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spk03: Good morning, ladies and gentlemen, and welcome to the H2O Innovations Q1 FY 2023 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question and answer session. If at any time during the call you require immediate assistance, please press star zero for an operator. This call is being recorded on Thursday, November 10, 2022. I would now like to turn the conference over to Frederic Dougray and Marc Blanchet. Please go ahead.
spk00: Yes, thank you, Madame. Thank you, and good morning, everyone. My name is Marc Blanchet, CFO of H2O Innovation. This call will be held in English, but I'll just say a brief word in French to our French audience. Bonjour, merci, et bonjour à tous. Dans un premier temps, j'aimerais vous remercier d'assister à cet appel, et vous aviser que même si l'appel s'atteindra en anglais, nous répondrons aux questions qui seront posées en français dans la seconde partie de l'appel. Pour faciliter le suivi de l'appel, je vous invite à télécharger la présentation sur notre site Internet, h2oinnovation.com, dans la section Investisseurs. Before we begin, I invite you to download a copy of today's presentation, which can be found on our website at h2oinnovation.com, in the section Investors. Frédéric Dugré, President and CEO, is joining me today for the call, which duration is approximately 30 minutes. During this call, Frédéric will give an update on the business and present highlights of the first quarter ended September 30, 2022, and I will be presenting the financial results. Please take a moment to read the forward-looking statements on page two and the non-IFRS measurements on page three of this presentation. I now hand over the call to Frederic.
spk06: Thank you, Marc, and thank you for you joining the call today. Well, following a remarkable previous year, end of June 30th, 2022, we are starting a new fiscal year on a really good foot. Indeed, we are proud to present for the first quarter of our fiscal year 2023, record high revenues of $56.1 million. This would present an increase of 46% year over year. What is most impressive is that 25% of this growth is supported by organic growth, And this is compared to 7.7% in Q1 of previous fiscal year. All our business lines contributed to this growth, driven by high demand of our specialty products, the startup and scope expansion of operation and maintenance contracts, and the award of new capital equipment projects generating additional services and after sales. As we proved in the past two years, our business is economically resilient. and we serve customers that require their essential products and services. We could even say that the water industry and our business is recession-proof. Indeed, our unique business model, promoting customer retention throughout the three business pillars, posted recurrent revenues by nature of 89% at the end of this first quarter of the fiscal year 2023. This high recurrent revenue level is due to our focus to grow the business first towards the services the operation and maintenance, and the specialty products. For this quarter, the momentarily lower revenues coming from the projects contributed to inflate the percentage of our current revenues. Looking at our sales pipeline, rich in diversified municipal and industrial opportunities, at the strength of our distribution network for specialty products, and at our consolidated backlog of $182 million, which is up 48% compared to the Q1 of the previous fiscal year, we envision continuation of strong organic growth with a focus on margin improvement. Despite the pressure on a gross profit margin emerging from high inflation on material and wages, we believe that price increase initiatives and other measures have been implemented to improve margins in the coming quarters. For the first quarter, our adjusted EBITDA finished at $5 million. This is up 24% from the previous year. Our team will continue to strive on improving the EBITDA margin to a double digit and even better for 2023. I remain confident to see improvements throughout this fiscal year since the new projects and the operation and maintenance contracts secured in our consolidated backlog includes adjustments on current market price and material and wages. On a long-term basis, considering our LTM revenues and adjusted EBITDA, our business continues to show strong growth momentum. Indeed, on a last 12-month basis, our revenues have reached $202 million, representing an increase of 37% almost from the previous fiscal year. On a five-year basis, our compound annual growth rate spanned at 14.4%, including acquisition and organic growth. On its end, the adjusted EBITDA and the LTM basis reached $19 million, an increase of 25.5% compared to the previous fiscal year. What is remarkable is that the adjusted EBITDA has increased by 27.5% on a key guard basis, showing our dedication to scale up the business and grow the bottom line faster than our revenues. Now let's move on to slide number five and review each of our business pillar activities, starting first with the operation and maintenance. Our O&M team is playing offense and defense at the same time. During the first quarter of our new fiscal year, not only we secured one new O&M project in the Southwest region for an initial term of two-year period, but we also renewed two new O&M projects in the state of Georgia and New Hampshire. while we also extended scope of work in seven projects. The acquisition of JCO and EC in the state of New York, completed in December 2021, impacted also positively our Q1. These new O&M projects, combined to the renewal and scope expansion, have pushed the O&M backlog to a new high of $135 million, representing an increase of 65.9% year over year. This strong backlog gives us an excellent visibility in the revenue growth expected in the coming quarters and fiscal years. On an LTM basis, the O&M revenue stood at $97.2 million, representing an increase of 37% compared to fiscal year 2022. Over the same period, the EBAC has moved from $10 million to $11.6 million, showing an increase of 15%. In the coming fiscal year, we'll continue to work on renewing operation and maintenance projects and capture CPI adjustments to improve our gross profit margins and the EBAC margin as well. Moving to page six, let's have a look now at the highlights of our water technology and services business pillar. Our WTS business pillar started the new fiscal year on a strong basis. In Q1 only, WTS was able to secure 10 new projects totaling $12 million. Now, four of them are for municipal applications and six others are dedicated to industrial applications. This diversification is in line with our strategy to focus on industrial customers to further grow the business. And this is allowing us to capture more recurrent revenues originating from the water, from the aftermarket service sales and consumables. Pushed by these new bookings, WCS backlog now stood at $45.6 million at the end of Q1, representing an increase of 13% compared to the previous quarter in Q1. With such a backlog, we are seeing revenues continue to grow in the coming fiscal year. These new projects added to our backlog are done with prices reflecting the latest material and wages increases. For these reasons, we're confident seeing an improvement in our margins in the coming quarters. We're also proud to report for the first time the commissioning of a silo, a membrane biological reactor for an additional wastewater application. Moreover, we finalized two water reuse projects for the city of Santa Monica, one of which is being used for the removal of PFAS contaminants. Another important water reuse project is approaching the commissioning phase. Indeed, major equipment got delivered to the city of Escondido, also in California, in Q1 fiscal year 2022. As you can see through these pictograms, our business activity for WTS remain high, as our engineering and fabrication teams are extremely busy. We are expecting the teams will remain busy for the coming quarter as well, as it's based on a robust backlog that we have. In the coming quarters, we should also observe an increase into our revenue recognition as the projects will move from the engineering phase to the fabrication phase, where usually most of the revenues are being recognized. On an LTM basis, WCS revenues reached $43.4 million, representing a 31% increase compared to the last fiscal year. Pressure on margins remain our number one challenge for this business pillar. Through recent change orders negotiated with customers and the addition of new bookings to our backlog, taking into account new material and wages prices, as I said, we're confident in being able to improve our EBAC performance in the course of the fiscal year. Let's look at page 7 on the performance of our specialty products business pillar. The first quarter showed an impressive growth of 62%. where three-quarters of it is generated by the organic growth and the remaining coming from the acquisition of LEADER completed on June 30, 2022. The organic growth is clearly driven by high demand we are experiencing from our specialty products, the strength of our large distribution network, and the growing interest of the end user for green chemistry and our eco-friendly water treatment solutions. To continue to fuel such growth, We will be hosting next week in Bilbao our International Distributors Summit with 150 delegates coming from around the world to learn more about our specialty products, components, and business solutions. This three-day event will also be a unique occasion to solidify business relations with each of our distributors and meet new ones that we haven't been able to meet since our last Distributors Summit in 2028 prior to the pandemic. We're also proud to announce that our laboratory in Madrid, specialized in membrane autopsies for the global water industry and precursor in the development of innovative and sustainable cleaning solutions, received the award for Research Center of the Year during the ALDIR conference in Chile two weeks ago. During this first quarter, Piedmont signed agreements with new distributors covering four countries where we have no coverage or local presence in the territory. As we're getting now into the season for the maple farming equipment, this business now is extremely busy, coping with growing demand of its products and working on the integration of leader as well that we just acquired. This high demand is certainly responsible for the increase into our inventory and Mark will talk about it during the financial review.
spk05: However,
spk06: This inventory is made of products that will be delivered to customers in Q2 and Q3, and they're all based on orders that we have in hand. For these reasons, we should improve, we should see a decrease actually into our maple inventory in the coming two quarters as we're getting into the high season of the maple syrup production. The maple farming equipment business has certainly seasonality. We usually build inventory in Q4 and Q1, and then recognize most of the revenues in the coming quarters. Looking at the level of inventory, I can tell you that we're now getting really busy and getting ready for the busiest maple season we ever had. Recently, we hosted our first distributor meeting, combining Leader and H2Onovation, all the American dealers that we have. This event allowed us to consolidate our selling platform, our portfolio of products, and to provide a clear vision on our growth strategy. Earlier this year, after the press release announced on Monday, we launched our unique 24-7 self-service store for our Maple customers. This first of its kind is a store that is being used using state-of-the-art technology to ensure secured access to our customers, as well as flexible and simple electronic invoicings. We believe this new platform will create a new business proximity with our customers and producers, isolated and remote geographies. As per the chart on the right-hand side, our LTM specialty products revenues reached $61.5 million at the end of September. This presents an increase of 40% compared to our previous fiscal year in 2022. On the same fashion, the LTM EBAC stood at $16.3 million. a $4.9 million increase or the equivalent of 43% compared to the previous year. As mentioned on the year-end call, our business is growing fast, and demand for green chemistry and eco-friendly solutions are gaining tremendous momentum. The expansion of our international sales team in South Pacific, Middle East, India, and Latin America is also paying off in a big way. In addition, the expansion of our distribution network is also contributing to the growth momentum that we have. I will now pass the call to Mark, our CFO, who will review and discuss the financial performance of this quarter.
spk00: Thank you, Fred. Now I'd like to go to page 9 and go over some of the financial highlights for Q1. The main highlight is the significant revenue growth. We're reporting revenues of 56.1 million compared to 38.4 last year. This represents an increase of 46%. Despite the challenging macroeconomic impact, we're able to generate an important organic growth of 25%. The increased demand for water treatment solution, the strong performance of our specialty products, along with efficient marketing strategy execution, have led to higher revenue contribution from new and existing customers. Revenue coming from GCO and EC, both acquired in December 2021, and Leader Evaporator, acquired on June 30, generated 20% growth. The gross profit margin stood at 13.5 million, or 24.1%, compared to the first quarter last year. Sorry, during this quarter, compared to 10.9 or 28.4 last year. As explained in previous quarter, the decrease in percentage was primarily due to high inflation on material cost, pressure on salaries, and higher percentage of revenue coming from operation and maintenance business pillar, combined with a business mixed factor within the specialty product business pillar. We're closely monitoring the evolution of the gross profit margin of our product and project, and mitigation measures are implemented to overcome this situation, such as price increase, procurement strategy, escalation clause in our project, scope expansion, and CPI adjustment with our operation and maintenance customers. The adjusted EBITDA also improved by 23.6% compared to Q1 last year, reaching 5 million compared to 4 last year. The adjusted EBITDA percentage decreased to 8.8 compared to 10.5 last year. This negative variation is mostly explained by the decrease in gross profit margin, which I just explained. The percentage of SG&E over sales has decreased compared to Q1 last year. Investment made in sales and business development are paying off since revenue are growing faster than the SG&E ratio. As for the gross profit margin, it is still impacted by the high inflation on material costs and the pressure of salary and business mix. We have implemented action plans to mitigate the cost pressure. On page 10, I would just quickly address the foreign exchange rate impact on our revenue, giving the opposite fluctuation of certain currencies. For the first quarter, so I want to attract your attention on the right side of this slide. For the first quarter, it had a global positive impact of $300,000 on revenue. The USD was very favorable, but it was offset by the pound, the British pound and the euro. So for mobilization purposes, each 100-point base of US CAD variation has an impact of 1.1 million on revenue and 160,000 on the EBITDA. For the pound, each 100 points has an impact on 120 on the revenue and 40 for the EBITDA. Now I'll go over the financial results of each of the business lines. For the operation and maintenance business pillar, revenue for Q1 stood at 27.7 compared to 18 last year, representing an increase of 53%. 20% is organic growth generated from important scope expansion and new projects secured in previous quarter, and 29% is acquisition growth related to the acquisition of EC and GCO acquired last December. Operation and maintenance EBAC reached 3 million compared to two for the same quarter last year, representing an increase of 53%, but remains stable in percentage over revenue. Even though EBAC percentage was stable, our gross profit margin is affected by higher pressure and labor costs, combined with additional resources hired to support the impressive growth. The gasoline price also have an effect on the margin here. Since 70% of our employees are working, of our employees are working for this business pillar. The operation and maintenance gross profit margin of VEEP and EBAC was more impacted by factor related to workforce. As explained in previous quarter, our team is currently addressing this challenge with our customers and partners as soon as there is an opportunity to do so. In most of our operation and contract, operation and maintenance track, we are entitled to increase our annual fee base on CPI, customer price index. Therefore, such annual fee increases will be effective with our customer as each contract reaches its annual contractual adjustment date. At the end of the quarter, the operation and maintenance backlog stood at 135.4 compared to 81 at the same time last year. It's an increase of 65.9%. I would also like to bring to your attention that contracts in Texas and in New York State are usually evergreen and therefore are not included in the backlog. Let's move to page 12 now and look at water technology and services, or WTS, financial performance. So the WTS revenue improved by 11.3%. The growth is essentially organic from service activities and capital equipment projects. WTS EBAC stood at half a million compared to one million last year. It's a decrease of half a million, or a decrease of 52%. The decrease is mainly explained by a deterioration of gross profit margin, which was negatively affected by higher material costs related to capital equipment projects. As most of these projects were agreed with customers several months or even a year ago, we were impacted by a higher cost of raw material and some of the components to manufacture projects. To mitigate the impact, our sales team included price adjustment clause based on inflation and contracts. And going forward, we should see this margin issue being resolved as we move forward into quarters. As G&A, expenses were also higher, primarily due to new hirings of sales resource, higher labor costs and commissions, as well as resumption of travel and our participation to some trade shows and conferences. The WTS backlog stood at 46.6 compared to 41.1, which is an increase of 13%. As Fred explained earlier, the backlog is well-balanced between industrial and municipal projects and provides excellent visibility on revenue for the upcoming quarter, keeping the focus on industrial projects, which comes with better gross profit margin. Now let's look at slide 13, the specialty product business pillar. Specialty products, just to remind you, includes revenue from maple, peat moss, and chemicals. It had a very strong performance, as I said earlier, from all those three business lines compared to previous quarter. Revenue stood at 18.4 compared to 11, which is an increase of 62%, of which 46% of that is organic growth. So Leader Evaporator, which was acquired in June, generated 2.6 million, or 23%. The GPB foreign exchange variation had a negative impact of $800,000. EBAC stood at 4.6 million compared to 3.6, representing a dollar increase of 1 million, but a decrease in percentage, which is mainly explained by the deterioration of the gross profit margin. The gross profit margin stood at 41.7 compared to 52.6. The decrease is explained by the business mix within the business pillar. When we compare to last year, revenue coming from both Piedmont and Maple business line were higher in proportion compared to previous year, and they generally have an average gross profit margin lower than the specialty chemicals. Additionally, the increased cost of material brought the gross profit margin to decrease compared to the same quarter of last fiscal year. Price increase and procurement strategy have been implemented in the recent quarters, which should remediate the gross profit margin erosion issue in the upcoming quarters. The SG&E increased by $600,000. The main reasons are the hiring of sales resource, pressure on salary, connection with inflation level, and resumption of travel, combined with the acquisition of leader. Slide 14, let's move to slide 14, financial position for, especially on working capital here. I'd like to bring your attention on certain variation on working cap, such as the account receivable. It increased by 11.6% since June 30. which is pretty much in line with revenue growth. Of that 11.6, 3.6% of this increase is explained by the foreign exchange variation. If we look at the inventory level, it increased by 23% since June 30. The impact of FX is only 4% for that variation. The explanation is because we're responding to the continuing high customer demand as shown by our revenue growth. We are still maintaining inventory at higher level to mitigate the current supply chain uncertainties. Also, Maple Business Line is currently building its inventory for the upcoming maple season. As Fred explained earlier, the inventory is made of product that will be delivered to customers in Q2 and Q3. based on order that we have in hand. For this reason, we should see a decrease into the maple inventory in the next two quarters as we will get into the high season of the maple syrup production. And I'd like to mention that none of our inventory is exposed to obsolescence or sudden depreciation. Regarding the contingent consideration, the decrease is related to the partial payment related to the GMP acquisition, which was paid in July. Let's move to slide 15, the net debt. On that slide, you can see the evolution of the net debt since Q1 2022. As of September 30, 2022, the net debt stood at 48.3 compared to 40 on June, representing $8 million increase. And this increase is explained by the payment of that contingent consideration of the amount of $4 million and cash flow used in operating activities essentially in working cap, as I explained, mostly in inventory. This wraps up the presentation of the financial result. I will now hand the call back to Frédéric for conclusion remarks.
spk06: All right. Thank you, Marc. And let's have a look at slide 16 for conclusion remarks. Well, after a first quarter posting strong growth, even though impacted by the pressure on our margins, we continue to try towards our three-year plan targets. If we had the $200 million based on an LTM basis, the growth coming from the three latest acquisitions combined to the organic growth momentum we are currently facing, supported by our $182 million backlog and high recurrent revenue that we have, we are very well positioned to reach the upper part of the $188 to $250 million bracket for 2023. Such growth positions us very favorably as well for the following fiscal year in 2024. In general, we aim to deliver every year a double-digit growth on revenues while maintaining an adjusted EBITDA superior to 10%. Looking forward, robust organic growth is expected to continue while our business mix and price initiatives should normalize our margin profile in the coming quarters. As organic growth rate has accelerated over the last two quarters, I mean, it was 25% in this quarter and 32% in the Q4 of the previous fiscal year, the company has made significant investments in working capital. H2O is a growth company in a growth sector, the water industry. And while the investments we have made are having short-term impact on our business, and our free cash flow generation, we're very confident that these strategies are accurate to our long-term business plan. On top of growing the revenues, we equally focus on improving our profit margins and generate a maximum level of cash to reduce our net debt. The water investment thesis has never, ever been so strong, supported by key fundamentals such as the population growth, increasing drought episodes, aging infrastructure, growing demand for eco-friendly and green water treatment solutions, and sustained willingness to invest more and more into water reuse solutions. Now, it's time to harvest for H2O. Thank you. I will now pass it back to the operator for the Q&A session.
spk03: Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press star, followed by one on your touchtone phone. you'll hear a three-tone prompt acknowledging your request. If you'd like to withdraw your request, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. Your first question comes from Michael Glenn from Raymond James. Your line is open.
spk02: So, I just want to dig into the working capital situation a bit more. So, for accounts receivable... and accounts receivable first. What should we think about exiting fiscal year 23? What should the appropriate level of accounts receivable be for the business?
spk00: You mean in percentage over sale?
spk02: Can you give a gross dollar figure if possible?
spk00: If I do so, you know, I think I give you a bit too much information because you'll be able to figure out revenues. I mean, in terms of, you know, account receivable will follow revenues quarter over quarter. So if you look at Q4 versus, you know, in Q1, so you look at the AR in Q4 versus the AR at the end of Q1, they grew by about 8%, and the rest is FX impact. So it will follow revenues. That's kind of our matrix to modelize. That's what I would.
spk02: Okay. Is there anything in the AR that, I mean, outside of the revenue growth, is there any parts of the AR that we should have any type of concern about?
spk00: No, not at all. I mean, it's, you know, some have a very short period of payments, such as operation and maintenance contracts. They come with payment terms that are It's very standardized by our businesses. So AR for O&M will be between you invoice on the first, you're being paid within 30 days. AR for a project is more between 45 to 60 days, and some international project reaches 90 days. But it's very in line. The trends are not changing, and right now nothing is exposed to bad debt. Otherwise, we would take a provision right away.
spk06: That's a very good point, Mark. And Glenn, also, just for perspective, I would say about 50% of our revenues comes from operation and maintenance. And the operation and maintenance part for the AR has barely nothing beyond the 30 days because customers, most of them are paying to ensure that we keep going and operating their plants, right? So this portion is extremely... I would say, quote unquote, secured, if we can put it this way, because of the ongoing activity that we have with each of these customers.
spk02: Okay. And then just similarly on the inventory, are you able to give some guidance at all for how much we should think about inventories coming off the current level? Yeah.
spk00: So inventory is really... affected by my seasonality. So right now, half of the amount of the inventory are inventory for the maple. And the maple recognize its revenue, essentially 70% of their revenue, of its revenue is recognized between Q2 and Q3. So as Fred explained a bit earlier, we're building inventory in Q4, start to building it in Q4 and in Q1. Q1, it's at its highest level. And then As we move forward in Q2 and Q3, we start to deliver these equipments to the maple producers. So that inventory is converted into revenue and then converted into receivable, which will be cashed in generally Q3, Q4. So that's the cycle there for maple. The maple season this year is twice as big as it has ever been because we bought Leder. And Leder is doubling the size of our maple business. So that seasonality effect that we used to have in the working cap or inventory and receivable and into revenues is twice the size that it was in the past. So I'd like to bring your attention to that. It explains part of that inventory increase compared to previous quarters.
spk02: And just on specialty products, that segment overall continues to do quite well from a margin perspective. As we think about leader or maple products representing a higher share, does that pressure, should we think about that also pressuring the percentage margin in that segment?
spk00: In that segment, slightly, because in proportion it will be a bit higher. But in the consolidated picture, it will improve the gross profit margin overall because it comes with higher gross profit margin than O&M, for example, or even some projects. So it will drive margin up on a consolidated basis.
spk02: Okay. Thanks for taking the question.
spk00: You're welcome.
spk03: Your next question comes from Frederic Tremblay from Desjardins. Your line is open.
spk09: Thanks. Good morning. Good morning. First question for me is on the backlog. Just, I guess, some comments on the composition of the backlog between municipal and industrial customers, how that has continued to evolve and what the implications of that would be on your margin expectations or your goals of improving margins moving forward.
spk06: So as I mentioned earlier in the call based on the last projects we secured, I mean six out of the ten were industrial related. So more and more we're wading towards industrial opportunities that we're chasing. Now, if you look backwards on the overall backlog that we have accumulated, there's still a great proportion of them coming from municipal. However, moving forward, the strategy is to focus more towards initial for the reasons I just said, higher margins, higher possibilities to secure after sales and recurrent business on the tail end of it. So I think it's a good mix. And so far, we have been, you know, waiting more efforts towards the initial sector.
spk09: Okay, great. Maybe a couple of questions on O&M. First, on the labor environment, just wondering if your current labor force is used at full capacity or if there is room for incremental business to be taken on in O&M, whether with your current workforce or through recruiting new employees?
spk06: Well, in the O&M, I mean, we can, I would say, quote-unquote, make money a little bit on the edges in a sense that we can stretch a little bit and add more scope of work on a given team. However, some municipalities and some projects are calling for a specific number of full-time resources employees will need to have. So if we have a given municipality, let's say for a million dollars, they may request us for the specific task and specific scope of work to have, let's say, 15 employees full-time. So we can then expand and stretch a little bit by having, let's say, an extra $50,000, an extra $100,000 for scope of work expansion with more or less the same team. We can do that, but there's also a limitation in what we can do. But this is why the scope of work expansion, as I mentioned, is strategic into our ways to also not only grow the revenue, but improve the gross margin. And this is what we're currently pushing and going through, and we feel good about that.
spk09: Okay, and just staying with O&M here, just on the CPI adjustment, is there a way for you to maybe characterize where you're at in that process, you know, whether it's, you know, how many of your contracts, what proportion of your contracts have been adjusted so far and what's left to be done and sort of the timing of it as well when we can expect that those adjustments to be sort of fully completed, understanding that the
spk06: inflation environment moving forward is a bit uncertain but based on what you know today so so this is happening on a monthly basis by the way I mean as such as when we're meeting with customers I mean we are you know calling or adjusting our pricing we can there's also at every year at the anniversary date of each of our projects we're quote unquote calling for CPI or asking for CPI adjustments so if we look at the portfolio of projects we have they are being distributed, you know, throughout the year, you know, at different periods and different moments. I would say right now we have probably, you know, went through one-third of adjustments, you know, on the overall backlog or overall projects we have in the portfolio, and it keeps going and added, you know, and changing every month as we move in time.
spk04: Perfect. Thank you, and congrats on a good quarter. Thank you.
spk03: Your next question comes from Gabriel Manou from IA Capital Markets. Your line is open.
spk07: Bonjour.
spk03: Bonjour, Gabriel.
spk07: Bonjour, ça va bien? Do you have any deleveraging targets for fiscal year 23?
spk00: Well, you're thinking of a debt-to-bid-debt ratio? I mean, it's going to be in line with our... cash flow generating from operating activities. And I think, I mean, you know, what said Fred a few quarter, like last conference call, this year is the year to harvest for us. We've invested a lot over the last year. We've invested in our UK facility to expand our capacity to manufacture chemicals. We did three acquisitions. We invested into scope of work. And this year really is to harvest. I mean, right now, a lot of our cash is invested into working cap to feed the growth. But afterwards, it's to harvest, it's to deleverage. So is there an objective? There's nothing that has been publicly disclosed. But if you want to modelize something, it will be in line with with our revenues. That's what I can say. It's tough to say. I don't want to put any guidance here, but it will be to the leverage. You will see that ratio going down over the next few quarters.
spk03: Your next question comes from Andre Leno from National Bank. Your line is open.
spk05: Hey, good morning. Thanks for taking my questions. Just a couple for me.
spk04: The first I have, I mean, we hear from different companies that when they talk... Hello?
spk01: I think we've lost the line. Operator, do you hear him on the line?
spk03: Yes, we have lost him. If you would like to reprompt, please press star followed by one.
spk01: It seems like we might have also lost Olivier from IA previously to that.
spk03: We have Andre Leno. Your line is open.
spk05: Hello, can you hear me now? Yes, we hear you better, Andre. Okay, great. Sorry about that. So the question I have is that when we talk to different companies that we cover, I mean, and they are trying to increase the prices and they have, when they talk to their clients, the clients are usually receptive to these price increases. I was wondering if you can talk a little bit about kind of when you discuss with the clients, I mean, do you have to push hard or are they just generally open to you increasing prices, even when it comes to like, for example, going above CPI and, Is there scope to go above ETI, especially when it comes to WTS and O&M segments?
spk06: Yeah, so two things. Yes, they are restricted to some extent. When we're talking about WTS, we usually have fixed-price contracts. So it's projects that are win at a fixed price at a given scope of work. However, in some cases, we have provision for price escalation that we can claim on, but it's different from each project or each contract. So this is why sometimes we go and ask for the customer for scope, you know, price increases, you know, with change orders. This is something we have done. This is something that is still happening every day, every month and what we do. For the other specialty products, we have been doing multiple price increases as we moved in time. It happens last year, multiple times. This year, we feel that now we see less pressure on the incoming and raw material coming to us. So this is why, you know, we won't be as aggressive as we were in price increases. And I think this is why we could see some margins improvement or expansion in the course of the year, because right now the material that we're paying for is starting to either remain stable or to reduce. For example, the price of steel has started to reduce and we have fixed, you know, higher prices on our retail price for products. So this is now could play in our favor moving forward. And for the operation and maintenance, when it comes to adjustments or CPI, well, it is sometimes written most of it by contracts for the fixed-term, long-term projects we have for operation and maintenance. Then for the other ones that are evergreen, mostly in the area of New York and Houston, Texas, well, we go on a month-to-month and negotiate with the customers. Either price increases on the operation and maintenance contract, or even on schedule of values related to other material and pass-through that, you know, we're having with customers. So we're playing this, I would say, this strategy on price adjustment every day in all our business segments with all our business lines.
spk05: That's good color. Thank you, Fred. And the last question I have for me, if you can share a bit of any kind of, you know, color and update on Leader. I mean, you said integration is going on, but any kind of thing unexpected either on the positive or negative side that you found with the business as you bring it together with your own maple operations legacy ones?
spk06: Well, we have done already a fairly good amount of work on the floor plans to redesign, rearrange, you know, the way the fabrication is being handled, the way it goes. So this has a positive impact. Obviously, I think though, on the negative or positive impact. It is creating additional stress for the overall organization. Our team is already thin in terms of overhead and resources. And now combined to the current growth that we're experiencing, organic growth with higher demand for our products, it's a great but stressful time for the team. So it all ends on deck to ensure delivery because as Mark said, I've never seen the backlog for maple business products so high. So usually we pick up orders till, let's say, June and July, and then we see a slowdown in the course of the summer. But now we started to receive orders on our backlog back in May, continued in June, continued in July, rent up as well in August and September. So this is why this increase in inventory is not an estimate on... on what will we be selling. It's based on orders in hand that we need to deliver in the coming quarters.
spk05: So stressful, but fun to watch. Okay. Now that's good. That's good to hear. And one quick follow up there. I mean, you said that the team, you know, it's a bit stretched. I mean, would you be looking to increase the team there or you're good for the time being?
spk06: No, I think it's for the time being. I think that as we implemented new business processes, we're going to gain efficiency, and this is what we hope for. Our team is pretty eager and motivated, and they were looking forward to have this transaction and growth happening. We don't expect to increase the overhead. We're expecting to gain more efficiency of the combination of the two manufacturing platforms in Vermont and in Amnord, and this should pay off. It's just that The growth combined to the integration phase is kind of a perfect storm. But let's say I think overall in the next six to nine months, we're going to start to really benefit from this business combination.
spk05: That's great to hear. That's it for me. Thank you. Thank you.
spk03: Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question comes from Gabriel Meru from IA Capital Markets. Your line is open.
spk07: Hi, I'm sorry. My line just disconnected. I still have another question. Is there any key initiative or priorities that you want to advance in 2023?
spk06: Well, for us, really, with the current growth, organic growth that we have is one word, just harvest. It all ends on deck to deliver on this huge backlog. It all ends on deck to push and continue to promote the green chemistry we have, the innovative products that we developed in the last year that now we're pushing to the customers. It's really a harvesting mode, and I think the time is now, and for us, we're excited about the future, so... The key initiative is just like stay focused, execute, harvest, deliver backlog, and grow the business.
spk07: Perfect. And what kind of updates can we expect at the AGM in December?
spk06: So usually at the AGM, we'll do an update on two elements. We'll do the update on the three-year plan, so kind of give the shoulders of where we are. So this will be... The third time that we give a three-year plan update. So this was more like a long-term vision, things we want to do, how we want to transform and grow the business. And obviously, we're going to give an update as well on how we're marching towards our 2023 objectives. And equally, we're going to give an update as well on our ESG plan, what we have achieved, the progress we're doing, and what are the key numbers and the key initiatives we're pursuing along the ESG plan.
spk04: Thank you.
spk07: That's all right.
spk04: Thank you.
spk03: Your next question comes from Gabriel Lang from Beacon Security. Your line is open.
spk08: Hi, good morning, and thanks for taking my questions, and congrats on all the progress. Thank you, Gavin. Just one thing for me. Obviously, a lot of organic initiatives underway right now. I'm curious... how that impacts your thought process around M&A, number one. And number two is, is this going to require you to add some additional, I guess, capacity into your business? And what kind of impact could that potentially have on your sort of near-term EBITDA margin, sort of 11% EBITDA margin targets?
spk06: Well, Right now, as I said earlier, same answer. I mean, for us, it's really, we're into harvesting. Our growth strategy has always been part of a combination of acquisition and organic growth. We have already completed in the last 12 months, let's look at it, I mean, three acquisitions. So we're delivering on that end. For us, right now, this fiscal year, I think it would be more weighted towards collecting, harvesting, And we believe that on the other end, things may, you know, play in our favor for future transactions in a way that will let the market slow down a little bit. You know, multiple may come down a little bit. So time in this case will be our best friend. Let's put it this way. Not only because we're coping with such organic growth that we're not forced, we're not onto a pressure to make acquisition. And in the long run, if we position ourselves, let's say in 12 or 18 months from now, not only will have the leverage, the balance sheet, But, you know, we may see better multiple loan transactions and opportunities we're looking at right now. So we're not in a hurry, but we're hurried to harvest on what we have planted in the business.
spk08: And then just on the – in terms of expanding the capacity of your existing business – What are your thoughts around that, and do you think that might have some impact on your sort of near-term 11% EBITDA margin targets?
spk06: Yes. So this is a very good point. The business makes – I mean, if you remove a second, let's say the inflation, the impact on wages, the impact on material and all that, if you remove that a second, if you look at our business, there's a fairly good amount of movement on the EBITDA percentage that is linked to the business mix. Now, on the good news or bad news, but on good news, if you look at it, the growth on the operation and maintenance has been slightly more than what we anticipated. And this is good on the good end. On the bad side is that this business is coming usually with lower margins than the specialty products, for example. So as much as we're growing fast, the specialty products, which is the high margin business, on the other hand, the O&M business is not staying still either. They're growing as well. And in dollars, they're contributing a lot. So this has a big influence on the overall percentage of EBITDA. However, as we said, we're going to continue to strive towards a double-digit EBITDA. And I think, I feel very confident that measures in place on mitigation, on prices, mitigation, on wages, and all that are going to pay off and start to pay off in the coming quarters, and we should regain momentum and margin expansion there.
spk08: Gotcha. No, thanks for all the feedback, and congrats again on all the progress. Thank you.
spk03: There are no further questions at this time. I'll turn the call back to Mr. Dungrave for closing remarks.
spk06: Well, thank you very much. And I'm looking forward to talking to you again. And you're invited to join our year and annual general meeting of shelters, which will be December 6th, where we will give you an update on the three-year plan as well as our ESG report and plan. Thank you very much. Have a great day.
spk03: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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