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spk00: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the H2O Innovation Four Quarter Fiscal Year 2023 Financial Results. Bonjour, mesdames et messieurs, et bienvenue à l'appel conférence d'H2O Innovation annonçant les résultats financiers du quatrième trimestre de l'exercice financier 2023. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press the Start key followed by 0 for operator assistance at any time. Cet appel se déroulera en anglais, mais n'hésitez pas à poser vos questions en français. Before turning the meeting over to management, please be advised that this conference call will contain statements that could be forward-looking and subject to a number of risks and uncertainties. and co-cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded today, September 27, 2023, at 10 a.m. Eastern Time. I will now turn the conference over to your host for today, Monsieur Frédéric Dugré and Marc Blanchet. Please go ahead, gentlemen.
spk10: Yes, thank you, and good morning, everyone. My name is Marc Blanchet. I'm the CFO of H2O Innovation.
spk09: This call will be held in English, but I'll just say a brief word in French to our French audience. Merci. Bonjour à tous. Dans un premier temps, j'aimerais vous remercier d'assister à cet appel et de vous aviser 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 ».
spk10: 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 Duguay, President and CEO, is joining me today for the call, with duration is approximately 30 to 45 minutes. During this call, Frédéric will give an update on the business and present highlights of the Q4 and the fiscal year ended June 30, 2023. I will be presenting the financial results. Please take a moment to read the forward-looking statement on page 2 and the non-IFRS financial measurement on page 3 of the presentation. I now hand over the call to Fred.
spk07: Thank you, Mark, and to everyone for joining the call today. We wanted to start the presentation by providing some perspective on the evolution of the business over the last five years, which highlights the significant growth and margin expansion achieved by the corporation. H2O innovation over this timeframe has increased revenue by greater than two times and adjusted EBITDA by three times through a combination of organic growth and accretive acquisitions. Our recurrent revenues for the fiscal year 2023 was 88%, providing increased predictability and visibility into future operations. Notwithstanding the challenging fourth quarter for Maple, we look at our corporation through a full-year lens and make business decisions for the long term. We view the weakness in Maple as an aberration and all are more confident than ever in our fiscal year 2024 and 2025 outlook provided in our three-year plan. This is underpinned by our current backlog, which has experienced additional growth since the end of our fiscal year 2023, and margin expansion disability, which is supported by numerous active initiatives. We have implemented price increase programs, CPI adjustments on O&M contracts and insourcing of some of our manufacturing products, while also experiencing expansion of embedded margins in our backlog for the new WTF and O&M projects. It is worth highlighting as well that the strong cash flow generation in fiscal year 2023, which ended the year at almost $29 million and was $14.5 million in Q4 2023 alone, reducing our net debt to approximately $40 million. This contraction of the net debt is a significant value generator. Today, with over 1,000 employees at H2Onovation, all working hard towards a well-defined business plan with the right KPIs in place to motivate everyone to achieve our objectives, we remain very confident in the future. Let's have a look at the performance of each of our business pillars. Starting at page five, with our largest revenue-generating business pillar, the operation and maintenance. In fourth quarter only, Our O&M team was awarded three new and extended seven operation and maintenance contracts. In terms of renewed contract, this included Hudson Valley in the state of New York, as well as the northeastern side of the United States. Of these contracts is the city of Lincoln in New Hampshire, and has been extended for an additional period of five years. H2Onovation was also awarded a new O&M contract with Rocky View County in Alberta for a period of two years, with the option to renew for three additional years. The corporation has also secured two additional O&M contracts in the states of New York and Texas. In course of fiscal year 2023, the operation and maintenance group also received two important recognition awards for the city of Kenton, 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 are showing extraordinary care for our customers and do not compromise on environmental compliance. On top of that, our business model promotes high customer retention and offer multiple sales synergies to create value for the customers. By continuing building our North American platform, combining water treatment equipment, services, specialty products, and operation and maintenance, we'll continue to monetize the platform with repeat and new business with both industrial and municipal customers. Moving to page six, let's have a look at the highlights of our water technology and services business pillar, the WTS. During the fourth quarter, We secured 14 new water treatment projects, totaling almost 18 million, comprised of eight industrial and six municipal contracts. On April 6th, new water projects announced, which include 1.5 million gallons per day ceramic filter filtration system for the Fort Berthold Indian Reservation in North Dakota. This design will feature a high water recovery rate of over 97%. Another project was for an electrical vehicle manufacturer that includes a treatment using multimedia filters, degasifier, and RO system. The company also secured a contract for 1 million gallons per day treatment system with two seawater RO systems for U.S. customers. The fourth project includes an 18 million gallons per day filtration system for the West End Water Treatment Plant in the city of Billings in Montana. On June 28, the company was awarded two First Nation projects in Northern Alberta in Canada. The first contract involved a drinking water rental system to provide water for the community of Garden River, while the full-scale drinking water project is being completed. The other project is for an emergency expansion of the John Doerr drinking water plant to accommodate the needs of the communities that have been unfortunately displaced by wildfires during the summer. In addition, H2O secured a project for the turnkey deployable water treatment plant using granular activated carbon on one of the primary technologies used for PFAS removal in order to polish the drinking water of an amusement park in the state of New York. This newly awarded project was derived from execution of cross-selling initiatives between business pillars as this is an existing customer of the operation and maintenance business line. Furthermore, the City of Delaware, a long-term client, requested an expansion to the existing ultrafiltration system, which was provided by HDO back in 2013. Two other undisturbed projects were also secured, including one of the mining clients that requested an extension of the current rental period for two of the mobile treatment systems. 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 our growing reference list are positioning H2O on the leading edge of our industry in order to solve water scarcity issues. Moving to page seven, let's have a look at the combined evolution of the WTS and operation and maintenance backlog, which have grown at the three-year key guard of 24% and 13% respectively. At the end of the fourth quarter, WTS backlog stood at 58.7 million, representing an increase of 61% year over year. Not only is our backlog growing, but we are experiencing explosive growth in industrial projects, diversified or customer-based, with many of our new contracts being repeat business from some of the largest corporations in the world. Subsequent to the end of the quarter, we announced 28.7 million of new contracts for the WCS business line and continue to see the funnel of high-margin opportunities. The addition of these new contracts pushes the WTS backlog to a new high of $83 million. This diversification should allow us to improve WTS margin profile in the coming quarters. We believe that the EBAC margin should also continue to improve as well into the revenue as the revenue condition move into the larger industrial and municipal projects recently signed with prices reflecting the latest materials and wage increases at the end of the fourth quarter the operation and maintenance backlog stood at 131 million representing an increase of four percent year over year Subsequent to quarter end, the company announced a new operation maintenance contract and renewals, taking the backlog now to $167 million. We continue to add new contracts while extending existing contracts and adding new scope of work. The company is laser focused on implementing CPI adjustments to offset labor cost pressures. On a combined basis, our consolidated backlog has moved from 190 million at the end of June 30th, 2023, to now today at 250 million, representing a 31.6% organic growth in the last three months. Again, this is giving us an excellent visibility for revenue recognition and margin improvement in the coming quarters. Let's look at page eight on the performance of our specialty products business pillar. The fourth quarter showed another impressive growth of our specialty products revenue. All our business lines are pushing for innovation and have been capable to attract new customers to our business. The company has achieved a significant breakthrough in the Israeli desalination market through the sale of its super-concentrated and dendrimer-based product synthesized in our facility in California. Furthermore, the team presented a compelling case study during a recent European Desalination Society conference showcasing the successful implementation of the anti-scaling at the desalination plant in Israel. In the past fiscal year, nine new mega desalination plants started using this green chemistry product in countries like Israel, Singapore, Algeria, Qatar, and Argentina. This in total represents 2.2 millions of cubic meters per day of seawater being treated. With these new plants, a total of 3.3 million cubic meters per day are treated now in larger scale seawater RO plants using this green chemistry, which represents a CO2 emission savings of 183 tons per year. Because the tensile scale is phosphate-free and 11 times more concentrated than conventional products, it has the lowest carbon footprint in the industry and the lowest cost of freight and handling. 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. It is worth highlighting that Piedmont, one of HQO's subsidiaries, received two significant coupling purchase orders for two 600,000 cubic meter per day seawater reverse osmosis desalination plants. The maple business had a very challenging period on the heels of the worst maple harvest over a decade and industry production 60% lower year over year. The company has taken measures to optimize the cost structure and diversify into new business variables. Through our strategic objective of transforming the maple division into an agri-food division, We intend to lower the seasonality impact and diversify our client base into other auxiliary markets where our expertise in sugar concentration and membrane filtration could be beneficial. I will now pass it up to Mark, our CFO, who will review with you and discuss the financial performance of the company.
spk10: Thank you, Fred. Before going over the result of the fourth quarter, I'd like to go over the result of the fiscal year compared to the previous fiscal year. We're proud to report a second consecutive year with organic growth above 15%. In fiscal 2022, our organic growth was at 17.7. This last fiscal year, it was at 20.1, which allowed H2O to generate revenue of $253.3 million for fiscal year 2023, compared to $184.4 for the previous year. We invested in growth initiatives to achieve the 10% organic growth objective provided in the three-year strategic plan, such as hiring failed resource and investing in SG&A to generate and support this growth. Those investments have been successful since the targets have largely been exceeded. This explains also the increase in SG&A compared to previous last 12 months. However, the ratio over revenue is lower. It went from 18.1 and now stands at 17.5, showing the scalability of a business model as revenue continues to grow. Net loss stood at 1.3 compared to net earnings of 5.1 last year. Net earnings for fiscal 2022 were impacted by a deferred tax recovery of 4.6. The adjusted EBITDA increased to 21.4 compared to 18.1 in previous fiscal year. The adjusted VAT over revenue is lower at 8.4% compared to 9.8% last year. The reduction in percentage is explained by a reduction of the gross profit margin due to the business mix within the specialty product business pillar and due to high inflation of material costs and pressure on salary combined with the most difficult maple harvest season in many years, as Freddie explained. The fact that we can rely on three business pillars is the strength of H2 innovation. It allows us to be able to count on different sources of revenue and thus reduce the risk of volatility on EBITDA. The last few years, we have been focusing a lot on growth. The focus for fiscal 2024 will be to bring back the EBITDA at above 10%. We have committed to a three-year plan and intend to deliver it. Now let's look at slide 11. I would like to go over some of the financial highlights of Q4. The main highlight is the momentum maintained on revenue growth. We were reporting revenue of $65 million compared to $52 last year. This represents an increase of 24.8%. 16% is organic, 3% coming from acquisition related to the leader evaporator acquired in June 30, 2022. The adjusted EVDA and dollar increased by 34% compared to Q4 last year, standing at $3.1 million. Sorry, the adjusted EBITDA in dollars decreased by 34%. Yeah, I wish too. Standing at 3.1 compared to 4.8. It represents 4.8% of revenue compared to 9.1 last year. The percentage decreased of adjusted EBITDA over revenue is due to the decrease of the gross profit margin in percentage. The gross profit margin has decreased from 25.9 to 23.5 compared to last year due to high inflation of material costs, pressure on salaries, business mix within a specialty product business pillar, combined with the most difficult maple harvest season since many years. The percentage of SG&E over sales increased compared to Q4 last year. Investment in sales and business development are paying off since revenue is still growing faster than SG&E ratio. The highlight we're the most proud of is the cash flow generated from our operating activity. We generated $14.5 compared to $6.4 million of cash flow used during the same period last year. It's a variation of $21 million, and it's mainly explained by the favorable change in working capital items. In addition, we want to highlight the increase of our consolidated backlog. It's up by 16% at the end of Q4, but increased by an additional 31% since June 30, as explained by Fred a few minutes ago and with the press release this morning. It now stands at $250 million. Obviously, it provides good visibility and revenue for the upcoming quarters. Okay, now let's look at slide 12. We present the P&L highlights for Q4. On that slide, I would like to bring your attention on the table on the right. I want to address the Essex rate variation impact on revenue, giving the opposite fluctuation on certain currency. For the fourth quarter, it is a global positive impact of 7.6 million or 4.1% on revenue. On our main three currency, USD, GPB, British Pound, and Euro, exchange rates were favorable compared to QFON last year. Adjusted EVDA for the fourth quarter to that 4.8, which is a decrease of 4.3% compared to Q4 last year. The main reason is the decrease of the gross margin from, as I explained in the previous slide, considering issues profitability has been impacted by ongoing macroeconomic trends, supply chain, higher inflation, increase in wages, and the tough maple season. 2023 maple syrup. As we explained, got off a late start, temperature went up quickly and resulted in 60% decrease in production compared to last year for our customers. So our customers are the producers and they are the ones that have suffered from that production loss. So as Fred explained, just previously we right-sized a bit that business in order to adjust our fixed cost for the upcoming revenues. Slide 13, operation and maintenance. So, let's go over each business pillar. So, for the O&M business pillar, revenue for 2023 stood up $117 million compared to $87 last year, representing an increase of $30 million or 34%. Fifteen percent is organic growth generated from important scope expansion and new projects secured in previous quarters. ONM's EBAC reached 13.1 compared to 10.5 last year, representing an increase of 2.6 or 24%. What represents a slight decrease in percentage over revenue, the gross profit margin in percentage decreased from 17 to 16%. And to create a safe and attractive environment for our workforce and to create value for our customer by offering them a talented team, we decided to establish a minimum wages of 15 US dollars per hour for all employees. This was implemented in Q1 2023. We also increased salary in accordance with inflation. So since 65% of our employees are working for this business pillar, the O&M gross profit margin and EVAC are more sensitive to factors related to workforce. In most of the O&M contract, we are entitled to increase the annual fee based on customer price index, CPI. 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 and gain margin points in the upcoming quarter. On June 30, the O&M backlog stood at $130 million compared to $126 million last year, and following the press release of this morning, the backlog now stands at $167 million. I want to bring your attention also on the contract in Texas and the state of New York. They're usually evergreen and are not included in the backlog. Now let's look at WTS, slide 14. The revenue improved by 18%, which is coming, all of it is coming from organic growth. mostly from service activities and also capital equipment projects. WTS EBAC stood at 4.6 compared to 3.9, representing an increase of $700,000 or 17%. The increase in dollars is mainly due to improvement of gross profit margin explained by improved project performance. However, the EBAC in percentage over revenue decreased slightly and is explained by higher SG&E selling higher SG&E. Those expenses were higher due to new hirings of sale resource, higher labor costs and commission, as well as travel trade shows and conferences. The WTS backlog stood at 58.8 compared to 36 last year. It's an increase of 61%, and again, following the press release of this morning, it now stands at 83 million. The significant increase of the backlog is due to our investment in sales resource. We're also focusing on industrial project, which generally comes with better margin, which allows to improve WTF gross profit margin. Slide 15, revenue of specialty products to that 85.5 million compared to 54.4. It's an increase of 31 million or 57%, which is 35% organic growth coming from strong performance of all business line. Leader evaporator acquired last June generated 12.1 or 22%. Leader was the acquisition we did in June last year. Ethics rate variation were nearly zero for this fiscal year. EVAC stood at 18.3 compared to 15.2, representing a dollar increase of 3.1. The decrease in percentage is mainly explained by deterioration of the gross profit margin. The gross profit margin stood at 39.8 compared to 47.1. The gross profit margin variation is explained for two main reasons. First, business mix within the business pillar, since most of the revenue are coming from maple farming equipment following the acquisition. They're usually at a lower average gross margin with a bigger impact during the fourth quarter since the maple industry faced the worst harvest season in many years due to the weather conditions. The second reason is the increase of raw material costs for manufacturing of our specialty chemicals. Price increase, procurement strategy, and in sourcing manufacturing have been implemented in recent quarters, which should impact favorably the margin. The SG&E expenses increased by 5.3. The main reasons are the hiring of sales resource, pressure on salaries in connection with the inflation level, the resumption of travel, combined with acquisition of leader. However, the SG&E expenses ratio over revenue decreased by 0.7%. Since we are expecting a slower maple season, Maple season for fiscal, sorry, since we're expecting slower maple revenue for fiscal year, for the next fiscal year, at the end of June, we right-sized the team in order to adjust fixed costs with anticipated revenue, which should improve the gross profit margin any back percentage. Slide 16, we're very proud to present this financial position that is stronger. Account receivables increased by 3% since June 30, 2022. So it increased 3% over the year, while sales increased by 25%. And the variation is mostly explained by FX variation. Therefore, it demonstrates the improvement we did in collections since accounts receivables remain relatively stable. If we look at the inventory level, it increased by only 1% since last year. Again, FX explained most of this variation and will remain vigilant in regards to the level of inventory to be maintained, but at the same time properly aligned to support sales growth. The payables increased by 5.3% or 22%, partly due also from foreign exchange. and also higher compensation benefits payable and timing of payment to suppliers. Regarding the contingent consideration, the decrease is related to payment related to GCO and EC acquisition, which was made during Q3, and partial payment related to the GMP acquisition in Q1. The third and last payment of the GMP earn out was settled and paid in August 2023, so last month. Slide 17, cash flow. We want to highlight the fact that our operating activities generated $28.9 million for fiscal 2023 compared to a use of cash of $6.3 million for the same period last year. As explained in previous calls, the fast organic growth of the previous quarter pulled on working capital, but we're starting to improve the cash conversion cycle of these investments. This year, we also invested 10 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 to some of our customers. The net debt, so on slide 18, you can see the evolution of the net debt as of June 30, 2023. The net debt, which includes contingent consideration, stood at 39.9 million, so just below 40 million, compared to 50 last year. It's an improvement of 10 million due to the cash cycle improvement. This wraps up the presentation of the financial results. I'll now hand the call back to Frédéric.
spk07: Thank you, Marc. In conclusion on slide 19, I want to bring back our three-year growth plan slide that we presented back into our AGM in December last year. Looking at our sales pipeline, rich and diversified municipal and industrial opportunities, the strength of our distribution network for specialty products, recurrent revenues at 88%, a consolidated backlog of 190 million, which has, by the way, expanded to 250 million post-year end, and the compelling market drivers for the water industry, we envision continuation of a strong organic growth with a focus on margin improvement in the coming years. Consequently, we increased our revenue midpoint targets to $278 million and $315 million for fiscal year 2024 and fiscal year 2025 respectively. While growing revenues, we remain equally focused on improving our adjusted EBITDA margin above 11% by fiscal year 2025. As previously mentioned, we have implemented price Price increase programs, CPI adjustments on operation and maintenance contracts, and in sourcing of manufactured products, while also experiencing expansion of embedded margins in our backlog for the new WTS and operation and maintenance projects. The water industry tailwinds have never been so strong. It is being compounded by restoring of manufacturing and government stimulus for new infrastructure. While the corporation is seeing a wave of new bookings from the proliferation of industrial activity in the U.S., we're just now seeing U.S. infrastructure stimulus funds hitting the agency level for deployment in municipal projects. This represents the next wave of growth of our industry. We're very pleased with the level of growth in fiscal year 2023 and the value surface to shelters through generating $29 million of operating cash flow, thereby reducing net debt to around $40 million level. Our growth prospects, margin expansion visibility, and balance sheet strength position the company for value creation into a foreseeable future. Thanks, everyone, for joining the call today, and we look forward to answering your questions. I will turn it back to the operator for the Q&A.
spk00: Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to retry a question, please press the star followed by the two. If you're using a speakerphone, please lift the headset before pressing any keys. Your first question comes from Michael Glenn from Raymond James. Please go ahead.
spk06: Hey, good morning. Fred, you talked about, in the opening remarks, you talked about the win within the Israeli desalination market. I'm just trying to frame the size of your desalination business right now. What is the underlying growth opportunity? What's the growth outlook for that business in particular what you sell into desalination like is that you know for thinking of a three to five year kegger for that market like what does what does that look like
spk07: Well, first, what we're selling to the salination market is mostly components and consumables. So when I mean components, it's the filter housing, it's the coupling business. We'll be selling also filter going inside the filter housing. We'll be selling specialty chemicals as well. So our addressable market is through these products that we're selling. You were referring to a key guard of how much you said, Lenny?
spk06: Michael, sorry. From your side, you have a view on the industry overall and maybe your underlying business. What kind of growth kegger do you think we should be thinking about as we model your desalination business in future years?
spk07: The desalination business, even though it has been a little bit cyclical, has been growing tremendously over the last five years. So for us to envision a 7% to 9% to 10% is definitely within reach. So that's what we're aiming at.
spk10: Considering the fact that we're gaining market shares. In addition to the fact that we're gaining market shares in that market.
spk07: So for us to beat this market is kind of acceptable, because as Mark explained, we added resources into areas that we're not covering. So that's why we're celebrating these wins. I mean, being able now to address the South American market with dedicated personnel covering the regions, supporting our existing distributors, and growing the distribution network is where we see the big upside. Same thing in other regions. I highlighted the fact that in Israel, You know, it's a big desalination market. We didn't have anything going in the last, you know, two years. And now we have finally, you know, find a way to get going there with the chemicals. So the way we're addressing, you know, the business development now through regions, through a team leading and supporting specifically regions and their local distributors is paying off. And we're in a position to beat, you know, this current growth, organic growth that's expected in the markets.
spk06: What would be the size of your desalination, like your desalination dedicated business right now would be about what kind of run rate and revenue?
spk07: Well, we don't provide this specific segment. I mean, it's within the specialty products, but we don't give this granularity of information. But I can tell you that it's a very fair portion of the specialty products. I mean, this is where most of our energy is going. Outside of the specialty products, there is a maple, and most of it is, I would say, desalination-related specialty products.
spk06: And for you as a company, if we're thinking about – what you would like to do with M&A. Is there logical add-ons to think about that you could acquire with some M&A, like some new products and things like that that would help?
spk07: Absolutely. So I think you're on the money on this. I mean, what we're trying to do here, we have more than 100 distributors. They are currently selling the products I just mentioned to you. If we're able to acquire the company, bringing specialty products, complementary specialty products, we can rapidly grow the small business into a business that becomes, you know, more sizable through the acceleration we can give by pushing this production into our network. So that's an example. So yes, We have been and we continue to be on the look for opportunities for specialty products. We believe also a very good way to grow the business effectively into the operation and maintenance is to add acquisitions, small acquisitions into specific regions to expand into a specific geography. We have done it in the past. We have done it for Texas. We have done it for New York. This is a very effective way to grow the O&M through small acquisitions.
spk06: Okay, and Mark, you kind of touched on the fleet investments that are being made. Can you just remind us where you are with your fleet? Are those units leased at this point in time? And what's happening with that particular part of the business?
spk08: Yeah, so we started to invest into that business A bit more than a year ago, we now have eight units.
spk10: We've got four under construction, and we'll continue to grow that. The objective is to get about 40 units within the next five years, and right now they're all leased. We haven't started manufacturing any equipment until we got a lease. I mean, probably the best would be to have a fleet standing in a yard and be ready to deploy, but we're not there yet. So right now we're signing contracts, build them, lease them, and on and on. And until now, we haven't had any contracts that have been terminated.
spk07: They say that you don't have a fleet until you have assets available in the parking lot. And right now, everything we're building is currently deployed in the field. So it's kind of a good problem to have.
spk06: And just some of the metrics that you can share, like return on capital, payback period on these type of projects?
spk10: I haven't shared that, but it's good, very good.
spk07: Yeah, the idea is very strategic, as you will understand, very sensitive information that we're trying to deploy these assets to mining customers and And they're buying these assets because they have urgent needs for water and they have complicated, you know, water to process. So we value this, obviously, differently than when we sell it, when we sell the same technology to a municipal customer, right? So let's assume that it's quite a high margin and it will be a transformational move in the coming years for us and as we continue to expand.
spk10: It will participate in the improvement of the percentage, obviously. That's the idea.
spk06: Okay. Okay, thank you for taking the questions.
spk04: Thank you, Michael.
spk00: Your next question comes from Frédéric Tremblay from Desjardins. Please go ahead.
spk05: Thanks. Good morning. Good morning, Frédéric. Maybe we'll start with Maple since it was called out as a headwind in the quarter. Thank you. With Q1 being almost over now, can you maybe share some thoughts on your expectations for Maple in Q1 and maybe the subsequent quarters relative to Q4? Are we expecting a gradual improvement or was the weakness isolated to Q4 from a demand and profitability perspective?
spk07: I think the Q1 is still impacted by the low season that the producer had. I think the farmers in general still have a sour taste on the bad season they had. Fortunately, there will be a point where they will have no choice but to invest and add new equipment or to replace them. because these equipments are getting old, you know, on the field. So we still believe that this year will be a challenging year in a sense that, you know, it won't be an extra year as we had in the past and previous years. However, we know that in Canada, in Quebec more specifically, the Federation has announced another 7 million of new taps available. So the producers and the farmers will have the possibility to further expand their production in the coming quarters, coming years. Now, we've heard that many of them have started to apply for this possibility to expand their quota and to increase the number of taps in their production. Some may invest this year, but most of them we believe will be for the following year. So this year, I think it will be a year where we're expecting some flat year kind of compared to what it was before. Our strategy to mitigate that, as Mark said, we have right-sized the business. We have done some price adjustments on our products. We are still in the process of turning around or integrating the company acquired last June, so leader evaporator. So now we are a little bit more than a year into it, and we're still making good progress to, gain efficiency into manufacturing and optimize what we have now. So for us, it will be to play more defense this year with that division and try to maximize profit through tight margin control on our products and manufacturing.
spk05: Okay, thanks for that. That's helpful. Maybe switching to inflation and pricing. You did mention that you're starting to see a stabilization on the horizon for inflation. At the same time, you're still in the process of adjusting some prices and implementing CPR adjustments. In terms of rough timing, when should we expect H2O to have fully caught up on the past inflation headwinds through the pricing strategies?
spk07: Well, it can go up to, for the operation and maintenance, it can go up to two years. I mean, by the time you do the full cycle and revisit all your customers, I mean, some are evergreen. Some are long-term contracts. You need to wait the anniversary date to engage into a conversation with your customers. Some will accept to have an increase over a two-year period instead of having just a drastic increase. So it's really hard because it has to be customized through each customer. The mistake will be to try to push too much, a drastic price increase to your customers without paying attention and then becoming blindsided and then seeing the customer starting to engage a conversation with your competitors. then losing the business. So we have to be very thoughtful, very strategic the way we're approaching it. And this is where our team has this customer and unique customer relationship. And I will even call it intimacy with a customer to, to convey that message. But time is our best align to this. So yeah, I mean, sorry, I mean, we could correct it over a quarter, but it will still be deployed and has started to be deployed, but it will take several more quarters. On the other hand, we're seeing, though, a stabilization more into the cost of wages. So for us now, we feel that the worst is behind us in terms of drastic inflation into labor costs. And we think that now our hands are around it. We see more stability. We see less turnover and so on. So this is helping us in the overall operation itself.
spk05: Great. And then just the last one for me. I'm great here on cash flow generation from operations, especially Q4. Any thoughts on what we should expect there in fiscal 24? Is there still room to sort of improve or enhance working capital management and just, I guess, just general views on cash generation for the year ahead. Thanks.
spk08: Yeah, I mean, last year, I would say an important KPI metric that we've implemented is cash conversion cycle for all business lines.
spk10: So the money turned down on a monthly basis, they even have like a variable remuneration target related to it. So we're pushing hard to continue to improve it. I mean, as much as 2022 was almost an anomaly, we caught up on that, you know, following the sudden growth. Now we kept the pace and, you know, it will go more towards normality, I would say, going forward, but also we'll continue to push on improving that QPI of cash conversion cycles.
spk05: Thanks for taking the questions. Thank you.
spk00: Your next question comes from Andrew Leno from National Bank. Please go ahead.
spk03: Hi, good morning. Thanks for taking my questions. The first one for me is actually a bit of a continuation of a question just asked on the cash in there, but from a different angle in that your cash balance is pretty significant in this quarter. So I just wanted to ask whether, number one, you have any minimum liquidity covenant from your lenders, and if not, what would be the best use of the cash that you have in the balance sheet?
spk10: You know, our cash, let's say our allocation strategy, capital allocation strategy right now will go towards the capex for increasing the fleet, and also we have to say that we're looking at M&E targets. You know, the three-year plan of last year and the previous one, we said we would kind of take last fiscal year to integrate. I think we did a pretty good job at it, and things are pretty well on its way. Next fiscal year and the following one, and we'll update the three-year plan in December, but it's definitely to get back into M&A strategy with Deliverage, the company, and just so that they – The teams are ready also to integrate additional targets if we agree on certain ones.
spk07: I mean, having a strong balance sheet that is not leveraged at this point for us is a good opportunity to continue and push our M&A strategies. As we said now, we think that things are coming back to normal. We believe that, you know, multiples for potential targets are coming back to some more common sense, let's put it this way. And we think that we're in good position with the pipeline of opportunities we have for M&A to capture these ones.
spk03: Okay. No, thank you. And, Fred, you answered my next question on multiples and the environment there. But just a quick follow-up, perhaps, for Mark. And maybe you mentioned it. Apologies if I missed it. But what are you aiming for CapEx for 2024?
spk10: We'll stick pretty much in line with history. We have about 1% to 2% of capex per year. Half of it is growth capex, half of it is maintenance capex. That's in the normal course of business. And as we announced last summer, we are investing into the fleet of assets, so trying to build a fleet. And I would say that the amount of CapEx invested for that fleet will be plus or minus similar to this year, maybe a little bit more. It depends on how fast we can build them. But it's somewhere between $6 million to $8 million of investment for that fleet.
spk03: Thank you. And one other question I wanted to ask, and I know you just announced some new wins, and congrats on that on the backlog, but with the economy slowing down a little bit, are you seeing any changes to the bidding universe, I mean, especially when it comes to the WTS, or is it just go-go?
spk07: Not at all. Not really, but not at all. If anything, I mean, we have seen even acceleration.
spk00: I think...
spk07: This acceleration is driven by reshoring, but also water now being perceived as an operational risk for these industrial companies. And I've been mentioning that is that previously, you know, companies were sourcing the water from most of it for the city, relying on the city to provide them. But now with challenges related to availability, scarcity, price of the water itself, they're now looking for ways to source the water that they need for their processes on their own way. So they are investing into their own water treatment facilities. Actually, what we're building is mostly, you know, water reuse facility for industrial customers. And this has great success, and we haven't seen a slowdown, per se, in that market. And as I said, on top of that, The municipal stimulus money, notably in the United States, hasn't really impacted us yet in a sense that now this money has started to flow to agency levels, started to flow to consulting engineers, for example. They're starting the planification, starting to prepare the RFQ, RFP, and they will go to tender in the coming months. So we think that for us there's another wave of opportunity also behind it. The mining sector hasn't really slowed down either with all the transition, you know, for the electrical and energy transition.
spk03: So, I mean, we're not short of opportunities, clearly, on that market. That's great to hear. Thank you. And last one for me, and I'll jump in the queue, but when you're talking about further price increases and outside of their CPI in the O&M, so I'm looking at more of the SP segment, What kind of price increases do you think you can push on over the next year? Is there any more room to do there? And if you can quantify, at least even in broad terms, it would be very helpful. Thank you.
spk07: So we have essentially two strategies on this. One, which is yes, straight price increase. And we think that we can see areas in some countries that are I would call it less competitively exposed than other ones, so we can see price increase of, let's say, 3% to 7%. In other areas where it's more sensitive to price, notably in the Middle East, because it's a high visibility region where the entire world wants to sell to the Middle East for components and products. So this is a more sensitive area. We'll be more prudent in the way we're approaching price increase between 2% to 5%. The other strategy is for us to replace some products at lower margins by high-value products margins. And that's why I was referring also to the benefit of our green chemistry. It has multiple benefits also outside of the green purpose and the green and phosphate-free and and lower footprint in emission, but it has also the benefit of having better margin because this product is made completely in-house, it's sensitized to polymer. So again, this is giving us an excellent price point where if we're able to replace a conventional product, a phosphate-based product with this green chemistry, not only we make the customer better and with a better product, but also we improve the margin profile. So it's a different strategy, and again, we have to customize it depending on who we're talking to.
spk03: Okay, sounds great. Thank you very much. I'll jump in the queue. Thank you.
spk00: Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Ben Jekic from PI Financial. Please go ahead.
spk02: Hi, good morning. I think the question has probably been answered, but I just wanted to ask one on the maple business. So you said it's going to, so what we've seen in the 4Q will kind of extend through fiscal 2024. Do you disclose, especially for us, kind of fresher to the story, what is the size of the maple business? within the segment?
spk10: So we, I mean, we didn't disclose it as per se, but I mean, last year we said we doubled it with the acquisition of Leader and this year Leader did 12 million. So it gives you a bit of an idea and it was slower than expected. So, you know, if you make round numbers, you've probably arrived around 25, 30 million of revenue. Gotcha. Perfect. Thank you so much.
spk00: Your next question comes from Gabriel Long from Beacon Securities. Please go ahead.
spk01: Good morning, and thanks for taking my questions. I actually just had one follow-up just around, I guess, the EBITDA margin aspirations for the current fiscal year at sort of 10.5% plus. Given where things sort of fell in fiscal Q4 and given what you've seen so far on the maple side for the September quarter, maybe just talk to us again about how – where do you think – where are you prioritizing the margin expansion over the coming several quarters? And at what point would you expect to see a year-over-year improvement in the EBITDA margin percentage? Do you think it will be more of a back-half thing at this point, given what you're seeing? Yeah, so there's two things.
spk07: I think the first benefit will be coming from the price increase for specialty products because it's faster to deploy and it's easier to see the benefits immediately. The second half of the year, or even the coming quarter, but I think the benefit of the backlog that now we're just ramping up from WTS is carrying, again, projects at much better margins than the previous one we had at the backlog. So we know that these new projects we're going to execute and deliver will be at better margins. So this is just a fact. I mean, you look at the profile of the backlog we have, once it's going to hit the P&L, it will carry a better margin. Then the long-term strategy, as I said, and this is the one where we have to be meticulous and strategic, is the operation and maintenance, where we have to customize our approach to each of the O&M customer we have. So it is our main focus from the beginning of this fiscal year, and it was the previous year as well. So this will remain, and we're engaged, and we're confident in executing that.
spk01: Thanks for the feedback. Thank you, David.
spk00: Your next question comes from Michael Glenn from Raymond James. Please go ahead.
spk06: Hey, Mark. Can you just, for the working capital and the outlook and the CapEx outlook next year, just give a dollar figure for total CapEx, including the fleet, next year, what we should be thinking about. If you could maybe put it into dollar terms and then maybe just wrap some info around working capital. Should we continue to see an inflow on working capital next year or will there be an outflow? Thanks. So you got a tough one here.
spk10: So in terms of CapEx, as I said, you know, About 2% of the revenues are regular CapEx spending, in addition to the fleet, which, as I said, $6 million to $8 million. Then in terms of working cap, as I said also previously in the call, we should go back to more normality in terms of ratio. So I invite you to maybe look at what we did, you know, 2019, 2021. Those are normal years. So in terms of working cap ratio, I think it'll look mostly like that. Does it help?
spk06: Okay. Yeah, that should help. So when you're talking about the 1% to 2%, it should probably then trend towards the higher under that range then? Is that a fair statement?
spk10: Yes, 2% makes sense, 1.8% to 2%. That's in line with what we did historically in normal years. Okay. Okay, thanks. Of sales, eh? 2% of sales. Yeah. Good.
spk00: Presenters, there are no further questions at this time. Please proceed with your closing remarks.
spk07: Well, thank you very much for joining the call today, and we look forward to catching up with you on Q1. Thank you for your trust and confidence. Have a good one. Thank you. Bye-bye.
spk00: Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.
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