our service cost in '25. We started our transition to our new service partner in Germany and it looks very promising. In 2024, we had significant cost increases due to the low performance of our previous partner. When it comes to improving sales efficiency, we've reorganized and simplified sales management in EMEA. Our strengthening and replacement of sales resources in both Germany and Sweden are coming along fine and picking up speed. The new products started to ship in the quarter and we have orders in all the key markets in Europe. Over to strategic customer focus. We continue our systematic approach to product development. Over the past 3 weeks, I have, together with the product manager, visited and held workshops with all sales and service teams across the regions. The discussions and inputs have been very engaged and the regional teams are really feeling part of our product development process. The result of these interactions over the past 2 years is clear. The recently launched products are spot on, on the critical needs of our clients. Going into 2025, we're further sharpening our focus within air cleaners in Europe and APAC on the industrial sector, and it's been very well received by the sales teams. A few words on this focus for 2025. As I said, we're sharpening that focus. In Europe and APAC, we will focus entirely on-air cleaners and cabin solutions. Within cabins, we stay with a broad approach. We're a market leader. It's a mature market and we're already strong in 3 out of 4 product areas, as you see on the right-hand side on the top. The cabins, outdoor lounges and smoking rooms. During 2024, we significantly strengthened our offer towards the smoking-room segment with the FS70 SRE, smoking room addition, allowing us to access and provide a very strong solution for this market area. When it comes to cabins, it's all about maximizing the reach. So the segment focus is wide. We're already in a lot of different segments depending on the profile of each market and we'll continue to be so. When it comes to air cleaners, which we see as an emerging market with strong growth potential, we will put our focus clearly on the industrial segment. The industrial segment is where we can fully leverage the versatility of our products, our ability to recirculate filtrated air to create negative or positive pressure in a room, work with clean zones and of course, a combination of these 4. We've clearly seen in 2024 that once we focus, we're able to improve our sales efficiency by addressing similar clients within an industry as well as being able to expand solutions to the same client in multiple locations. In 2024, we've been able to expand our business with a leading European food and beverage client to 5 countries and many more locations with around 100 units installed. In Austria and Germany, we've been able to expand to more than 6 locations and over 50 units installed with a key company in the defense industry. With this more focused approach on air cleaners, we will get even closer to the clients and their pains related to indoor air quality, and we can be faster in meeting their challenges with bespoke solutions. We expect that this more in-depth understanding will help us in addressing more critical must-have application areas and thereby moving our margins up over time. With that, I hand it over to Henrik to take you through the financial update. Thanks.

In QleanAir Group, both EMEA and APAC are strong contributors to sales, representing more than 90% of total sales. EMEA accounts for 54% of QleanAir Group revenues. Germany is not reaching our targets, but other European markets are contributing to a higher extent. APAC accounted for 43% of total revenues. There's a clear demand for our solutions and we're gaining more and more traction with Air Cleaners through focused work on chosen customer segments. Japan had a lower revenue in 2024, partly because of the weak Japanese yen and partly because of seasonality of our renewal contracts. Americas represents 3% of the total revenues. We are hurt by the canceled HORECA contract in the quarter, and we continue to experience longer sales cycles in general. We had a negative growth of 16% in the fourth quarter, reached a sale of SEK 104 million versus SEK 124 million a year ago. The recurring revenues accounts for 74% of the total revenues and amounts to SEK 77 million. It's a relatively stable quarter for the revenue type, recurring revenues. The gross margin was 66%, down from 67% and the adjusted operating profit was minus SEK 3 million in the fourth quarter versus SEK 10 million a year ago. In the fourth quarter, the operating margin was minus 3% adjusted. And last year, it was 7.8%. This slide illustrates the relation between the book values of units in Clean Air balance sheet and the revenues stemming from such units, including service, the recurring revenues. The recurring revenues was SEK 299 million 2024. The recurring revenues are a solid base of revenues that to a larger extent are predictable in the future. The book value is relatively low, SEK 48 million compared to the recurring revenues and this is a contributor to our margins. To break these recurring revenues down per unit on an average, the revenue is approximately SEK 64,000 with a book value of approximately SEK 10,000. We experienced a high profitability on renting out the units over time. 2024, we saw a decline in the installed base. School orders of air cleaners in Germany were not prolonged, resulting in fewer installed units. However, going forward, we see a growth in air cleaners in both EMEA and APAC. We have 3 different revenue streams, the mix of recurring revenues, sales to finance companies and product sales to end customers. The nature of our business is that we have a recurring revenue as a foundation of the total revenues. On top, we have a product sale and that is customers that do not want to have a rental setup. We offer them to buy the units, and that is to a large part in the U.S. And as the HORECA contract was canceled, the product sales was low in the fourth quarter. And we also have revenue stemming from sale to finance companies. That is long-term rental contract that are sold to finance companies, and that is primarily in Japan, declined because of the Japanese yen and the seasonality of 2024. The cash flow improved in the fourth quarter, even though the operating profit was lower. Favorable changes in working capital compensated in the quarter. We continue to amortize according to plan every quarter, and the net debt-equity ratio was 0.8. In the quarter, we received a waiver from Swedbank and mid-January 2025, we changed bank from Swedbank to Danske Bank. And going forward, Clean Air will continue to amortize each quarter. Handing over to Sebastian for a summary.

Thank you, Henrik. And to close off the session in front of the Q&A, what we do at Clean Air is important. We dedicate our work to improve the health of people, the quality of products and the performance of processes. We do so throughout our 3 product categories: cabin solutions, air cleaners and clean rooms. Looking at the amount of clean air that is delivered through our solutions, we estimate that we clean 7.3 billion cubic meters of indoor air by end of Q4 and it matters as air pollution is a key challenge for human health. People die prematurely from the exposure to polluted air. We spend an important time or important part of our lives in indoor environments and indoor air can often be more polluted than outdoor air. And let me reiterate, a number of measures have been initiated that we expect to yield results. We stick to our plan with a very systematic approach to both operational and strategic development. We have our 3 clear priorities: customer focus, sales efficiency and cost control. We continue our focused product development that just brought 6 new products to the market. We now sharpen our focus within air cleaners on the industrial segment to move faster and take a position in that emerging market. With that, I'd like to open up for questions.

[Operator Instructions] The next question comes from Anders Roslund from Pareto Securities.

I would like to start off with a question about the EBIT or the losses in Q4. Could you shed some light on the moving parts here? I assume that the losses are mainly due to the cleanroom business.

So there are correct. So it's a very important piece of it, right? But of course, when you look at our profitability, a low point in renewal to finance companies also play a major part, right? As we renew contracts the second or third time, that's a very profitable piece of our business. But clearly, as I mentioned, the absence of the Curexa contract, which had been planned for the fourth quarter, I mean there is no way we can compensate from that. Our installing team and so forth are people within our own organization. So it's not like a third-party contractor that we can just let go. So you're right in your analysis. Did you want to complement, Henrik?

No, it's a combination of the low sales in Japan and the U.S., yes.

Yes. And you also mentioned the final delivery of Swedish clean room. Is that part also.

No. So in our Q3 earnings call, so I was more reflecting on the full year, right, that we...

Okay. So that has no impact.

No. It was a challenging year in 2024. But we also, during that year, dealt with both the clean rooms dating back from '21 and '22 and also the post-COVID-related purchases, right? And both those items we dealt with in Q3 actually.

Okay. So let's look into '25 instead. Given that you had the low point in Japan in renewable contracts, I assume that every quarter here coming in '25 will be better than the fourth quarter and is it a sort of change during the year? Or will it start off very strongly in Q1 or gradually increase? Or how should we look about the Japanese recovery here?

So if you start off with sort of the base that we carry forward quarter-to-quarter, if you look on Page 6 and...

Yes, exactly.

You take a hint back in '21 '22, you sort of see what base at least we will carry forward into the subsequent quarters of 2025. Of course, it also depends on the exchange rate to the Japanese yen, right? Because that hit us a little double in 2024 as the exchange rate worsened about 10% from the time 3 years up until now. But for sure, you can see that Q4 in 2021, which reflects on the Q4 in 2024 was really a low point, right? And then it gradually. But of course, everything is a combination. We have a great benefit of our recurring revenues and our ability to renew contracts and we're really good at that and it's a very stable rate of renewal, so to say. But it's also, of course, dependent on our ability to sell new units in every quarter. But I think Japan has really made the move into the small and medium businesses into the HoReCa sector with cabins. So I think it looks quite good. I came back from Japan about a week ago, and it was a very engaged team.

Yes, because that's the key issue here that the renewal really takes place. I mean it could also be that you have a churn that clients are leaving and not renew their contracts.

No. So in Japan, we see no difference in the rate of renewal. it's been very, very stable. and I think if we look at the overall growth in cabins or decline actually in cabins last year and you back out the Japanese yen and you back out the fact that we had a much lower renewal base in 2024. Just to give you a feeling, in 2023, we had an average of JPY 205 million per quarter in renewal to finance companies, and that went to JPY 170 million in average in 2024. So if you back yen and the fact that we have that drop in base, we're still in a decline, we're more talking 5% so we view the cabin solution market as a continued stable market. And I think the recently launched introductions into the cabin solution area, the SL12, which is an outdoor smoking lounge and the FS 70 SRE, which dramatically improves the performance of smoking rooms, which is sort of a competitive market to the cabin solution market. I think we're really moving our game forward.

And when it comes to the Cabin Solutions in Germany, where you've changed your service provider, is that in place? And when does it reflect in your rental rates that you have higher cost levels now?

Well, the higher cost levels we experienced already in 2024 with our previous supplier, right? And we have during the year negotiated, we're in the transition phase right now. So right now, we are shifting from the old partner to the new partner, and that should be completed by Q1. So that's good or we're convinced it will improve our service costs versus '24. We have because of the performance of the previous, we have to go in and sort of support with other partners to solve, I mean, for us, service is key with our clients. So when it doesn't work, we'll just have to all hands on deck to fix it and that cost us some money in '24.

You will address that, but that the new partner will contribute to lower costs in '25 when it comes to service. It's not that when you renew contracts that you raise rental costs to cover for higher costs.

No. We view the increased costs as related to 2024, and we're coming back on normalized situation with the new partner.

Excellent. Okay. Coming back then to the cleanroom business, you have taken orders of roughly SEK 20 million. You took 4 orders in, in the second half of last year? And when will those deliveries start to kick in?

Yes. So I think we wrote quite clearly in the press release, that we have a very strong signed contracted backlog for 2025. So I have to be careful. We sometimes we're not allowed to use the name. So the Northeast, the thing we did in Baltimore is a 2025 installation. I actually think all those 3 are for 2025.

Yes. But I just wonder if they start to be delivered already in the first quarter? Or is it sort of back-end loaded towards the second half.

No, it's not back-end loaded. It's really the first 3 quarters. We have a strong backlog in.

Okay. And outside those 4 large orders or 3 large orders you presented of roughly SEK 20 million, do you have some base order or just smaller orders coming in?

So on the backlog side from the U.S., I think we're well now over maybe SEK 35 million, SEK 30 million, SEK 35 million in signed contracted backlog for delivery in 2025. In addition to that, we have a running business of service contracts. We have over 100 clean rooms at hand in the U.S.

Yes. And now you have taken down costs related, first of all, to Curexa, but also in general terms, how is it with the cost level in the U.S. now?

No. So with the cleanroom business, which is a project-oriented business, it requires a certain structure. And I think that we have that structure in the U.S. We were able to cut it back a little bit given the midview or the fall of 2024 and we did so. But I think otherwise, we are at that level that we need to be. But in a company like ours with our margins, we cannot sort of address the issue that we have just by cutting costs. Our focus is to drive revenue, right, and drive growth. And I think, as I alluded to both in Q3 and Q4, we're initiating and have started the discussions to look more at other actors being complementary to our offer targeting and addressing the same client. And as an example, if you take robotics that are coming strong in the pharmacy area in the U.S., one challenge for those robotics companies and these are really big companies is the room for the robotic solutions in clean rooms. So just as an example, that is our possible partnerships where we could play a role together with these large companies to improve the reach of these solutions.

Interesting. And then finally, if we go to Air Cleaners, it seems that the industrial part is growing strongly, while the old COVID-related sales to Germany is sort of fading out. How much of those COVID-related installations is left? Or is it sort of out of the book now and we can start to see growth again coming from the more industrial-related part of the business?

I think and I've just come back from the kickoff and workshops with all the regions. there's one thing that impresses me of the teams is that if we look back during COVID, right, we really had a bump in air cleaner sales reaching about SEK 100 million. And then since then, as you said, the HEPA filtration has really gone back. We've taken our cancellations on the school side, which was quite a big deal. And the sales teams and service team have managed to convert that into industrial air cleaner sales. It's really impressive. And we see a lot of traction in the industrial area. Of course, the economic environment in Germany and overall in Europe is against us. But we're seeing as we focus on the industrial sector that we can be more in more critical application areas, which means they're more resilient to this economic downturn. But I would say that we've dealt with most of the COVID-related sales that we had back in '21. It's way before my time, right?

Yes. Because if I see the absolute level of Air Cleaner sales, at least from my estimates, it came out slightly better than expected. And there is no seasonal effect that everybody is sort of you sell a lot in the fourth quarter. I assume this could be a relatively good base looking into the fourth quarter sales in Air Cleaners could be a good base for looking into '25.

That's our view as well.

Excellent. And the strong growth in Japan, you said it now at par with Sweden when it comes to sales level. This has been growing quite strongly. Is that all mixed with the office segment, which is, I call it, more COVID related? Or is it purely industrial?

So it's gradually stronger and stronger on the industry. And we're actually -- as we now move into 2025, the Japanese team are shifting more resources into industrial air cleaner to meet the demand, right? But during 2024, we still had but not COVID related, but rather more the influenza, the allergies and so forth. We still have some office cross-selling from our cabin side into the offices more to combat allergies and influenza virus spreading. And how strong that's going to be forward, it's really hard to say. But of course, we make a difference also in the office environment where we see the growth potential and the leverage of our strength in our products is towards the industrial segment.

Good. That seems very interesting. And the 6 new products launched in the Air Cleaner segment, is that covering the global sales, you sell those 6 new products also in Japan, Germany, Sweden, et cetera. And you also mentioned France here. How is that looking?

I mean it's from very low levels, I assume. Yes. So France, we view France as our third pillar in Europe and maybe our third pillar globally. We look at our ability to grow in Germany over the last 5 to 7 years, we really see France as the next one. The types of industry compared to Germany and everything sort of pointing in the right direction. So when it comes to investments, as we move into 2025, we've really agreed with our Board that our focus as we improve our numbers will be to continue our investment in France.

Excellent.

In France also showed growth in 2024, sorry.

So coming back, you usually don't give any outlook for 2025, but there seems to be at least a positive trend in all 3 business units.

Agreed, I have to say.

Okay. I think that was all questions for me.

[Operator Instructions]

Do we have anything?

Nothing through mail or on the web. So no written answers.

Okay. So if there are no further questions, I'd like to reiterate our communicated financial targets remain delivering 7% to 13% organic growth annually and building up our EBIT margin in the range of 15% to 20%. Taking our company to new levels is a journey. We have a very structured approach and we stick to our plan and we're convinced that this is the right way and that it will yield financial results and allow us to meet our communicated financial objectives in the mid- to long term. Thank you for your participation and interest in QleanAir, and I wish you a great continuation of the day. Thank you.