Xeros Technology Group plc - Interim Results

28 Apr 2015

Building momentum
 
Xeros Technology Group plc (AIM: XSG, "Xeros" or "the Group") , the innovative developer of a patented polymer bead cleaning system with multiple identified commercial applications, today announces its unaudited interim results for the six months ended 31 January 2015.
 
Operational highlights

Commercial Laundry
·      Increasing customer traction:
  o As at 31 January 2015: 41 installations with a further 61 committed to be installed
    § 17 new machine installations in the period
  o As at 24 April 2015: 54 installations with a further 69 committed to be installed
·      13 utility incentives programmes signed, more in progress
·      61 Forward Channel Partners sign at Clean Show 2015, significantly expanding the Group's sales and service capabilities across North America
·      Smaller machine development continues: launch 15 kg prototype before the end of 2015

Domestic Laundry
·      Ongoing partner discussions with machine manufacturers and detergent companies

Beyond Laundry
·      Leather processing - joint development programme with LANXESS announced today to develop leather bead processing technology

Cash balance as at 31 January 2015 of £24.2m (31 July 2014: £29.5m)

Bill Westwater, CEO of Xeros Technology Group, said:
"The building blocks are in place for acceleration in our primary Commercial Laundry business. The combined impact of water scarcity and energy conservation, especially in our key US market, are now intense market trends. Our current enterprise customers are demonstrating that Xeros bead cleaning provides a robust and effective solution. This was clear from the excitement that we created at Clean Show 2015, with 61 channel partners signing up in four days to provide us with a scalable sales and service capability across North America.
 
"It is not only in Commercial Laundry where we have seen success. The joint development programme announced today with LANXESS provides an entirely incremental opportunity to develop and ultimately commercialise a Xeros bead solution in the $50 billion leather processing market. Just as we did in Commercial Laundry, our team is set to move from positive laboratory trials to a prototype in a tannery before the end of 2015.
 
"We continue to discuss partnership opportunities with major global players in Domestic Laundry. Our success in Commercial Laundry, especially as we move to smaller machines and end-user consumer trials, is creating greater interest from these global players.
 
"We're hugely encouraged by the momentum building across the Group's activities as we continue to deliver a superior performing Xeros bead solution for a world that can no longer depend on traditional aqueous processes."
 
For further information, please contact:
 
Xeros Technology Group plc www.xeroscleaning.com
Via Instinctif Partners
Bill Westwater, Chief Executive Officer
Chris Hanson, Finance Director

Jefferies International (Nominated Adviser)
Tel: 020 7029 8000
Simon Hardy / Harry Nicholas

Instinctif Partners
Tel: 020 7457 2020
Helen Tarbet / James Gray

About Xeros
Xeros has developed a patented polymer bead cleaning system with multiple identified potential commercial applications. The Group has targeted the commercial laundry market and has begun the roll-out of 25kg capacity washing machines which exclusively use Xeros' patented polymer bead cleaning system. In trials with customers, this system has been shown to achieve superior cleaning performance as well as material reductions in water, energy and chemical usages compared to conventional commercial laundry methods. The Xeros proprietary polymer bead cleaning system also reduces the carbon footprint of the entire laundry process. In addition to the commercial laundry market, the Group's polymer bead technology has a range of potential applications in other industries including domestic laundry, leather processing, garment finishing and metal cleaning. The Group is currently in various stages of development and preparation for commercialisation of other identified applications, the most advanced of which are leather and domestic laundry.
 
Most recently, in March 2015, the Group won the Smaller Company category at the FT ArcelorMittal Boldness in Business Awards in London. In May 2014, the Group at the Edison Awards 2014 in San Francisco won Bronze in the Energy/Sustainability category for its virtually waterless commercial laundry system and was also named University Spin-Out of the Year in the New Energy & Cleantech Awards 2014.
 
Overview 
The Group has continued to make significant progress in the six months ended 31 January 2015 and this robust performance has continued into the second half of the financial year.  
 
In Commercial Laundry momentum has increased, especially in the US. We have begun to see more customers move from conventional aqueous cleaning to take up the benefits of Xeros' superior performance and more cost effective system.
 
During the period, the Group installed 17 machines, with another 13 machines installed since the period end. As a result, as at 24 April 2015, the Group has 54 machines installed with a further 69 machines committed to be installed.  
 
In Domestic Laundry, discussions with potential commercialisation partners have continued. The Group intends to start end-user consumer trials before the end of 2015.
 
The Xeros platform technology has multiple applications. This was demonstrated by the announcement on 28 April 2015 of a joint development programme with LANXESS, the global specialty chemicals company, to advance the application of Xeros' polymer bead cleaning technology in the leather processing industry. The partnership intends to have a prototype in tannery trials in the second half of 2015.
 
Strategy
Xeros' strategy is to exploit its owned and patented platform bead cleaning technology in a large number of industrial markets to take advantage of the global challenges of water scarcity and the rising cost of energy. The Group will sell large quantities of Xeros polymer beads across these industries, leveraging these re-usable and recyclable polymer beads to anchor long term, high margin service revenues.
 
The first market Xeros targeted was Commercial Laundry, where the Group is now gaining strong customer traction, especially in the US, supported by Xeros Sbeadycare® Pulse. The Group is also developing smaller machines to broaden its portfolio in Commercial Laundry, driving penetration in multiple geographies and ultimately providing a machine designed for in-home use.
 
Beyond laundry, there has been substantial progress in Leather processing, and the Group has announced a joint development programme with LANXESS on 28 April 2015, the global specialty chemicals company, for the development of Xeros' technology for the leather industry.
 
Xeros will sustain technological leadership through its in-house R&D capability, which will continue to optimise bead cleaning performance and enhance the design of bead consuming machines. Xeros is currently working with BASF to develop 'Generation 2' polymer beads.
 
The Group's proprietary technology is protected by a library of patents which form a comprehensive intellectual property portfolio.  During the period the core method patent was granted in the US, strengthening the Group's competitive position in this key geography, and completing protection in all its major target markets.
 
The Xeros patent portfolio currently comprises 37 patent families, which cover bead cleaning technology in applications from commercial and domestic laundry through to leather and wool processing, as well as metal surface treatments.  The Group intends to protect its technological advantage by continuing to file patents to safeguard its products and methods.
 
Operational review
Commercial Laundry
The increasing scarcity and increasing cost of water globally, has long been known - but it is now becoming acute. Especially in the US, water scarcity is a key public issue and a daily feature in national and state news bulletins. For example, on 1 April 2015 the state of California imposed mandatory curbs on water use, ordering 400 local water-supply agencies to reduce the amount of water they deliver by 25%.
 
Major US utility companies now offer their customers substantial incentives for the use of energy efficient systems. In a little over a year and based on their own independent assessments, 13 utility companies across the US now offer bespoke financial incentives to Xeros customers with more due to follow. 
 
All this raises the profile of, and demand for, water and energy efficient technologies such as the Xeros cleaning system.
 
Increasing momentum
During the period, the Group installed 17 machines with another 13 machines installed since 31 January 2015. As a result, as at 24 April 2015, the Group has 54 machines installed with a further 69 machines committed to be installed.    
 
Xeros now counts as customers the top five global hotel chains in addition to a number of smaller independent hotel brands and an increasing number of retail dry cleaners and commercial laundries.  These early adopters and key decision makers at the Group's larger enterprise customers are providing increasing 'referenceability' and a platform to scale up the Group's presence across their businesses.
 
The number of utility companies offering incentives to Xeros customers for energy reduction using the Xeros polymer bead cleaning system has increased from three to 13 during the period. This opens up wider opportunities for potential Xeros customers to benefit from utility incentives on adopting Xeros' bead cleaning technology and further broadens Xeros' national coverage throughout the US.
 
Infrastructure development and routes to market
The Group has continued to develop the infrastructure necessary to support the growth of the Commercial Laundry business, especially in the US. In April the Group established its Global Commercial Laundry business unit run by Jonathan Benjamin, its President, based in the US. In his expanded role, Jonathan will steer the Commercial Laundry business and will be responsible for product development, sales, marketing, and operations worldwide.
 
The Group has also recently appointed Jaret Christopher as General Manager and Senior Vice President of Global Technology. Jaret will be responsible for the strategic direction of Xeros' technology initiatives including the development and commercialization of Xeros' remote monitoring technology, Xeros Sbeadycare® Pulse.
 
The Group's direct sales team has achieved good traction through its focus on enterprise customers and the business is now developing further routes to market in order to accelerate growth. 
 
A new Forward Channel Partner programme has been announced in North America aimed at commercial laundry suppliers that will sell and service Xeros' polymer bead cleaning systems.
 
Xeros' Forward Channel Partner programme - launched at the biennial industry Clean Show in Atlanta on 16-19 April - is creating a broad sales network across North America of established laundry industry players.  This network will also support installed Xeros machines, delivering the 'final mile' of the Xeros Sbeadycare® service and extending the Group's own customer service capabilities.
 
To date 61 Forward Channel Partners have been added to the network, which expands the Group's sales and service capabilities substantially and will enable the Group to capitalise further on growing interest in its commercial and environmental proposition and help accelerate the roll-out of Xeros Sbeadycare® across North America.
 
Development of pricing strategy
There is increasing market acceptance of the benefits of the Xeros Sbeadycare® service model. Customers are subscribing for the Group's 'one-stop-shop' service package of equipment, consumables and maintenance, which is available to customers either with a machine leased (the "Complete" package) or with a machine purchased outright (the "Perform" package). In both cases, the customer pays a monthly service fee and signs up for a minimum five year commitment. All customers, whether Perform or Complete customers, have subscribed to the Xeros Sbeadycare® service model, which provides Xeros with long term, high margin recurring revenue.
 
To date most customers have subscribed for the Group's Complete package, where the machine is leased to the customer and paid for over the term of the contract. The results of a recent customer survey and in-market learnings, which have shown a desire among potential customers to own Xeros machines outright, have been used to develop a new Xeros Sbeadycare® pricing strategy based around offering customers a lower entry upfront purchase price for a Xeros machine as part of the Perform package. This new pricing model, which was well received at Clean Show by potential customers and Forward Channel Partners, features a market competitive purchase price for acquiring a Xeros machine upfront, in line with the price paid for a conventional machine, and a higher monthly service fee over the course of the five year contract.
 
This new pricing model allows the customer to buy the machine at a more conventional capex cost, while the Group is able to demonstrate to the customer that the increased opex cost of the monthly service fee is offset by the opex savings from reduced water, energy and chemicals costs that the customer benefits from by using a Xeros system.  For Xeros, while the lower entry purchase price point for the machine results in an initial up-front loss on the cost of the machine, the greater monthly service fee will generate increased service margins for the Group and an improvement in gross margin overall over the course of a five year contract.
 
Further developments
As the business grows, the Group is looking to secure a second source machine manufacturer, and further expand its Forward Channel Partner network with 'final mile' servicing capability, and the increased availability of utility incentive programmes. 
 
Further development of the Group's remote monitoring technology, Xeros Sbeadycare® Pulse, will help accelerate customer conversion and facilitate customer service on machines once installed.
 
Development of smaller machine sizes, to be showcased via a Xeros laundromat concept store in the US, should help to increase market penetration.
 
Domestic laundry
The Group's deployment strategy in domestic laundry is to partner with businesses that can provide scale and reach and who will produce and distribute Xeros machines.  Discussions with both machine manufacturers and detergent companies continue as the business moves to end-user consumer trials. The Xeros laundromat concept store due to open in the US before the end of the year will be designed specifically with these trials in mind. 
 
Beyond Laundry - Leather processing and other markets
The Group has proven on a small scale, with the help of the Institute for Creative Leather Technologies ("ICLT") at The University of Northampton, that Xeros polymer bead technology produces a superior finished leather product whilst significantly reducing the environmental impact from water usage and effluent. 
 
On 28 April 2015 Xeros entered into a joint development programme with LANXESS.  LANXESS is a DAX listed global specialty chemicals business based in Germany with sales of €8.3bn, and is a leading supplier of chemicals to the leather industry, supplying tanneries around the globe.
 
Development work to date has been completed by the Xeros R&D team, including two employees recruited specifically for the leather project and who work in Xeros premises at ICLT.  Scale up work will now take place in conjunction with LANXESS, with the first prototype in tannery trials during the second half of 2015. 
 
The Group's success to date in leather processing validates Xeros as a platform technology with multiple applications.  The Group has other patent protected opportunities, such as garment finishing and metal cleaning, which are at various stages of development and preparation for commercialisation.

For full announcement, please click here