H2O Innovation Inc.

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.

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.

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.