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spk00: Good morning, ladies and gentlemen, and welcome to the H2O Innovation Q3 FY 2023 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, May 11, 2023. I would now like to turn the conference over to Frédéric Dugry and Marc Blanchet. Please go ahead.
spk03: Yes, 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. Donc, dans un premier temps, j'aimerais vous remercier d'assister à cet appel. Et je vous avais dit que même si l'appel se tiendra 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, h2o-innovation.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 h2innovation.com in the section Investors. Frédéric Duret, President and CEO, is joining me today for the call, which duration is approximately 30 minutes. During this call, Fred will give an update on the business and present highlights on the third quarter ended March 31st, 2023, and I will be presenting the financial results. Please take a moment to read the forward-looking statement on page two, and the non-IFRS financial measurement on page three of the presentation. I now hand over the call to Fred.
spk07: Well, thank you, Mark, and thank you for joining the call today. After such a strong third quarter, we can say that we continue to execute, focusing on profitable growth. On top of delivering 31.7% revenue growth for this quarter, We are really proud to post for four consecutive quarters organic revenue growth higher than 17% compared to the similar periods. Such growth is underpinned by the repeatable and increasing business with existing customers as well as new customers. Our business model clearly promotes customer retention, thus high recurring sales. At the end of our third quarter, recurrent revenues stood at 87%. With a diversified backlog of almost 203 million, up 86% from last year, combined with a high level of recurrent revenues, we have strong visibility to sustain growth. Managing such growth in a tight labor market with a volatile supply chain makes a challenging environment. However, we achieve a sustained adjusted EBITDA of $6.9 million, representing an increase of almost 29%, compared to Q3 of previous fiscal year. As we continue pushing various initiatives to improve operating margins in all our business lines, we will remain well aligned with our three-year strategic plan. Cash management and reducing our debt continues to be a focus for the company, and we intend to continue to improve our cash conversion cycle and remain selective on the growth capital expenditures. Cash generated from operations reached $10.4 million in the third quarter and led to a reduction of our net debt to $49.4 million. On a five-year Kigar basis, our revenue growth and adjusted EBITDA have increased by 19.5% and 33.7% respectively. Our team is executing its business plan and exceeding its objectives. This remarkable performance is not only the result of the acquisitions we completed, and the new customers we secured, but most importantly, the commitment of our thousand-plus employees manufacturing products and taking care of our hundreds of customers around the world every day. The company is experiencing strong sales synergies and, most importantly, sustained sales momentum across all business lines. We are delivering on new capital equipment sales to major industrial customers capturing significant orders for specialty products delivered to some of the largest desalination plants in the world and broadening scope of work expansion within our renewed O&M customer base. At H2O Innovation, growth is present in every business line and every aspect of our business. Let's have a look at the performance of each of our business pillars. Starting at page five, the largest revenue generator, the operation and maintenance. Our O&M team continues to deliver with three contract renewals in the state of New Hampshire, New York, and the province of Alberta. On top of that, our team was able to secure the one new O&M contract with Piedmont Medical Center in Georgia. From water reuse equipment delivered by our WTS division, our O&M team was able to retain this customer through an initial two-year O&M contract. This contract shows once again the synergies that our business lines have among themselves, but also the unique value proposition recognized by the customer. By having the same company designing, manufacturing, and operating a water treatment plant, the end user can optimize its OPEX and reduce its operating risk by having a single point of responsibility. The O&M Group also received two important recognition awards for the city of Canton in Georgia, and the town of Warren in Rhode Island. These awards testify to the level of compliance and quality of the work delivered to our customers. This is exactly why we retain our existing customers and why we keep winning new business. We're showing extraordinary care for our customers, and we do not compromise on environmental compliance. On top of that, our business model promotes high customer retention and offers multiple sales synergies to create value for the customer. By continuing building our North American platform, combining water treatment equipment, services, specialty products, and O&M, we continue to monetize the platform with repeat and new business with both industrial and municipal customers. Moving to page six, or slide six, let's review the O&M backlog and the general financial performance of that business pillar. The combination of contract renewals and new contracts has enabled us to push the O&M backlog close to $150 million, representing an impressive jump of 96% year over year. Let's recall that our O&M backlog doesn't include evergreen contracts, which are mostly located in the states of Texas and New York, which represent about 30% of the overall revenues. All these efforts are reflected into the financial performance of the O&M group. On an LTM basis, the O&M revenue stood at $112 million compared to $87.5 million, representing an increase of 28%. The acquisition of JCO NEC, completed in December 2021, combined to the addition of 18 new O&M contracts and 14 renewals in the last 12 months, contributed to post this important growth. Over the same period, the EBAC, which is the earnings before admin costs, also moved from $10.5 million to $13.2 million, showing an increase of 25.7%. In the coming quarters, we will continue working on the renewal of OMAM projects and capture CPI adjustments to improve our gross profit margin and EBAC margins. Moving to page seven, let's look at the highlights of the water technology and services business, which we call also WTS. During the third quarter, we secured five new water treatment projects totaling $5.5 million, four dedicated to industrial customers and one for the municipal customers. The first one is with a data center that manages data for a customer that the corporation is currently engaged in doing business already with one of the existing projects we have. This new project is located in the northwest region of the United States. The projects include a 2MGD ultrafiltration treatment system with an exceptional high recovery greater than 98%. This new equipment is in line with the customer objectives to reduce its water footprint and thus become more water positive. The corporation was also selected to provide a temporary water treatment system for a First Nation community in Canada. for which boiled water advisories were issued. HVO deployed one of its mobile assets, a containerized system with a capacity of 100 gallons per minute, to supply the community with drinking water. The three other projects were for reverse osmosis systems and green sand filters for customers located in the states of Iowa and Kentucky. Respectively, these systems will treat the water used in a sugar separation process and ethanol plants. In the same period, three important projects were delivered in Texas, New York, and Alberta. The first one was for a 3.6 million gallons per day ultrafiltration plant in Georgetown, Texas, using a Fibroflex proprietary technology to ensure the client an access to multiple membranes in the coming years and maintain the value of its plant. For the second project, O&M H2O Innovation provided a silo to a pharmaceutical company in the Northeast to treat some of their wastewater. The last delivered project was a containerized RO system. I mentioned earlier for the production of drinking water for First Nation community in Alberta. To promote the concept and benefits of water reuse, we team up with the city of Las Virginas in California and Fox Microbrewery to craft the first beer made of water reuse. The beer name, Revival, as you can see on the picture, signifies that the water used as its main ingredient was granted a second life. The sponsorship project is intended to stress the importance of sustainability in the way we use and reuse one of the most precious resources in the world, water. The recycled water comes from Las Virginia's Water Reuse Demonstration Facility in California, where H2O innovation supply and ultrafiltration and reverse osmosis systems back in 2020. Looking at the evolution of our backlog and its diversification between industrial and municipal customers, our decision to remain membrane agnostic and develop open source membrane platform was a winning strategy and an important differentiator as well. Also, our focus on water reuse and growing reference lists are allowing us to position H2O innovation on the leading edge of our industry in order to solve water scarcity issues. Moving to page number eight, let's have a look at WTS backlog and general financial performance of that business pillar. At the end of our third quarter, WTS backlog stood at 55.1 million. This represented an increase of 65% year over year. Now, not only the backlog has been growing, but more and more we're adding industrial projects to diversify their customer base. This diversification should allow us to improve WTS margin profile in the coming quarters. As we continue growing our backlog, our revenues are also moving in the right direction. We are expecting revenues to continue to grow in the coming fiscal year. Indeed, revenues from WTS have reached 48.1 million on an LTM basis at the end of March 31st. This represents an increase of 13.4% compared to 2022 fiscal year. Most importantly, The EBAC from that business pillar has increased by 10.1% over the same period, faster than our revenues. We believe that EBAC margins should continue to improve as we move into the revenue recognition of larger industrial and municipal projects recently signed with prices reflecting the latest material and wage increases. Let's look at page 9 on the performance of our specialty products business pillar. The third quarter showed another impressive growth of our specialty products revenues. All our business lines are pushing for innovation and have been capable to attract new customers to our business. More and more, the clients are recognizing the benefits of our green chemistry and are realizing important savings on freight, warehousing, emissions, and packaging. These differentiators are definitely driving new sales and attracting new customers looking for sustainable and eco-friendly products and solutions. Our component business line, Feedmont, continues its impressive growth trajectory and signed a new distributor agreement on top of receiving large consumables and spare parts orders from previous delivered projects in the Middle East. At last, our maple farming business equipment, delivered on top of one of the largest membrane filtration units for sap concentration to a producer in Ontario. On top of that, the team continues to focus on the integration of Leader Evaporator, which was acquired on June 30, 2022, and they're trying to focus to rationalize product portfolio, review pricing on products, streamline supply chain, and improve operational margins. All these initiatives should impact more positively the following fiscal year. In the meantime, it is worth to mention that our maple division reached a new record high revenue for a single quarter, thus impacting the overall business mix of this business pillar. Through our strategic objective of transforming the maple division into an agri-food division, we intend to lower the seasonality impact and diversify our time-based into other auxiliary markets where our expertise in sugar concentration and membrane filtration could be beneficial. Let's have a look at page 10 on the revenue and EBAC progression of our specialty products business pillar. At the end of March 2023, revenue stood at almost 80 million on an LTN basis. This represents a 47% almost increase compared to fiscal year 2022. 58% was generated by organic growth. The remaining portion of the growth originated from the acquisition of LEADER, completed on June 30, 2022. The organic growth is clearly driven by the high demand we are experiencing for our specialty products, the strength of our large distribution network, and the growing interest of the end user for green chemistry and eco-friendly water treatment solutions. While growing the revenues, the EBAC progressed also very well. At the end of March 2023, the EVAC stood at $19.5 million on an LTN basis. This represented an increase of 28.1% compared to the previous fiscal year. The EVAC remains under pressure as we continue pushing for price increase on our products, better terms with key suppliers, and overall business mix with high margins and lower margin products. Many initiatives are moving along to improve the margins, and we remain confident to observe positive outcome in the coming quarters. I will now pass it on to Marc Blanchet, our CFO, who will review with you and discuss the financial performance of the company for this quarter.
spk03: Thank you, Frederic. So before going over the results of the third quarter, I would like to go over the results of the last 12 months compared to the previous 12 months. As I said in previous call, we must look at our results on a last 12-month basis to capture the long-term evolution of the company. Our effort made over the last 12 months to focus on increasing organic growth allowed us to increase the LTM organic revenue from 10.1% to 23%. Our revenue on LTM basis reached $240.4 million compared to $167.5 for the previous 12 months. We invested in growth initiatives. to achieve the 10% organic growth objective provided in the three-year strategic plan, such as hiring sales resources and investing in SG&A to generate and support this growth. Those investments have been successful since the target has been largely exceeded. This explains the increase in SG&A compared to the previous LTM. However, the ratio over revenue is lower from 18.3 to 17.2, showing the scalability of our business model as revenue continues to grow. Net earnings reached 3.4 compared to 2.5, an increase of $900,000. The adjusted EBITDA increased to $23 million compared to 16.2 in previous 12 months. The adjusted EBITDA over revenue is lower than 0.6 compared to 9.7 last year. The reduction in percentage is explained by reduction of the gross profit margin due to the business mix within specialty product business pillar and due to high inflation of costs from material and pressure on salaries. The fact that we can rely on three business pillars is the strength of H2O Innovation. It allows us to be able to count on different sources of revenue and thus reduce the risk of volatility on EBITDA. So at slide 13 now, let's look over the financial results for Q3. The main highlight is the momentum maintained on revenue growth. We're reporting revenue of 68.3 compared to 51.9 for Q3 last year. This represents an increase of 16.4 million, or 31.7%. 18% is organic revenue growth and 8% acquisition growth related to the leader evaporator acquisition closed on June 30, 2022. The adjusted EBITDA also improved by 29% compared to Q3 last year, reaching 6.9 million compared to 5.3. It represents 10% of revenue compared to 10.3 last year. The percentage of EBITDA over revenue decreased due to the decrease of gross profit margin and percentage. The gross profit margin has decreased from 27.2 to 26.3 compared to last year due to high inflation of material costs, pressure on salary, and business mix within the specialty product business pillar. The percentage of SG&E over sale has decreased compared to Q3 last year. Investment made in sales and business development are paid off since revenue are still growing faster than the G&A ratio. The cash flow from our training activities generated 10.4 compared to five during the same period last year. The variation is mainly explained by the favorable changes in working cap items. In addition, we want to highlight the importance of the important increase of our consolidated backlog. It's up by almost 6% and it provides good visibility on revenue through upcoming quarters. On slide 14, We present some P&L highlights for Q3, but on that slide, I'd like to bring your attention of the table on the right. I want to address the ethics rate variation impact on our revenue given the opposite fluctuation of certain currencies. For the third quarter, it has a global positive impact of 2.9 million or 5.5% on revenue. The USD exchange rate was favorable and partly assessed by the British pound and the Euro. Going forward for modelization purposes, Each 100-point base of USD cap has an impact on the quarter of half a million on revenue and 55,000 on EBITDA. For the GBP, it has an impact of 36 on revenue and 8,000 on EBITDA. I'll now go over the financial results of each of the business pillars. So slide 15, for the O&M business pillar, revenue for Q3 stood at $30 million compared to $24.1 last year. representing an increase of 5.7 million or 24.7%. 17% is organic growth generated from important scope expansion and new projects secured in previous quarters. When MZBAC reached 3.5 million compared to 3 million for the same quarter last year, representing an increase of half a million or 18%, but represents a decrease in percentage over revenue. The gross profit margin and percentage decrease from 18 to 16.5. Hence, to create a safe and attractive environment for our workforce and to create value for a customer by offering them a talented team, we decided to establish wages of $15 an hour for all during Q1 2023. Since 70% of our employees are working in this business pillar, the UNM gross profit margin and EBAC are more sensitive to factors related to workforce. In most of UNM contracts, we're entitled to increase the annual fee based on customer price index. Therefore, such annual fee increases are being effective with our customer as each contract reaches its annual contractual adjustment date. We will then continue to achieve price realization in the upcoming quarter. At the end of the quarter, the on and back looks to that $147.7 million compared to $75.5. This is an increase of 95.7%. As Fred said earlier, contracts in Texas and in the state of New York are usually evergreen and are not included in the backlog. On slide 16, let's go over the WTS revenue. It improved by 18%, so it grew by 18%, which is all organic for service activities and capital equipment projects. WTS EVAC stood at $1.7 million compared to $1.4, representing an increase of $400,000 or 26.5%. The increase is mainly due to the improvement of the gross profit margin explained by improved project performance. Selling and general expenses were higher, primarily to new hirings of sales resources, higher labor costs and commission, as well as resumption of travel and our participation to trade shows and conferences. The WTS backlog stood at 55 compared to 33 million last year, which is an increase of 65.1. As Fred explained earlier, the backlog is well-balanced between industrial and municipal projects and provides good visibility on revenue for upcoming quarters, keeping the focus on industrial projects characterized by better gross profit margins. Let's move to page 17, specialty products that have very strong performance from all the businesses. lines for this quarter. Revenues stood at 24.2 compared to 15.9, an increase of 8.3 million, or 52%, which is 23.4% organic growth. Leader evaporator acquired last June generated 4.3 million, or 27%. The ethics rate variation had a net positive impact of $200,000, mainly from the British pound and the euro. EBAC stood at $5.6 million compared to $4.3, representing a dollar increase of $1.3 million. The decrease in percentage is mainly explained by the deterioration of the gross profit margin. The gross profit margin stood at 39% compared to 44%. The gross profit margin variation is explained by two main reasons, the business mix within the business pillar. The small revenues are coming from maple farming equipment following the last acquisition. which are usually at lower average gross profit margins, and the increase of raw material costs in manufacturing of our specialty chemicals. Price increases in procurement strategy have been implemented in the recent quarters, which should impact favorably the margins in the upcoming quarters. The SGN increased by 1.1 million. The main reasons are the hiring of sales resources, pressure on salaries in connection with the inflation level, the resumption of travel combined with the acquisition of leaders. However, the FGN ratio over revenue decreased by 1.6%. Let's move to page 18 and look at the variation on the financial position for selected information. So the account receivable increased by 12% since June 30, which is in connection with the revenue growth. And 5.6% of this increase is due to foreign exchange variation. If we look at the inventory level, it increased by 10% since June 30, approximately 52% is for the specialty products. We maintain appropriate level to respond to continuing high customer demand as shown by our revenue growth. Foreign exchange explains 3.5% of this variation. Account payable increased by 1.9 million, or 8.4%, mainly due to the foreign exchange impact and timing of payment to suppliers. Regarding the contingent consideration, the decrease is related to the payment related to GCO and EC acquisition. So we did that payment on Q3, and also a partial payment related to GMP acquisition, which occurred in Q1. Let's move to slide 19, cash flow from operating activities. So we want to highlight the cash flow from operating, we want to highlight that the cash flow from operating activities generated 10.4 million for the third quarter. compared to $5 million for the same period last year. As I highlighted earlier, the fast organic growth of the previous quarter pulled on working cap, but we're starting to improve the conversion cycle of these investments. This last quarter, we also invested $3.3 million of capex. Most of these investments are growth capex and are for equipment required to execute new O&M contracts or equipment we manufacture and lease for some of our customers. On page 20, net debt. On slide 20, you can see the evolution of the net debt. As of March 31, 2023, the net debt, which includes the contingent consideration, stood at 49.4 compared to 50.3 on June 30, representing a $900,000 decrease due to cash cycle improvements. This wraps up my presentation of the financial results. I'll now hand the call over back to Fred. All right.
spk07: Thank you, Mark. So we'll move to the conclusion slide at slide number 21. Well, I can tell you that the water industry is now at a critical inflection point, driven by obviously population growth, aging infrastructure, more stringent regulatory measures, water scarcity, aging working force, and companies' objectives to become more water positive. In fact, Of the companies that have identified as pledging to be water positive, the combined market cap exceeds $8 trillion U.S. These factors will continue to contribute to growth in our sales and will certainly generate a lot of opportunities for all our business lines moving forward. In March 2023, the United Nations convened to discuss the key role of water in achieving its sustainability goals, which was attended by over 10,000 delegates. Specifically in the U.S., the $50 billion stimulus money of investments dedicated to water infrastructure and other sustainable technologies has now reached the agency level and will impact H2Onovation funnel and backlog over the coming years. The reshoring team is also spurring a surge in job creation and factory construction in the U.S., which will again put additional pressure on existing water infrastructures. Risk to higher tolls and quotas is a business continuity risk for almost every single industry. Sentiment for the water industry and specifically H2Onovation is also inflected. The company during the third quarter left its one-year anniversary listed on the TSX and has experienced a 68% increase in trading volumes year-to-date to 191,000 shares daily. While I would like to continue to focus on operations and financial results, it is worth highlighting that share price performance has exceeded the TSX and Russell 2000 by 40 and 45% respectively over the past year and even more specifically over the five-year period. The company has seen more institutional support from new and existing geographies. We would like to thank them, by the way, We'd like to thank our shoulders and the capital market partners for appreciating the long-term vision. Finally, with 126 merger and acquisition transactions completed over the last 12 months, ended March 31st, we can conclude that the water sector remains active and very attractive for investors. Indeed, the average transaction size was around 774 million U.S., with an average revenue multiple of 2.7 times and EBITDA multiple of approximately 14 times. Even larger transactions, such as the latest one announced by Xilin, acquiring Evoqua, is proposing a transaction valuation greater than 20 times EBITDA. We have confidence in our strategy, as we have the right solutions, resources, and platform to maintain our growth momentum while minimizing our risk and improving our profitability. Our business model is very unique with high recurring revenues, representing an important financial differentiators, but also a strategic focus to maximize customer retention and long-term value creation. That completes the call for today. I will pass it back to the operator for the Q&A session. Thank you.
spk00: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. 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 Michael Glenn with Raymond James. Please go ahead.
spk04: Oh, thanks. Fred, during your comments towards the end, you talked about the 50% billion dollars of infrastructure money that's now reached the agency level in the U.S. If we're thinking about that amount of money, what portion of that would be relevant to H2O products? Is it sort of in the next year we could see some of that starting to come to the company?
spk07: Yeah, so as part of that, so there's two things. First, when it starts to reach the agencies, I mean, we're still at the planning level. So from the agency, the customers that are currently into a rush, you know, to implement or upgrade existing infrastructure will first hire consultant engineers. So the Jacob of the world, the Stentec, these large, or WSP, these large engineering firm will first start to do the planning exercise, prepare specs that we're going to bid on. So there's still for us another window of, I would say, between 24 to 36 months to see some kind of planification and tangible projects that we're going to bid on. Now, there's a lot of that money, obviously, that is going for either, as I said, capital equipment upgrades, so an existing infrastructure that needs to be upgraded because their treatment is not sufficient, or expansion because of population growth or because it's too old. So in both cases, whether it is water, wastewater, or even PFAS treatment, we can address this with our current offering.
spk04: Okay. And just looking a little bit closer to in the province of Quebec, we're reading a lot about this massive industrial project that's being proposed in Beckencourt with this battery metals hub. Is that something where H2O – I know that there's water treatment that would have to get installed alongside of that. Are those the type of infrastructure projects that H2O would be able to get involved in on the industrial side? Yes.
spk07: We're currently delivering water treatment equipment to one of the largest electrical car manufacturing facilities for their battery production, indeed, in southern Texas. So it is absolutely within reach. It is part of our expertise, either from the industrial or from the mining perspective as well. At the mine site, I mean.
spk04: Okay, so we could think of potential at the mine level as well. These are all opportunities that are relevant to H2Onovation. Okay. And then just on the gross margin in specialty products segment, I guess there is some, as we've brought Leader in, there's some seasonality to think about there. Maybe just a little bit of guidance, like quarter-by-quarter guidance, if you can, in terms of how to think about gross margin within specialty product segments.
spk03: Okay. So I won't be very specific quarter per quarter, but I can tell you, and as you all know, there's a seasonality aspect to it. So first, you know, we talked about the fact that the margin has been lowered due to the business within the business pillar. So we've had a significant amount of revenue coming from leaders. So, you know, there is the chemical, the specialty products, and the agri and maple equipment into that business pillar. So the Agri and Maple equipment have a lower gross profit margin. So that explains part of the fact that the gross profit margin decreased a bit during this third quarter. Also, it's where there's the seasonality, second and third quarter. As for the fourth quarter, the revenues coming from that seasonality aspect is not significant. there as much or barely any revenue coming from from that right now even though we're working in order to improve those revenues with more sales from coming from the agri sector general um so uh you know it will affect so there will still some some fixed costs so it will affect the margin uh on the fourth quarter as well uh so the you know the The margin references that you had last year needs to be a bit adjusted. I think you have a good idea of what happens during first, second, and third quarters. So fourth quarter is generally very similar to the first quarter.
spk04: Okay, thank you.
spk07: The other colored line that we could add is the fact that when we acquired Lear on June 30th, through this acquisition, we inherited from an existing backlog where there was given margins already built in into the price of the equipment that we had to deliver. Now, fast forwarding this story one year later, the new equipment that we're currently selling obviously reflect new price adjustment from materials, from wages. If you look at the backlog that now we're building up for the new season and for the new fiscal year for the maple itself, is reflecting and building a better margin. So I would say the worst is more behind us, let's say, from this acquisition.
spk08: Okay. Thanks.
spk00: Your next question comes from Andrew Lino with National Bank. Please go ahead.
spk06: Hi. Good morning. Thanks for taking my question. I'll start with a macro as well. And on the I mean, in terms of the projects or the funding that is going, but Quebec has recently announced a pretty large increase in the water and wastewater infrastructure funding. I was wondering if you can talk a little bit what kind of percentage or what dollar amounts of this new funding is applicable to H2O innovation and how would you compare it to the prior one and when would you expect the bidding for this contract to start?
spk07: Well, it's hard to put an exact figure on this. However, I can tell you the overall Canadian market is a market where we're less present than the American market because this is an area of focus for us where we spend more time in the previous year to grow and develop. So, so I think this is, this is relatively new to us, you know, and this, this represents another opportunity, um, for, for the Quebec, for the Quebec market. Now, I think, you know, there's areas, um, if you compare it to the Quebec market, then other states such as California and Texas and the southern states where they're screaming, uh, more urgently, you know, for water needs. And, and this is why, you know, at first stage, you know, we, we decided to focus, you know, furthermore on these areas. Now, obviously, this is in our backyard. This is in our neighborhood. So I think we'll be opportunistic, you know, for Quebec as well and try to, you know, get advantage of that. But our strategy is not designed, you know, around Quebec specifically. Let's put it this way.
spk06: I see. Okay. Okay. Okay. Thank you for that color. And... And the other question I had when I look at it, it's more related to, to the Q3 results, but if you're looking at the organic growth, especially, are you able to kind of differentiate a little bit how, what, what component of that was pricing and what was volume in there? I mean, the mix basically between two.
spk03: Yeah. So, um, it's, so we, we don't extract and I, and I know some of our other companies of our industry have done it. I mean, um, But roughly, price increase, because not everything applies. Price increase, for example, for O&M is relatively easy for us to identify. And we haven't done it by purpose. We don't disclose it. Price increase for chemical, it's easy to do. And it's applicable there. But for the, for example, the projects, It's a bid, so there's no price increase, so we have to respect the amount that we bid. Price increase on material that are in and out, it's tough to identify what was the price of last year versus this year. I would say most of it, the big majority of it is volume, and probably the price increase would represent around 2.5% to 3% of our revenue growth. No, it was great to hear. Thank you, Mark.
spk06: And then kind of if you're looking at forward, and I mean, sure, especially when it comes to O&M, you have a small kind of CPI related and then contract related for WTS. But on the S&P one, do you think you have more room to increase prices there going forward? Yes.
spk03: If not, yes.
spk06: Okay.
spk03: Yes, definitely. I mean, it's something, you know, we're I would say, you know, we have some catch-up to do. I mean, we did it last year, but inflation is still present in our industry and especially pressure on salaries, as I explained. So we still need to have those discussions. But, you know, with respect to our customers, we couldn't just increase prices all of a sudden. So we had to work with the customers in order to do it by step. Sometimes it's by scope increase. Sometimes it's by reducing costs or... you know, proposing efficiency. So it's, I would say it's a two to three year process the way I see it.
spk06: Okay. No, thank you. Thanks for the call. And last one for me, I'll jump in the queue, but about maple, I mean, we're hearing that the maple season was a little bit soft this year. Any color or concerns there? And as a bit of a follow-up, if you can share sort of what percent of the maple working capital has already been converted?
spk07: Yeah, it was indeed, let's say, a choppy season for most of the producers in Quebec. It was certainly a shorter production for most of them. They have produced less syrup. However, we've heard that the quality of the syrup was extremely good, despite the fact that it was a short season. So there's two things that currently we could say. First, because in Quebec, you know, The financial stability of the producers rely on the quota, thus the federation. They're guaranteed of payment. They're guaranteed of getting their syrup paid and bought. This provides financial stability. That's number one. Quebec still represents slightly more than 70-75% of the overall production in the entire Northeast Canadian and U.S. markets. So this is good. Now, the other thing it tells is that because it's very choppy season and most likely will continue, I would say maybe in the coming years, we'll see, you know, sudden, you know, increase in temperature and sudden drop through the season. It means also that more and more producers will have to equip themselves with proper technologies and efficient technologies to be more responsive to deal with these high fluctuations. Meaning, that they will need to produce more efficiently using best equipment, such as reverse osmosis, such as telemetry, as we have, such as a bunch of other equipment that will allow them to be more efficient. So in a nutshell, you know, it says one, and yes, it was a choppy season. Thank God we have in Quebec, you know, some kind of guaranteed provision, you know, from the Federation. On the other end, we feel good because we have state-of-the-art technologies to continue helping the producers to gain efficiency. So I still remain positive for the coming years. I mean, challenges are ahead, but it's still an industry that we enjoy growth and will continue to enjoy growth.
spk06: Thank you, Fred. And then any color on the working capital? How much of that is left or even kind of a directional general idea?
spk03: Yeah, can you just repeat? You said any color on the working cap, but I missed the second part.
spk06: Oh, yeah, yeah. No, I was saying, hey, Mark, how much of the working cap, of the maple working cap has been converted and how much is left there, even if percentage, if not dollar amount?
spk03: Yeah. I mean, most of it right now are a lot of receivables. I mean, you know, at the end of the season like that. So there is always a base inventory. So the way the season works is, the inventory that's left there is to start to rebuild the equipment for the next season. And what has been sold is right now into receivables. So I'm sorry, I don't have the exact number. I know the number, but I don't want to say anything out of the call. But it's probably, I would say, When you don't have the sales, I would say about 20% of the sales that are still in a working cap.
spk08: So that's great color. Thank you.
spk00: Your next question comes from Frédéric Tremblay with Desjardins. Please go ahead.
spk05: Thanks. Good morning. So on the cost inflation, on raw materials and wages. That's been topical for the past two quarters. I wanted to get your thoughts on the trajectory of these costs for the next two quarters. Do you have any expectations that you can share on that? Do you expect the wage and cost pressures to diminish as we move forward in the next two quarters?
spk07: Yeah, so for the wages first, really, I think we're still under pressure on wages. I mean, we're still, quote-unquote, fighting, you know, to keep our talent, to recruit. So it's still a challenging labor market that we're experiencing. So I would say we're not out of the woods in terms of, you know, having high salaries. I mean, it's less than what it was last year, though, but still, you know, we have to remain on our toes, you know, to do what is necessary to keep our people. It won't be as massive as it was last year, for example, when we pushed forward this initiative of minimum wage of $15 an hour for some first entry-level employees in southern states. But still, it is a challenging environment. Now, on material, I think we're starting to see some relaxation in the material. I mean, we have seen already improvements in the price of steel and the price of plastics and the price of different goods, some raw materials and some transformed products that we're buying. So in a nutshell, this is moving now for us in the right direction. Despite the fact that, yes, supply chain material is moving in the right directions, we are very, very diligent in pushing forward price adjustments on all of our business lines, from the component business to the specialty chemicals. Particularly on the specialty chemicals, I think there's still a lot of work to be done. But again, we want to be diligent. We want to do it and address it case by case, geographies per geographies. We have to be mindful also of the different challenges and different reality that countries are facing. Most likely, if you look at China and India and the Middle East, they're not going to face recessions as we're facing. Most likely, they may have very little recession or even nothing. On our end, it will be different in North America. So we'll be very mindful in the way we're addressing also price increase and price adjustment to our different customers. Mark, you want to add any color on this?
spk03: No, I would have said the same thing, but... Good.
spk05: Okay, great. And then if I go to slide seven on the presentation, there's a pretty significant increase in the commissioning, the projects in the commissioning stage, plus 24 there. I'm just curious if there was anything special that would explain that. Is it just timing or productivity or anything else that would have given that?
spk07: It's just timing. Our team is extremely busy. It sounds crazy a little bit, but indeed, the team is extremely busy. We set it for many, many quarters now. I mean, it's going through the pipes. It's huge in terms of number of projects we have secured and now, you know, moving to the construction to the commissioning phase. So there's quite a number of projects that will be started in the coming quarters. And, yeah, this is what we're currently facing. And we're just starting to see an acceleration to it. The good news is that we're still expecting revenue and recognition to increase in the coming quarters from that business bullet. Leading, by the way, to other potential after-service sales because all these customers down the road will require, you know, a service contract, will require, you know, consumables, membrane, filters, chemicals, and so on.
spk05: Mm-hmm. Okay, great. And then last one for me still on WTS. I think historically, and to correct me if I'm wrong, but I think, you know, the targeted contract size was in the $1 to $10 million range in WTS. Is that still your sweet spot or would you be open to looking at larger opportunities if margins are attractive?
spk07: Yeah, it's still, most of what we see is within this. I mean, frankly, I mean, absolutely. I mean, we have seen and will continue to explore opportunistic, you know, opportunities that may be higher, you know, between the 10 and 15 million as they come. Again, we want to be diligent in selecting these. But you're right. I mean, the 1 to 10 million is kind of our sweet spot where we believe that margins are the most attractive for us.
spk03: And, Fred, I think it's the, you know, that's where the industry is leading as well for the last few years. I mean, industrial projects will be in this area. It's pretty rare that you'll see industrial projects above that. Even in the municipal, you know, the trend over the last years has been to build decentralized systems so they're smaller. The trend of building like a huge, huge mega plant brings higher risk, especially in California with the earthquake and all. So in terms of risk management, it's a bigger market to, I would say, small and mid-sized is a bigger market than the big size. Small and mid-sized is bigger.
spk07: Yeah. The trend is into decentralization for sure around the world.
spk08: Great. That's helpful. Thank you very much.
spk00: Your next question comes from Najee Beidou with IA Capital. Please go ahead.
spk01: Hi. Good morning. I just wanted to start with margins. It seems like they're pretty stable, but SG&A is So slowly improving. I'm just wondering, what are your priorities for the rest of the year to start to get margins moving higher? It seems like there's a lot of puts and takes, still some cost pressures, but, you know, getting the pricing increases. Any other adjustments or other initiatives you think you can implement this year to get them higher?
spk07: Well, this year, I mean, we're still on the fourth quarter. I mean, the year is almost done. So we're going to continue to execute our business plan as we stated. There are a number of initiatives, you know, from price adjustment to identifying a scope of work where we can bring, you know, higher margin opportunities. And this is what we're going to execute in the coming quarters. I mean, I don't see anything different or new that we could add to our strategy there.
spk03: I mean... And, G, if I may add, though, I mean, for this quarter, I mean, you have to put in the balance that, you know, the Maple division does not generate any revenues on the fourth quarter or barely any. So, I mean, it has to be considered in your consolidated margin for this fourth quarter. A bit similar to the first quarter, let's say.
spk01: Understood. There's some seasonality in the business. And on the... sort of balance sheet, net debt is improving. I'm just wondering if this is sort of the right pace of the leveraging for you, sort of, do you think, you know, four to five million a quarter, is that sort of the target in terms of reducing the net debt? Yes, exactly.
spk03: And we should see conversion, you know, the way I see it, there will continue to have a conversion of working cap during the fourth quarter, as I explained on the previous question. We will cash those receivables. We won't need to increase inventory as much. And same with invoicing that's being done for projects.
spk01: So your assumption for cash conversion. And just related to all of this is, I guess you're going to be lapping one more quarter with M&A contributions and more FX tailwinds. I understand organic growth is still strong and that's the focus, but once you lap, quarters and you continue to deliver. What you mentioned in terms of trends on M&A, that's very helpful. But those types of high multiples are on larger deals. So I'm just wondering, you know, things continue to go in the right direction. Has your appetite on M&A changed? And what's the pipeline looking like today for more smaller businesses that you would target?
spk07: Yes, our pipeline, I mean, we do have one. It's very alive, I can tell you this, and on multiple opportunities. More on the talking side because you're right that what we reflected, you know, from the latest report is more from higher transaction or bigger transactions. On the talking side of things that I will qualify the businesses, you know, below the $25 million revenue a year, We still believe that there's good opportunities for us to acquire them at multiples that are affordable in order to create accurate transactions on day one for H2O. So transactions that we will acquire that lower multiple than what we're trading at.
spk01: Okay, so pipeline is still active on that side. Just one last question. Yes. It seems like you're tracking to the top end of your guidance for this year, which is great to see. I'm just wondering if you can give us an update on sort of the organic growth outlook for next year. Are you still kind of targeting mid-double digits for fiscal 2024? And where else could you see some upside?
spk03: Well, you know, the backlog talks by itself first. I mean, that's a good indicator of what's coming up. A lot of the revenues are in specialty products, which are recurring in nature. And in terms of growth, I mean, this year was, you know, we all agree it was a very, very good year. We have put everything in place to continue to generate double-digit growth. Will it be in a high double-digit? You know, that's not the way I plan. I hope for it, but I won't plan for it. I'm a bit more conservative. And the way I see it as well, if we slow down a little bit that growth, it'll generate more cash conversion of the working cap, allow us to free cash also for M&A. But nevertheless, it'll be in the double-digit. That's the way we see it. Everything indicates towards that.
spk01: Okay, that's great. Thank you very much and congrats on the good results.
spk00: Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Yuri Link with Canaccord Genuity. Please go ahead.
spk02: Good morning, guys. Good morning, Yuri. Morning. Morning. I don't think the margin topic's been brought up enough, so I'm going to go at it a little differently. Is the 10% EBITDA margin goal that you had set under your fiscal 23 strategic plan, is that something we should still be with just a month or so to go here, something that we should be planning on? And I'm asking because that would imply a fairly big step up in this current quarter on the EBITDA margin. And so just any clarity on that.
spk08: Yeah.
spk07: Well, I would say the game plan hasn't changed as part of our, of our three-year plan and the one that we updated as well. Did we face additional, you know, headwind, you know, from unexpected or stronger wage increases? Yes. Yes. Did we face additional headwinds from the acquisition or restructuration or integration of Leader acquired on June 30th? Yes. So are they fixable? Absolutely. Are we going to secure and improve price? Are we going to secure and improve CPI as we have adjusted our employees first and then we're going to adjust our contract?
spk08: Yes.
spk07: So It's hard to say whether June 30th will be exactly on the money. For me, I look at it still on a three-year perspective or even a little bit longer. But we're doing multiple things to improve margins continuously. And this hasn't changed and this won't change. So for us, our three-year plan, as we said, to move towards 11% up is what we're striving and working really, really hard every day.
spk08: Okay. That's all I have. Thanks, guys.
spk00: If there are no further questions at this time, please proceed.
spk03: Fred, I think you want to say thank you to our auditor.
spk07: Well, that completes the call. I wasn't sure there was another one coming. So that completes the call for today. Thank you very much for attending it, and we look forward to catching up with you at the end of our fiscal year, June 30th. Results will be presented in September. Thank you. Have a good day. Thank you, everyone. Bye-bye.
spk00: 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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