H2O Innovation Inc.

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.

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.

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.