Kontrol Technologies Corp

Good morning and welcome to the Control Technologies Q4 Full Year 2021 Earnings Conference Call. I'm joined by the CEO of Control Technologies, Mr. Paul Ghezzi, and CFO, Mr. Claudio Del Vasto. Before we begin, please be reminded that certain statements and information included in the management discussion and analysts and financial statements and presentations including information related to future financial or operating performance and other statements that express the expectations of management or estimates of future performance. Constitute forward-looking statements. For more information on the company's forward-looking statements and risk factors, please reference the management discussion and analysts and our financial statements for Q4 and full year 2021. For all public information filings, please visit www.cdar.com. Thank you. I would now like to turn the conference call over to Mr. Paul Ghezzi, CEO of Control Technologies. Mr. Ghezzi, you may begin your conference.

Thank you. Hello, everyone, and welcome to the Control Technologies fourth quarter and full year 2021 earnings conference call. I'm joined on the call today by our CFO, Claudio Del Vasto. 2021 was a breakthrough year for control driven by organic growth, innovation, and strategic acquisitions. We delivered record results across our key metrics as reflected in our year-over-year revenue growth of 367% to $58 million and adjusted EBITDA growth of 227% to $6.5 million in 2021, while also achieving profitability on a net income basis. With the North American economy reopening and a new focus on sustainable infrastructure, driving an improvement and upgrade cycle in the commercial and industrial building sectors, the company is well positioned for future growth. I'll provide an update on our business initiative shortly, but first I will turn the call over to Claudio for a review of our key financial metrics for Q4 and full year 2021. Claudio? Thanks, Paul.

Hello and good morning, everyone. This is Claudio Del Vasto, CFO of Control Technologies. As Paul noted, we achieved record growth in the fourth quarter and full year 2021. We're pleased to report that our revenue, earnings, and cash flow from operating activities all grew substantially in the year. Allow me to provide a very brief summary on our results. Revenues for the fourth quarter were $28.7 million, an increase of 567% from the same quarter in the prior year. Revenues for the full year of 2021 were 57.7 million, up 367% over 2020, and well above our 43 to 46 million guidance range. Gross profit for the fourth quarter was 5.9 million, an increase of 238% from the same quarter in the prior year. Gross profit for the full year of 2021 was 15.8 million, up 162% over 2020. Net income for the full year was $1 million, compared to a net loss of $1.9 million in 2020. Adjusted EBITDA for the full year 2021 was $6.5 million, an increase of 227% from 2020, and in line with our guidance of $6 million to $7 million. Cash flows from operating activities for the full year 2021 were $4.7 million, representing an increase of 200% from 2020. We improved our financial position through an early repayment of debt financing that totaled $3 million in 2021. In summary, Control delivered strong revenue and earnings performance, driven by growth across our platforms as we continue to strengthen our balance sheet. I'll now turn it back over to Paul.

Thank you, Claudio. As we look forward to the remainder of 2022, we are focused on a number of key strategic initiatives that we believe will translate into further operational growth. These include, but are not limited to, the continued expansion of our energy technology platform across North American markets, the acceleration of the BioCloud technology through key distribution partners, and driving organic growth within our existing markets through our cross-selling initiatives. Our expanding suite of building technology solutions, organic growth and strategic acquisitions are materializing in the form of significant operational momentum. The importance and necessity for enhanced intelligence to operate better, safer and more sustainable buildings is driving the ongoing building modernization process. From government policy, stakeholder activism, and the growing importance of social responsibility in corporations, solving the climate-related challenges are paramount. Historically, the company has been focused on the addition of smart building technologies as a retrofit or upgrade to existing buildings. We entered the new construction market with the acquisition of global HVAC and automation in July 2021, which was our largest acquisition to date. We've been working diligently on the integration of Global's operations. To that end, we have recently announced two HVAC and automation projects in the combined amount of approximately $24 million that showcases our ability to supplement our recurring revenue base with these larger contract wins. These projects are scheduled to commence in Q2 and Q3 of 2022. We continue to expand our BioCloud partners and distribution network as we continue to develop and enhance the technology. Commercially, we've expanded our BioCloud footprint into Japan, the Middle East, and Europe, as the movement to employ air quality monitoring is driving demand for innovative safe space solutions. We believe we're in the early stages of viral and pathogen detection becoming integral to building monitoring technologies, and we anticipate that BioCloud will be a catalyst for continued growth as we continue to secure additional commercial partners and increase our brand recognition globally. We recently launched our new consolidated brand for the carbon markets, Control Carbon. GHG emissions and carbon credits are growing in importance to the global market as the move to net zero continues to gain momentum. The combination of stakeholder activism, corporate social responsibility, and government policy are providing a macroeconomic backdrop for the growth in this expanding market. By leveraging our technology platform, we are enabling our customers to meet their social responsibility mandates and provide a path to monetize verifiable energy savings from efficiency projects and corresponding GHG emission reductions. We are well positioned with both our industrial and commercial teams to capitalize on the many aspects of this market, ranging from carbon capture equipment supply emission monitoring and reduction, and assisting our customers with carbon offsets. In a post-COVID recovery environment, supply chain disruptions have affected many businesses, including Control. The global supply chain remains highly sensitive to disruptions and is not operating at pre-COVID efficiency, and we anticipate this will continue throughout 2022. Control has experienced inflationary pressure in the labor market, consistent with many service and solution companies. Some of these inflationary costs are passed on to customers in the form of price increases. Others will be absorbed over time. While supply chain issues along with wage and inflationary pressures have impacted the business, we continue to seek to navigate these challenges by adding more technology into our projects, working with our suppliers, and passing costs on to our customers where applicable. Despite these macro constraints, we have maintained discipline in the management of our P&L, by limiting discretionary spending and working diligently to deliver positive adjusted EBITDA and will continue to do so moving forward into 2022. Control continues to be uniquely positioned to capitalize on what Morgan Stanley refers to as the ongoing building modernization super cycle. And while we are pleased with the execution of our operating strategy in 2021, we have more work to do and we look forward to continuing our momentum into 2022. We are just getting started into the next phase of our growth ahead as we work to deliver sustainable value for our shareholders. I would like to take some time to thank our staff, our customers, and our partners for their commitment to control as we continue along on our journey. We are working diligently to continue to deliver strong financial performance while ultimately working toward our vision for a more sustainable future for all. We hope you continue to track our progress as we continue to innovate in the quarters and years ahead. I'll now turn the call over to the operator for Q&A.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request, and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Tate Sullivan from Maxson Group. Please go ahead.

Hi, thank you. Good morning. Following up your comments about BioCloud and safer buildings, is your market opportunity supported by emerging regulations, or is it mostly client-driven at this point, please?

Yes, thanks for the question. So I would say it's multiple fronts. Building regulation is really what I would call regional local. So in Canada would be province by province. In the US it would be state by state. New York and California would be leading the charge in the US for more. We would call it automation reporting and regulations around air quality. I believe the Biden administration. has just made an announcement on air quality. So I think those are the opportunities where it's not just about filters and UV cleaning, it's about detection. What we have found with BioCloud is the primary interest tends to lean towards the HVAC systems and monitoring the air from that perspective, and that's where we've had success with our global distribution partners tend to be from the HVAC industry. Thank you.

Thank you. And a follow-up, you mentioned global distribution partners. Is your ideal business mix going forward around the original equipment sales to those global distribution customers, or is it more of a recurring revenue opportunity related to the monitoring? Can you comment on the ideal mix?

Sure. So what we've discovered through our process is the distribution model works the best for us because it does a number of things in terms of how we operate the balance sheet and the P&L. So from a distribution partner perspective, it's a hardware sale, but also the recurring revenue from the replacement cartridges. Ideally, the recurring revenue will grow over time. And from a pure market perspective, we do have some cases where we'll go direct to a customer conversation, but primarily we focus on the distribution model, which saves us on the P&L and gives us an opportunity to add global brands to our partnership.

Thank you.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. And your next question comes from Jeffrey Campbell from Allianz Global Partner. Please go ahead.

Hi, Paul, and congratulations on the 2021 outperformance. Thanks, Jeff. You announced the addition of the U.S. REITs. customer last week, which appeared to be a win for SmartSuite. So a couple of questions. First, is the U.S. as a percentage of overall controlled business about the same as in the past or is it growing? And second, do you think you're more likely to win U.S. work with your smart technologies versus the HVAC installations?

Yeah, thanks. Great question. So I'm going to answer it in a slightly different way. What we've discovered about the U.S. So I would say we are primarily focused on the commercial class B market, which is an underserved under technology market from the perspective of building automation is really lacking in that market. So what we've discovered in the U.S. is that holds true the same as Canada. So the real interest is coming from, you know, we own a number of properties and we have no visibility into our energy. Costs are rising. So that's going against us, and we need to get more control in place. So what we offer, our technology is really designed as a cloud-based interface for the customer to have control. You could also call it building automation light. So that's really where the interest is. It's taken us longer to crack into the U.S., primarily because of COVID and on-site issues. So now we can travel, we can go on-site, we can do our deployments. The U.S. REIT we announced really started about a year ago and it was just really a challenge to get on site so I think that's behind us and the interest is coming really towards the technology what can you do for me what visibility can you give me and then the bigger question is if I've got you know 20 buildings how do I get all of them online in a unified platform I think that's one of the areas that we hold a competitive advantage because really we design the technology for that purpose So we are excited about moving into the U.S. and growing that part of the business. Okay, great. I appreciate that, Keller.

You referenced the approximately $25 million in recent HVAC lens. I just wanted to ask if these and perhaps any unannounced HVAC work has contained predominantly vanilla equipment or is anything cutting edge like this BRV, BRF technology that you've discussed in the past?

starting to get us all yeah so I would say the the industry is moving from what would be a traditional fan coil unit heating cooling HVAC to heat pumps which are more efficient and then VRF VRB which are which are even more efficient so it's really project by project some of these projects will be three to four years in development you know before they start to get built so that really depends on when they started and My view on this is within the next five years, everything's going to be VRF, VRD, and there's going to be a good chunk that's geothermal. So those projects will start being planned and developed today, and I think we'll see close to 100% movement away from traditional HVAC. And we're prepared for that, and that's something that we talk about and think about quite a bit. And if you can gain expertise in your staff and that knowledge, It does provide you with an opportunity to, let's say, take an existing customer to a new platform or compete better in the market. The other thing we're adding is our technology into the building as a value in terms of more monitoring, more technology from the control side into the global HVAC side. So overall, we've been very pleased. Of course, there's a lot of work to do when you acquire a company that's that size. There's more integration work. There's other processes and technologies that we want to add, but I would say it's off to a great start and more to come on that. Right.

In the context of BioCloud partners, I'd just like to ask how you assess the work with Steelcase that's progressing at this time.

So, the way we think about our partners is, you know, we like to add global brands and They have their own customer base, and we allow them to do, essentially, they do their own marketing spend using our products. So I think it's a big win for us to have these large firms marketing the BioCloud technology for us. I would say, quite conservatively, it's saved us millions of dollars in marketing, so there's a big win right there. It's put us in front of some pretty interesting opportunities. And overall, we're pleased with the uptake on the distribution partnership. BioCloud is a new technology. It's innovative. It hasn't been around for that long. And for us to be able to attract global brands and partners, we're very pleased. And the other thing with BioCloud, which is quite different from our energy technology, is it puts us on the global stage. It is our one technology where we're having discussions around the globe. Much of those we press released. So I think we've been very pleased with BioCloud being part of our overall revenue and technology and innovation. Thank you.

Well, and to follow that up, and not to put the cart before the horse, but do you foresee the possibility that these global conversations that are starting with BioCloud could eventually lead to work for the other parts of the control portfolio, or do you think it's going to tend to be more limited to Bioflow over time?

Yeah, great question. So I would say where that is true is in customer conversations when you're talking about HVAC. Today, in today's world, you're always talking about air quality. In terms of our distribution channels, most global HVAC companies will have their own technology, but there are synergies around the way we operate in buildings from a software perspective. Typically large HVAC manufacturers or distributors are lacking that piece. And so there have been some conversations around that. But I would say what's really happened is those local markets are opening up to us because we're in those markets with our distribution partners. And we have had other opportunities on the energy management side. So while it's not a perfect cross sale, I would say one definitely helps the other.

Okay, great. That's helpful. Let me ask a final question. Could you talk about controlled carbon a bit? Should we think of this as essentially an expansion of the original carbon credits efforts? And I ask because it sounds like the greenhouse gas emission verification, the carbon offsets, carbon capture, that might require some new hardware or maybe some new software beyond what you were talking about earlier.

Right. So I would say think about it from an industrial and commercial perspective. So the controlled carbon brand is meant to capture our work in both. The initial press release was around our commercial efforts in buildings, energy efficiency projects, and monetizing verifiable credits. On the industrial side, we have customers that are blue chip global companies in the oil and gas sector, the cement sector. They've got a different problem. They're going to be forced to to do things that include carbon capture or significant reduction that don't apply to the commercial sector. So on the industrial side, we've discovered an opportunity to support carbon capture through better monitoring equipment sales and helping those customers. And those tend to be regulated customers that have to follow state, local, federal policy. So two different markets, different solutions, but we are going to aggregate those under one brand, which we define as Control Carbon.

Okay, great. Thanks for the clarification, and best of luck in 2022. Thanks again. Thank you.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one.

And you're next. Okay, and there are no further questions at this time. You may proceed.

Okay, that's great. Thank you very much. So thank you, operator, and thank you, everyone, for joining the call. We appreciate you spending time with us, and we look forward to continuing to work toward operational excellence and drive sustainable value for our shareholders going forward. If you'd like to connect with us, please email us at info at controlcorp.com. Or you can reach out to the MZ Group or investor relations firms for any questions you may have. Thank you and have a good day.

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines. Have a great day.