Hello and welcome to the QleanAir Q3 report for 2021. Throughout the call, all participants will be in listening only mode, and afterwards there will be a question and answer session. Today, I am pleased to present CEO Christina Lindstedt and CFO Henrik Resmark. Please begin your meeting.
Thank you very much for that and, very welcome to our presentation of our Q3 results. Next page, please. I would like to start by giving you a brief overview of who we are, and we are a premium provider of solutions for indoor air cleaning. We serve more than 3,000 customers globally. We have an installed base of different air cleaning solutions of more than 10,000 units globally. That installed base constitutes the base for our future revenue generation and for how much clean air we deliver out in our market. We have a business model where we mostly work with long rental contracts, typically for 36 months, and in more than 75% of the cases, these contracts are either renewed or extended. We have satisfied customers, and we have long-term relationships, and we have a sustainable business model.
We also measure how much clean air we deliver on a quarter-by-quarter basis, and we see every quarter that figure increases. We have an asset-light business model where we cooperate with external partners for manufacturing and for service. Next page, please. Looking back at Q3 and the highlights of our performance, I would like to underline that I'm very happy to see that we continue to deliver solid growth in our Facility Solutions product category. We deliver growth of 104% compared to last year, resulting in a revenue of SEK 90 million or SEK 20 million and a revenue share of 19%. This is very much in line with our strategy that we continue to increase the size of our facility business and its revenue share.
Very importantly, we deliver an increase in our total order intake, and it's up by 29%. Very importantly also, we continue to deliver good profitability levels, reaching an EBIT margin in the quarter of 22.6%. Sales are up with 5%, and our installed base continues to develop, increasing by 17% and leading into an increase in QleanAir delivery of 30%. This is taking place in a quarter that has been very turbulent in terms of component shortages, in terms of higher material costs, and higher transportation costs. It's been a very challenging business context to maneuver in. I would like to take this opportunity to really thank the whole QleanAir team for the dedicated and committed work that has been done during this challenging quarter and unpredictable quarter. Next page, please.
Looking at the progression quarter by quarter of our order intake and our sales level, we see that we are delivering stable levels, both in terms of order intake and sales after a couple of challenging quarters at the early stage of corona. This in spite of the pandemic and the supply chain concerns. We also continue to deliver a really good profitability level. We have an underlying business with a strong profitability level. Next page, please. Looking at the regional breakdown of our order intake and of our sales, we see that the revenue share or the order intake share of Europe is increasing to a large extent. It increased by 77% compared to last year. There are basically two main reasons for that.
One is that we've seen a really good development of our clean room business in the Nordics, in Sweden, and also a great continued growth of Facility Solutions in Germany. In Japan, the order intake was slightly lower than last year. The months of July and August were months where we were still in a state of emergency in Japan due to the pandemic, and also during the Olympic Games. In September, we saw a step-by-step strong improvement when it comes to the corona situation and our activity level. We also see an increase in sales in Japan in the quarter by 4% and in Europe by 4%. Next page, please.
Similarly, looking at the quarter-by-quarter progression on a regional basis on order intake and the quarterly sales, also here we see a stable level in both Europe and in the APAC. Next page, please. On a product category basis, starting with Facility Solutions, our highest growth product category, where we deliver a portfolio of customized air cleaning solutions to a number of different customer segments. Historically, to customers in industry, warehouse and logistics, and food. From the outbreak of corona, with the strong increase in awareness about the importance of indoor air quality in more and more contexts, we are also serving more and more customer segments.
We have developed business with healthcare, with public sector, with offices, and we have in 2020, and going into the beginning of 2021, a record time for bringing new products into the marketplaces, catering for more customer needs. Next page, please. As a consequence of these product launches and this increase in awareness, we continue to develop our Facility Solutions business with our traditional customer segments. Some examples of that are that we continue the development of the business with a big logistic customer in the Nordics called PostNord, which was one of our first customers already since 2016 on the Facility Solutions side. We also develop new opportunities when it comes to food in Denmark. Next page, please.
We also continue to develop the newer customer segments on the Facility Solutions side, like healthcare, where we, for example, do business with a school system and a hospital in Germany. We continue with the business on the office side, where we, in Japan, have a very strong base from our Cabin Solutions business. That is also what we are addressing when we bring Facility Solutions and grow that business in Japan. We cross-sell to a strong customer portfolio on the office side. Also in Germany, we are step-by-step increasing our presence in the office segment on air cleaning solutions. We announced, for example, in the quarter, large deal with 60 units of FS 30 to a prominent historical customer called Rügenwalder Mühle, who's a producer of charcuterie.
We also in Germany continue to deliver schools providing safe and secure environments in the schools. We also signed a frame agreement with a school system in Austria. This has been an important breakthrough for us in the Austrian market with a value of EUR 1.2 million at the timeframe of deliveries up until 2024. Really strong progression for us in the DACH area. Next page, please. Looking overall at the situation on Facility Solutions side, we are tracking good growth levels. Looking at the rolling 12-month basis, we are tracking at SEK 77 million in terms of turnover. We see great opportunities for us to continue to grow this business.
We are convinced that the increase in awareness about how important it is with the quality in the indoor air, that awareness is here to stay. We will continue to leverage our innovations and our strong product portfolio and increase our presence with existing customer segments and existing scalable customers and continue the expansions towards the newer customer segments and also increase our geographical reach. So far in Europe, it's basically in Sweden and in Germany that we have a significant presence, and we can grow further there, but also in other geographies equally as we continue our growth path in Japan. Next page, please. Looking at our Cabin Solutions business, where it is the European market and the Japanese market we are approaching. Next page, please.
From a sales perspective, we saw in the quarter a stable revenue level in spite of challenging circumstances in many markets due to the corona situation, not the least in Japan, where our customer base is offices. With few people present in the office, then the business opportunity for new business is lower. In spite of that, we deliver stable sales levels, and we deliver strong renewals both in Europe and in Japan. As mentioned, we've seen the light in the tunnel. We've seen an improvement in the pandemic situation in Japan, and we see great opportunities for us to come back to our growth path in the Japanese market, both within our traditional customers and also with the new customers that we have developed with our Facility Solutions business in Japan. Next page, please.
Thirdly, looking at our Room Solutions business, which is our clean room business, where we target the U.S. market and the Nordics, especially Sweden and in Europe. Our primary customer segments in the U.S. are pharmacies within the hospital system and independent pharmacy groups. In Sweden, we target companies in MedTech and life science, for example. Next page, please. Looking there at the development of Room Solutions, we saw a really high activity level in the Nordic region. In the quarter, we announced two major orders amounting to SEK 20 million approximately together in value. These are orders that we are installing here now during the autumn and to some extent into the beginning of 2022.
One of these orders that we announced with Björklöven is the biggest order to date in QleanAir history across all geographies and across all product categories. This is a really positive development for us with our cleanroom business. Looking at our quarterly sales, these are much more volatile when it comes to the cleanroom business because of the nature of the business. It's a few projects, each with higher values. It's normal that we have higher volatility there, and we also have a larger degree of product sale in this product category. Nevertheless, both order intake and sales in the U.S. were lower than last year, and we haven't yet gotten back to the activity level before the pandemic.
In addition, in the quarter, we had an impact from a negotiation we're having with one of our biggest customers on the cleanroom side, where we are discussing a reprioritization of the cleanroom project for them. That means that it had a negative impact on the revenue in this quarter. It's a strong customer relationship where we've installed five cleanrooms to date, and we are discussing several more for the future. Very important for us is our focus in the U.S. to come to closure in pending discussions with our customers and turning opportunities into orders. There we have a very strong focus from our U.S. team on achieving that. We continue to strongly believe in our opportunity on the cleanroom side, both in the Nordic market and in the U.S.
Next page, please. We also measure on a quarter-over-quarter basis our impact in terms of sustainability, how much clean air we deliver through our installed base. In order to make that figure a bit more tangible and a bit more visual, we translate that into the number of Avicii Arena per hour that we clean, and we see a progression quarter by quarter on that. In Q3, we reached 11.22 Avicii Arena per hour. With that being said, I would like to hand over to our CFO, Henrik Resmark.
Thank you very much. Moving into page 18, please. We see a continued growth in Facility Solutions in Europe in the third quarter versus third quarter last year. We continue to see a clear traction for Facility Solutions in primarily Germany. We see a high degree of renewal contracts in Japan within Cabin Solutions. As we have pointed out earlier, as we grow the installed base in Japan, the base for future renewal contract is growing. Ordering intake and sales are below expectations in the U.S., continued long sales process to win customer contracts. QleanAir Group ordering intake is up by 29% versus the third quarter last year. Page 19, please. QleanAir business model continues to deliver strong cash flow and margins.
We have an efficient business model, and our business model is a combination of recurring revenues and sale to finance companies and product sale. We continue to see stable cash flow. The margins in the third quarter are strong, and the strong margin is a consequence of the renewal rate, the business model, and continuous cost control. Strong margins while we continue to invest in R&D and product portfolio and marketing and sales to deliver long-term growth. Page 20, please. We continue to grow our installed base quarter by quarter, +17% last 12 months. This is of course one focus area for us. Increased installed base will deliver growth in revenues long term.
We see a growth in Facility Solutions in Europe, while Cabin Solutions in Europe is more a mature market, and the average prices per Facility Solution unit is lower than for a Cabin Solution unit on average. Finally, moving into page 21, please. Net debt is down to SEK 167 million. Equity ratio is improved up to 31%, and the net debt equity ratio is down to 0.9. Having said this, I hand over to Christina again.
I would just like to summarize our financial goals and dividend policy over the medium term, and that is on the one hand, to deliver an average organic sales growth of 10%, to deliver an EBIT margin between 15%-20%, and to pay out a dividend of 30%-50% of the net profit. Page 23, please. Looking then to summarize our key activities in the next step, that is very much focused on top-line growth and continue to grow our Facility Solutions business, and continue to leverage our new product launches and our scalable customers, and cross-sell to our large installed customer base of more than 3,000 customers globally, and to continue the development of our more recent customer segments and also more recent geographies when it comes to Facility Solutions.
We are continuing to increase our direct sales force, adding sales resources, and also developing partnerships in order to increase our reach geographically. We continue to increase our sales focus on the Room Solutions side, turning opportunities into orders. We'll focus on increasing our growth pace in Japan on our Cabin Solutions side, where we see great opportunities as the market situation is improving. We will also to continue to invest in innovation and in our brand. That finalizes our presentation of the Q3 results, and we are open for Q&A.
Thank you. If you do wish to ask a question, please press 0 1 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 0 2 to cancel. There will be a brief pause while questions are being registered. Our first question comes from Anders Roslund with Pareto Securities. Please go ahead.
Yes, good morning. Yeah, I would like to start with the order intake. Even it's up year-over-year, the sequential development is relatively weak. If you exclude the SEK 20 million in orders in Sweden, it seems that sequentially orders are down in EMEA. They are significantly down in APAC and also in Americas. If we start with the EMEA situation, why is the sequential development? Is it in Facility Solutions? And, how do you see the sequential development in the various divisions? If we start with the-
When it comes to the distribution between renewals and new business, of course, Facility Solutions is a younger business for us. The fact that we have two vacation months during Q3 has an impact on the traction on new business generation in that respect. As we mentioned in the U.S. on the cleanroom side, we are not in line with last year, and we discussed that we need to increase our speed in turning opportunities into orders. Equally in Japan in the beginning in July and in August. Yeah, in July and in August, we still had a state of emergency in the market, so it was still challenging market situation. It's a number of different factors coming into play.
If we start with the Facility Solutions, I mean, the year-over-year development, irrespective if it's order or sales is very impressive. Do you just think that the sequential weakness here is just due to the seasonal effect of somewhat lower summer activity? How do you see specifically when it comes to the virus-related-
Yes.
-equipment?
Yes.
What do you see there?
Yes. I would say that is the main impact. We've seen a number of large orders during the springtime. It's not as common to finalize such tenders in the middle of the summer. We see a seasonal impact. In Japan, we also see a state of continued emergency. A little bit different. We definitely see great opportunity to continue the growth path in Facility Solutions when it comes to both new business and in the next step, in renewals.
No, that's very important. In the Room Solutions area, what do you think now? It has been sort of mature now in the U.S. for a couple of years. When do you expect to pick up in the U.S. business?
We have a strong pipeline and we expect this gap to come soon. I mean, we see a continued great opportunity in this business. Given the fact that hospital systems have been a very significant customer base for us, and they have been severely impacted during the Corona times, that has impacted our activity levels. We see that we are moving out of that, and we see an increase in terms of activity levels and lead generation. I am convinced that we will be able to look at the positive development in the U.S. business also.
This very impressive development in Sweden with those orders of SEK 20 million, how far could you develop the Swedish market? I mean, those were big orders, but, is there a continued strong development in Sweden, or do we have to wait for those large orders to come more sort of in a erratic pattern?
No, I mean, we have a combination also of smaller orders, more bread and butter business. We see these types of bigger, very interesting projects for us. We see great opportunities to continue to grow the cleanroom business in Sweden. We have a dedicated team focusing on nothing else but growing our cleanroom business. That is giving results here very well in 2021. I am very convinced that we will continue to see a positive progression in that business also going into 2022.
Interesting question here. In Sweden it's not legislation, it's the MedTech business. It must be part of their sort of production units. While in the U.S. it's pharma and it's primarily legislation driving growth. Is it possible that you will broaden your market scope in the U.S. to also address the MedTech business or similar businesses in Sweden?
Absolutely. I mean, we see that our solutions are very, very good also for these types of customer context and customer needs. We definitely see opportunity to broaden the scope in the U.S. business as well.
Oh, interesting. If we go back to the Facility Solutions, for an outsider, you could say there are two main groups. It's the more virus related equipment and the ordinary equipment that you had before COVID was coming into place. Could you see any differences in how the non sort of office and school related business is going? I'm talking about your traditional inventories.
Yeah
... or-
Yeah. I mean, during Corona, that was the part of the business that was impacted by the fact that it was more difficult for us to pursue our sales process and really physically go out and visit our customers, which is important in order to close bigger business opportunities for new customers. Now we have seen during a number of months opening up of markets, even though lately it's challenging again. We've been seeing positive progression in terms of markets opening up and us being able to conduct our sales process, and meaning also that we continue to do interesting business in our traditional customer segments. With Corona moving away, we are up to speed and growing again in our traditional customer segments on the industrial side and warehousing logistics and food.
Yeah. Exactly. Okay. Then a question maybe for Henrik. It's Q1 in the sales I see other revenues, almost SEK 3 million. It's one-off here, or how should we look upon that?
Good question. Well pointed, Anders. That is actually a support that we got in the U.S. subsidiary for Corona reasons. As we haven't reduced the staff and the number of employees in the U.S. and therefore that loan or grant was written off by the authorities in the U.S. In the third quarter we have booked it as other income, of course affecting the margins, of course. That's a one-off item.
Yeah. You should exclude that from the EBIT at 200% as a growth in order to get-
Yes
... sort of more-
Yes.
Okay.
Yes, Anders. I mean, if you deduct that, then you will still have margins of around 20%. The margins are still strong.
Yeah.
In addition to that, then I would also like to highlight the fact that we have had certain costs in the third quarter that we haven't adjusted for, but they are quite substantial. If we take those costs off, so to speak, then we have this strong margin of 22%.
Okay. Because that was my next question. The other-
Yeah.
... external cost was quite higher than expected. Is the-
Exactly. I prefer not to work too much with adjusted items. We have some other income that is a one-off thing, and we also have certain costs that could be seen upon as they are one-off costs. We have decided not to adjust for anything.
Okay.
In the description around other external costs, we list what they are. It's two things, basically, a determination of a cooperation with a market partner in Germany and costs linked to a market analysis.
Okay. Yeah, you mentioned that. In fact, it's not that far away from an underlying margin than you report in the-
Exactly.
Exactly.
That is my point, Anders.
Yeah.
That's good to know. The margin was very-
Just to comment, but also on a year-to-date basis, that other income seems to be compensating for salary costs that we have because we have maintained our team in the U.S. in spite of challenging circumstances during the Corona.
Mm.
That is a contribution to the offset towards the salary costs that we have.
Okay. The margin was very impressive. Is it mainly the Cabin Solutions and the high renewal rates you have?
Yes. Correct. I mean, we had a very high renewal rate in Japan, and as we have pointed out earlier, Japan is both a growth engine for us, but also very, very profitable. Partly thanks to Japan in the third quarter, the margins are very, very high. Of course, on a general basis, we work very hard with continuous cost control also. It's a combination of factors, but Japan is contributing a lot, yes.
Excellent. Just to come back on your sort of outlook statements here. You mentioned that supply chain disturbances will continue to have an impact, but so far, I could not see very much of those effects, negative effects in your P&L. Describe what has caused problems so far, and what do you expect here in the coming quarters?
What has caused problems is the general turbulence in the market, that it has been very, very difficult to predict the reliability of component supplies, components not arriving as scheduled, and the prices going up. It has been very challenging context to navigate in. We have not in Q3 lost orders because of this, but we have, in certain cases, have longer lead times. In that respect, it has had a certain impact, and we have carried additional costs due to this situation. How long it will last is difficult to predict at the moment. We see that it will continue into Q1, but then hopefully step by step improve as we continue into 2022.
Yes. Given that you haven't the impressive margins you had, those additional costs, what sort of magnitude-
It does not have any impact on our renewal business, so it's only on the new business. Of course with our business model of long-term rental contracts, it doesn't have the same impact as the company having 100% of product sales.
Mm.
No renewals. In that respect, our business model serves us well.
Okay, do you have any delay in delivery times? That's what you said to some extent for example.
We have had longer delivery times. We haven't yet been in a situation with significantly changing already communicated delivery times.
Mm.
On average, our delivery times are somewhat longer, at the moment.
Okay. Excellent. Generally speaking, do you expect any sort of new initiatives regarding new markets opening or new product launches or anything more specific that we should know about?
Yes, we don't speak in advance about upcoming product launches, but that is something that is really at the heart of what we do. You can absolutely envision that we will have things to launch in the pipeline here. That will be an important part of our next steps for sure. In terms of new markets, Japan is still fairly new for us on the Facility Solutions side. There, we are focusing a lot on growing that, both our initial position within the office segment with products like the FS 30, but also to develop our more traditional Facility Solutions business, which we have successfully done since many years in Europe, so more towards these customers in industry, warehousing, logistics, and so on.
We are also focusing on increasing our reach in Europe, where primarily so far it's in Sweden and Germany. We see great opportunities for further growth in Sweden and Germany as well.
This Facility Solutions initiatives in Japan, when do you expect to see any visible effects of that initiatives?
I mean, we already have a visible effect. We've been working with cross-selling our solutions to our customer base on the Optix side during a year. We see, I mean, great opportunities to grow that business. Of course with our business model with long-term rental contracts, the impact in terms of revenue is not as quick as if it would be product sales. It takes-
Mm.
It takes longer time for it to have a major impact in terms of our total sales in Japan.
Mm-hmm. Okay. Finally, a question about the tax rate. You mentioned that you had some changes here. What should we expect here going forward?
We have changed the transfer pricing policy and the tax policy we made at fourth quarter last year just to make a more efficient tax cost all over the QleanAir Group. We will expect therefore for long-term more to be closer to the Swedish tax rate and potentially somewhat higher than that. That is what we can guide on the tax costs.
That's extremely impressive given the high share of revenues in Japan. You must be successful in that respect.
Yes. We have been working with our auditors on this of course checking everything. Yeah.
Mm.
That policy was in place again, fourth quarter last year. This is our strategy going forward.
Excellent. Okay. That's enough for me. Thank you very much.
Thanks, Anders.
Thank you.
Our next question comes from Mattias Ehrenborg with Redeye. Please go ahead.
Good morning, Christina. This is Mattias Ehrenborg from Redeye.
Hello.
Hi. I think you have pretty much already touched on all of my questions earlier in this Q&A, which is great, so I will try not to repeat that. I think you mentioned this in the presentation, but the gross margin in the quarter was very high, especially relative to your historical average and also in recent time. You mentioned that the main driver, you mentioned some drivers of the improvement here, but what was the primary driver here? Has been a high degree of contract renewals in the quarter. You mentioned some cost control also.
When it comes to the gross margins, I would definitely say that it's a high portion of renewal contracts. We have earlier pointed out the reason for that. When we sign a new three-year rental contract with an end customer, we don't acquire the unit again, so to speak, and we don't have to install it again. That is the primarily reason for we have the expansion of the gross margin.
Okay. Perfect. I think you also touched on this earlier, but I didn't catch it fully. Component shortages, how has this affected you in terms of lead times and possibly extra costs?
Yeah, I think I mentioned this before, but we have been facing longer lead times to some extent. I mean, it affects us a little bit differently product per product and product category per product category. We haven't yet been in a situation where we have delivered significant delays or had any order cancellations and so on due to this. It has consumed a lot of our efforts and working time to follow the shipments and look for alternatives and things like that. It's been a challenging context to navigate in.
I presume you also see this in the nearest six months or so also, or what does the future hold, do you think?
Yes. We see a continued challenging situation on the supply side. We are, of course, continuing to work a lot on mitigating actions in terms of inventory, in terms of capacity planning and a lot of focus in order to continue to be able to not have any disruptions in our business.
If we jump over to the Room Solutions segment, you mentioned you had a delay in a project where you negotiated with an existing customer. Is this an existing customer in the sense of already having a clean room contract, or is this the first order it has placed? What I'm looking for is to understand how this has affected-
Yeah.
- the P&L historically and how one can expect it to affect the P&L in the future.
No, this is an existing customer of us since the very beginning of our business in the U.S. since 2016, basically. We have five clean rooms installed with them, and we have running service contracts. They are now in the process of reprioritizing their clean room needs. That means in the short term that we have not continued work on one project, but utilize our resources elsewhere, and that we are finalizing the orders that we will take for the next clean rooms with them. The impact has been a lower than anticipated revenue generation with them in 2021. We see great opportunities for continued cooperation and business opportunities in the future.
Okay. Thank you.
The P&L impact is revenues that hasn't happened, so to speak.
Okay. Is it possible to give a range of how much we're talking here or?
Well, we are in a negotiation, so that we don't know yet. I mean, the plan is to transfer our focus to other clean rooms, instead. Once that is finalized, that will be shared. It's one of our biggest customers and with great opportunities for more rooms here in the future.
Okay. Thank you. That was last question for me. Thanks for taking the time.
Thank you.
I remind you that if you do wish to ask a question, please press 0 1 on your telephone keypad.
I have actually got the question through email regarding the EBIT margin. How does the EBIT margin compare across the different segments, Facility Solutions, Room Solutions, and Cabin Solutions? I can answer that we are not guiding on that information per product category. We're only guiding on the financial targets, and we're only sort of publishing in the report for the total group, for the QleanAir Group. I will not be able to guide on that more specifically.
We have no further questions. I hand back the word to our speakers.
Okay. Thank you very much. Bye-bye.