Earnings Call: Q3 2020

Nov 12, 2020

Thank you very much for that and very welcome to this audio class with Clean Air. I am pleased to present to you our Q3 report. Page 3, please. I would like to start with giving you a brief overview of Clean Air. We are a global provider of premium indoor air cleaning solutions. Our main markets that we operate in are Nordic Europe, Central Europe, Japan and the U. S. We have a diversified customer base with a high retention rate and more than 2,500 customers. We operate with a business model, which mainly consists of long term contracts of 36 months. This means that we have a business model that generates strong cash flow and a high and increasing level of recurring revenues. We have satisfied customers, and more than 75% of our customers are extended or renewed. Our customers are extended or renewed. And on average, our solutions remain with our customers for 6 years. We have proprietary technology and solutions providing substantial barriers to entry in these areas that we operate in. Our markets have strong fundamental drivers from regulatory shifts and from increased awareness of the importance of indoor air quality. And we have large opportunities within the customer segments that we're focusing on industry, food, offices, automotive and cleanroom segments. Page 5, please. Looking at our operational highlights during Q3, we have maintained a high activity level at the company in challenging times given the COVID-nineteen situation. We continue to serve our customers. We have also continued our path of introducing new innovative solutions in the marketplace within our product category, Facility Solutions. In Q2, we launched a specific solution for the food segment, which was followed in Q3 by a solution for larger industrial spaces, which previously has been an important focus area for us. And we've also worked a lot on a new introduction in Q4 of a solution which we have developed in close cooperation with the health care sector as a response primarily to this COVID-nineteen challenge. We've also taken our first order of facility solutions in Japan and step by step plan the introduction of the facility there. We have our new marketing team in place at our headquarters in Solna, and we won a new frame agreement with PostNord, which is an important customer of ours since a number of years and a Nordic customer in the logistics sector. Page 60. Looking at our key financial highlights in Q3. We continued to deliver stable and good margins and an increased level of earnings per share. Our EBIT margin landed at 17% and SEK 17,800,000 compared to an adjusted level of SEK 21,000,000 last year. Our sales landed at SEK 104,900,000, which represented a decline of 4.6% compared to the same period last year, taking into account currency adjustments. Our order intake landed at SEK 54,400,000, which meant a decline of 39% compared to the same period last year. So we have had impacts from COVID-nineteen on our sales and our order intake level. Given the large contribution of our business from recurring revenues, it is, however, not possible to automatically translate our order intake level to future revenue generation. So we see a strong increase in recurring revenues, which land at SEK 64,900,000 in the quarter, which is an increase of 35% compared to the same quarter last year. And we continue to deliver an improved operating cash flow of SEK 22,400,000 and our earnings per share amounted to SEK0.61 per share compared to SEK0.16 during the same period last year. Our resilient business model with a large and increasing share of recurring revenues and outsourced services in services and manufacturing serves us well during the COVID-nineteen phase. Page 7, please. Looking at the development in our different product categories. Let's start with cabin solutions first, which is the foundation of the company and compromises the product lines of the smoking stations towards offices, public spaces and industry. Cabin Solutions represented in the quarter 79% of our total sales, and our main markets are Europe and Japan, where the European market is more mature and we, during the years, have seen a strong growth in the Japanese market. In Japan, during the latter part of last year and the first half of this year, we saw an exceptionally high growth in sales, which was linked to a health promotion act that came into force from the 1st April in Japan, which meant that many customers made their purchasing decisions prior to that day. Now we've seen a normalization in demand in the Japanese market. And we've also seen impacts from the COVID-nineteen situation in Japan, where the market has been largely in a lockdown phase during most of this time of the COVID-nineteen situation. But we continue to see strong potential in our cabin business over the medium and long term. And in spite of a decline in Q3 of 11% in sales, we are still up year to date with 16% in sales in our Cabin Solutions business. Page 8, please. Moving to our product category, room solutions, which is one of our newer product categories, where we, during the years 2016 to 2019, have delivered an annual growth level of 63%. And the U. S. Is our main market in this product category. In the quarter, the sales of room solutions represented 12% of our turnover. And there, we saw an impact both on our sales performance in the quarter and our order intake, very much related to the situation that our core segments in the U. S. Market are hospitals, it's pharmacies within hospitals and independent pharmacies. And they have been severely impacted by the COVID-nineteen situation. So we were down in the quarter in sales 28%, but we are still up year to date with 24% in the Room Solutions business. We are addressing this with a strong focus on accelerating the pace of closing customer opportunities, focusing on customers outside of the hospitals and also putting a lot of energy and effort to reinforce our channel cooperations and marketing activities to increase our qualitative leads generation. And we are convinced about the opportunity in our Bloom Solutions business also over the medium and long term. Next page, please. Moving to Facility Solutions, our second of our newer product categories. We continue to invest in innovation and new solutions. And step by step, we introduce more products where we focus on real customer demand. We increased our sales compared to the same quarter last year with 14%, and we also delivered good growth year to date of 10%. Next Page, please Page 10. Here, I would like to show to you our family of solutions within the Facilities segment. Moving into 2020, we had 2 solutions. We have the Air King Low and we have our FS-seventy. Now we have step by step built up a family of products. We target different product segments with specific features that we know these different customers need. We started then with a food solution that was introduced in Q2, where we have learned that the food segment is a segment with a lot of regulations given the importance to protect the consumer growth that are being produced and also to protect employees working in the food sector. And that has given us great contribution in our business in Q3. Now we are then launching what we call the FS90, which is a larger unit with the biggest capacity we have ever produced. As a response to requests from some of our customers with larger industrial areas where FS90 is a good complement to our complete installations. Then we have worked a lot in tight cooperation with the health care sector to develop the FS30 aiming for the office segment and public places and health care, where we provide HIPAA-four infiltration, which contributes to reduce the risk of spreading viruses, but also with a combination of good efficiency and low sound levels, which is very important to these customer segments. So we have during 2020, step by step built up a very strong portfolio within our Facilities segment when we move into 2021. Next page, please. The COVID-nineteen has had impacts for us in the short term. On the challenging side, it has meant that it's more challenging for us to some extent to conduct our sales processes because we continue to be dependent on physical meetings. And we have seen in some segments that customers have longer decision processes related to investments. But we've also seen an increase in demand for air cleaning in some of our customer segments. And we also have seen an increase in awareness in general in society about the importance of cleaning indoor air and the fact that air cleaning solutions, professional air cleaning solutions can contribute to reducing the risk of the spreading viruses. And we for instance, in Germany, a very important market for us in Europe, there's been an increased activity supported by the public to increase activities to improve the general indoor air quality in the market. So the mix picture for the short term, but for the medium and long term, we see that the COVID-nineteen situation will have a positive impact on the demand for our types of solutions. Page 12, please. To summarize our portfolio, we have a stable and diversified revenue base from our more than 2,500 customers. We have more than 9,400 installed units within our 3 product categories in more than 20 countries. In 62% of recurring revenue, and our typical contract length is 36 months and more than 75% of our contracts are extended or renewed. Then I would like to hand over to our CFO, Henrik Driesmerch. Thanks. Moving to Page 14, please. As mentioned, order intake is down by 39% and sales down by 5% organically in the quarter. We are a growth company. We are launching new products, and hence, we need to meet our new customers to be able to sell. A large part of our markets in Europe and the U. S. Have been closed or have had restrictions, also Japan to some extent. We move on to Page 15, please. Despite the decline in order intake and sales, the margins are stable in the 3rd quarter. When I say stable margins, I mean stable EBITDA, EBIT and gross margins. We have an increase in recurring revenues, up by 34%, increase in short term contracts, primarily within Facility Solutions. Rolling 12 months, we have recurring revenues of SEK 246,000,000, close to 50% of total revenues. Cash flow is improved versus Q3 2019, and the business model is is efficient also in challenging markets. And still again, more than 75% of customer agreements are either renewed or extended. It is clear that Pener has a satisfied customer base and that customer base is growing with increase in installed units globally. We move to Page 16, please. On this page, I would like to highlight 3 items. Equity ratio improved to 23%, up from 14. Net debt reduced to SEK 207,000,000, down from SEK 251,000,000. We have a clear strategy to reduce the net debt over time according to scheduled amortization. And operative cash flow, SEK 22,000,000, up from SEK 14,000,000. It is improved and again, the business model is efficient also in these markets. Cash generative business model and strategy to pay dividend to shareholders. The dividend for this year, 2020, was withdrawn and that question is under review by the Board. Then we move to Page 17, please. We had an organic growth minus 5% in the quarter, but accumulated January to September, it's plus 15.6. The target is approximately 10%. The EBIT was 17% in the quarter. Accumulated January to September 19.3 percent EBIT margin, and the target we have is 15% to 20 percent. And again, the dividend was 0. With that, I hand over to Christina again. Page 18, please. Since 2015, we also measure our performance in terms of our amount of cleaner delivery, and that is based on our whole installed base over the world. And we translate that into how many Ericsson Globe Arenas we clean per hour. And there, we've seen a continuous increase. And by September 2020, the number was 8.65 Ericsson Globe Arena per hour in terms of clean air delivery. Page 19, please. In summary, Clean Air as an investment. We have a unique service offering based on a holistic approach to deliver clean air as a service with full service rental contracts. We have proprietary air cleaning technology and back office solutions providing substantial barriers to entry. We have long contracts with a high degree of extensions across a diversified customer base, generating strong and predictable revenues. We have an asset light business model with limited CapEx needs, providing strong free cash conversion and equity return. And with that, we would like to hand over to the Q and A session. Thank Our first question comes from Anders Rosend from Pareto Securities. Please go ahead. Yes, good morning. Yes, I would like to ask question about the demand situation. Order intake was down quite significantly while sales was held up well and also the installed base. And you mentioned in your report that short term orders less than 36 months are not part of the order intake, but that short term order intake increased by 127% in the number of units. Could you elaborate a little bit about the order intake and this short term demand? Yes. Good question, Anders. First of all, how we define the order intake, it's a long rental contract with a defined end date. We now have a strong order intake on shorter contracts, shorter than 3 years. And many of those shorter contracts, they don't have a clear end yes, because yes, because we are getting still a flow of contracts and installations, but again, shorter contracts. But that also adds to the installed base. So we are growing this company in terms of global installed base units, and that is driving the recurring revenues. And shorter contracts than 3 years, they are recorded as recurring revenues. And the recurring revenue is increasing. And that, of course, is a great contributor to our long term revenues. And that is the reason why we have a large decline in order intake versus what we can recognize in the P and L through also including all contracts, of course. So that is the reason for that. Yes. So we shouldn't interpret a lower order intake as that sales will continue to go down or We cannot translate the reduction in order intake to a projection of the revenue generation for the following quarters. As a reference point in Q2, we had decline in order intake of 29%, whereas we generate reduced sales level in Q3 of 4.6%. That doesn't that cannot be translated into Q3. But it seems to say that there is not the direct correlation between the order intake revenue upcoming revenue level. Okay. And then the next question, what is the composition of those short term orders? Are they found in Cabin Solutions or in Facility Solutions? And how do you see upon this potential in that area? It's more Facility Solutions, more related to new solutions within Facilities. But it's still the bulk is medium term, so around 12 months. But it's a good way to enter new markets with new solutions. Okay. Coming back to Japan again, where do you think there is some sort of a stable market demand in Japan? How do you see upon the future demand there? The future for the medium long term, we are very much convinced about the continued strong development in Japan. Then in 2020, during COVID-nineteen, Japan has been in a lockdown phase during much of this time of COVID-nineteen, and there has been a large degree of working remotely. And that has impacted companies' willingness to invest in their office environment. But that is a short term issue related to the COVID-nineteen situation. If we look at the sales development in the quarter, it seems that Europe is held up relatively well. But while the downturn was entirely in Japan and also to some extent in the U. S. What has happened in Europe? Is it the sequential recovery in Cabin Solutions? Or is it Facility Solutions coming back or both? We see good contribution from our new solutions in the facility segments, like the food products, for instance, that we launched in Q2, but also an overall growth in facility. And we also see a continued great contribution from our installed base of cabin solutions. Okay, excellent. Then coming to your new products here. And of course, there is some attention to this indoor air cleaner, where we would start marketing that in the Q4? Is it already launched? Is it possible to buy it already? Or is it something that will come? It is launch, and we are open to take orders. But it will still take some time before we start shipping it. But we are getting prepared and geared up to introduce it in the marketplace. And it's introduced in Europe and in Japan? Exactly, exactly. So this is an important vehicle for us in the Japanese market. And there, we primarily turn towards our already existing customer segment in the offices from our Cabin Solutions business. Yes. But when you talk about the indoor market, you also mentioned several areas like hotels, etcetera, that you are not that present today. So how do you sort of market in those areas where you're not present with cabin solutions? Are the new safe ports It's a little bit different in different markets. In Japan, our primary market is the office segment, where we are well established since many years, and that is also our primary market here with our new solution, the FS30. Then in some European markets, we've seen an increased demand in segments like hotels and schools and so on. So at the moment, that varies a little bit in the different geographies. It seems that you're having a more sort of optimistic view short term in the Facility Solutions area than in the Room Solutions area. When do you think that recovery when the health care sector in the U. S. May recover, is it do we have to wait until next year? Or what do you think? I think it's very dynamic what is happening in the U. S. So I cannot predict that when we will be through with the COVID-nineteen challenge in the U. S. But we are working, of course, a lot with our customer segments that are not as impacted by this as the hospital sectors. And we are also working a lot with increasing in general our lead generation. So we have a lot of activities in place and a lot of different customer discussions, which for us confirms that the business opportunity there remains. But it's difficult to predict completely when we are out of the COVID-nineteen situation in the U. S. The new legislation in the U. S. Market has been postponed. Have you seen any changes in that respect? No, we do we have not really continuously asked ourselves that question, but we see a continuous demand for implementing the solutions that live up to these standards even though the deadline is still floating. So nothing has changed in our view regarding that opportunity there. Okay. Yes, thank you for this and open up for other questions. Thank Okay. There appears to be no further questions. So I will hand it back to the speakers for any remarks. Apologies. There appears to be another question from Anders. So Anders, please go ahead. Yes. I would like to come back to the margin development, which I think was impressive given a lower sales outcome. Are you still sort of addressing the COVID-nineteen situation? You are talking about taking measures, etcetera. How do you see upon the near term margin development? Are there still measures to take? Or will you sort of wait for the recoveries? Good question, Anders. I will put it like this. Of course, we follow the COVID situation very, very carefully and adjust accordingly. Still, we are a very clear growth company. So we are investing in certain activities that are long term for us, launching new products, etcetera. And I also would like to emphasize our business model, including a high degree of variable cost structure. If we are selling a lot of new products, then of course, we have higher COGS, etcetera. But if we have somewhat smaller order intake on long term contracts, for instance, that will, of course, also change the costs. And also then the certain variable costs are going down automatically, you can say. And that is the primary reason why we have these stable margins on gross margin, on EBITDA and on EBIT. And as you know, one of our 3 financial targets is the EBIT margin. And it's very, very important for us to remain at stable and hopefully improving margins, of course. But in these times and circumstances, we are quite happy with delivering these stable margins. And again, the business model proved to work. Yes. I mean those margins you delivered in the Q3 are impressive given that you are launching a lot of new products. Are there more costs related to the product launches in the near term? Or are they already reflected in your present cost level? Of course, we accrue the costs accordingly. But with product launch, it's not only product development, it's also marketing and all those efforts. And those efforts are to be recognized and are to come as well. So of course, we will have as I said, we are keeping to invest. We are a growth company. So we truly believe in our business model, but also in the new products that we are launching. So we will continue to invest in R and D. We will continue to invest in marketing to be able to support the sales. So there will be costs coming related to that, definitely. Just you haven't said anything about it, but your it seems that your production is unaffected by the COVID-nineteen. And so the negative part is just that your sales activity sales and marketing activities, I guess, are lower than should have been the case in a better less COVID-nineteen impact? We, of course, were very, very tight with all our partners in our supply chain, and that is that has been a big part of our high activity levels here during the quarter. And so far, both from our side and our partner side, we manage that very well. But that requires, of course, continuous hard efforts. You have finally now, you have launched a couple of new products here in the Facility Solutions area. Is are there more to come? Or is this something you will sort of work on now for the next year? We will continue to invest in new solutions. So innovation and marketing will be very important areas for us going forward and moving into 2021. So that will be that will continue to be part of our future road map, absolutely. Okay. That's all questions for me. Thank you. Thank you. There appears to be no further questions. So I will hand back to the speakers for any other remarks.