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Edited Transcript of HEO.V earnings conference call or presentation 13-May-20 2:00pm GMT

Q3 2020 H2O Innovation Inc Earnings Call

QUEBEC May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of H2O Innovation Inc earnings conference call or presentation Wednesday, May 13, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frédéric Dugré

H2O Innovation Inc. - Co-Founder, President, CEO & Director

* Marc Blanchet

H2O Innovation Inc. - CFO

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Conference Call Participants

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* Daniel Rosenberg

Haywood Securities Inc., Research Division - Analyst of Technology

* Gabriel Leung

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Raveel Afzaal

Canaccord Genuity Corp., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the H2O Innovation Conference Call Announcing its Third Quarter 2020 Financial Results.

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(Operator Instructions). Before turning the meeting over to management, please be advised that this conference call, the company's statements that could be forward-looking and subject to a number of risks and uncertainties and could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded today, May 13, 2020, at 10 a.m. Eastern Time. I would now like to turn the conference over to your host Frédéric Dugré and Marc Blanchet. Please go ahead, gentlemen.

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Marc Blanchet, H2O Innovation Inc. - CFO [2]

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Yes. Thank you very much, and good morning, everyone. My name is Marc Blanchet, I'm CFO of H2O Innovation. This call will be held in English, but I'll say a brief word in French to our French audience.

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Before we begin, I invite you to download a copy of today's presentation, which can be found on our website at h2oinnovation.com in the section investors. Frédéric Dugré, President and CEO is joining me today for the call, which duration is approximately 30 minutes. During this call, Frédéric will give an update on the business and present highlights of the third quarter 2020, and I will be presenting the financial results of this quarter. Please, take a moment to read the forward-looking statements on Page 2 and the non-IFRS financial measures on Page 3 of the presentation. Now I hand over the call to Frédéric. Thank you.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [3]

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Thank you. And thank you Marc. And thank you for joining the call today regarding the presentation of our third quarter results ended March 31, 2020. We are extremely proud of the results we're presenting today. They truly testify the success of our strategy to focus on building a business relying on recurring sales and high customer retention. As presented on Page #4, the third quarter was punctuated mostly by the impressive revenue growth of 60% coming from the specialty products. Indeed, the acquisition of Genesys completed on November 15, 2020, is -- in November 2019, sorry, is improving strategically our corporate profile from a revenue, gross margin and profitability perspective. It was also quite nice to see the sustained growth of Piedmont and PWT this for this quarter, both adding also strong gross profit margin to our consolidated results. On top of that, we also experienced a really positive comeback from our Maple Farming Equipment division compared to last year.

As of today, and even more, while going through the COVID-19 pandemic, we can say that our Genesys acquisition is delivering as planned. The integration road map is progressing well with 60% completion on all the tactical objectives that we have. We started also to capture the first sales synergies. At Page #5, we see that part of our revenue growth for this third quarter was also coming from our O&M business pillar. From all the business lines that we have, it is by far the most resilient business line that we have due to the nature of services that we're providing. People won't stop drinking water, neither they will stop flushing their toilets. So -- and for this third quarter, the O&M is showing a 7.1% organic growth, mostly driven by scope expansion on existing O&M contracts and by addition of new MUDs customers, municipal utility district in Texas related to the [A South] in Houston

Supported by strong specialty products revenue, the gross profit margin increased from 23% to almost 29% for this quarter. We are very proud to present a record high adjusted EBITDA of $3.8 million or 10.5% of the revenues. This marks an important milestone for the company for its employees who continue to work and continue to go above and beyond to serve our customers, manufacture amazing products, launch new technologies and support the overall business in many ways. On a good note as well, the earnings reached $1.6 million before nonrecurring and noncash impairments of $5.3 million related to the project and aftermarket business pillar. Marc will further discuss this later in the presentation.

Overall, I would say that we delivered strong results for this third quarter. Our business model, presented on Page 6, focused on growing recurring sales and improving our profit margin through specialty products -- for specialty products is indeed delivering positive results. Here's a couple of key drivers behind the significant financial improvement. As mentioned previously, the acquisition of Genesys completed on November 2019, combined with the sustained growth of Piedmont and to the comeback of our Maple Farming Equipment are responsible of our performance today. Furthermore, the performance of PWT can't be ignored since the addition of new distributors secured last year is starting to provide positive results in specific very promising regions such as Saudi Arabia.

Also, the 7.1% revenue growth from the O&M activity, boosted by scope of work and new MUDs customers are also contributing to improve our financial performance for this third quarter. Unfortunately, the sustained growth of the second and third business pillar are partially offset by the 24.8% revenue decrease experienced in the first business pillar. Indeed, the postponement and even cancellation of a singular product in California has not allowed us to generate the revenues expected. Nevertheless, our combined backlog remained strong and diversified at $136 million, giving us an excellent visibility for the coming quarters. In a nutshell, our business model is solid and relies on 3 distinct but highly complementary business pillars. It also creates multiple sales synergies between the different business lines and provide a one-stop shop value proposition for our customers.

Moving to Page #7. Navigating through the COVID-19 crisis have allowed us, and hopefully for investors, to realize a few things about our business. Indeed, water is truly a necessity. Everything relies on water, no water, no food, no power, no manufactured products, no transformation, no animals and no lights. As I said earlier, people won't stop drinking water. They will continue to take showers and wash their clothes and never -- and they will neither stop to flush their toilets. Going through this global crisis, we also realized how resilient and recession-proof is our business model, with 88% of recurrent revenues by nature. So early in the beginning of the COVID-19 pandemic, we have implemented many preventive and protective measures to ensure the continuity of our services for all our business lines in 4 countries where we have operations and employees located. We are also closely monitoring our cash flow and haven't seen any deterioration and change in our cash flow cycles, partially due to the nature of services we are providing. For all these reasons, we have been able to respect all bank covenants and maintain a healthy financial situation.

At Slide #8, we are showing how we have continued to ensure the selling, manufacturing and shipping of specialty chemicals around the world. Despite the global pandemic, our team was able to produce a record high number of batches and orders while respecting physical dispensing and other sanitation best practices. During that time, our salespeople and distributors were engaged with customers to provide virtual training on our products and securing new orders. What a teamwork we have.

On a similar manner, our O&M team, as shown on Slide #8 -- #9, sorry, continue to service and expand our 200-plus municipal, commercial and industrial water and wastewater facilities while facing adversities. Not only the COVID-19 crisis but also recovering from different tornadoes in March, while impacting the states of Georgia and Mississippi. We have a terrific team in place with so much experience in crisis management. Think about it. Our team has to face the terrible Hurricane Katrina that devastated notably the coast of Mississippi in 2005. A couple of years ago, it was Hurricane Harvey that paralyzed the entire Houston metro area in 2017. Today, going through the pandemic, we realize how valuable it is to rely on such a solid and experienced team, capable to face adversity with courage, care and determination. I'm really proud of our employees, and I want to thank them for their amazing work while continuing to respect the extraordinary sanitation measures we implemented.

At Slide #10, we are showing how the level of recurring revenues by nature has evolved over the previous financial periods. The strategic decision to focus in growing recurring sales and focusing on customer retention has allowed us to significantly derisk the business, improve cash flow and gross margin profit. For our third quarter, the recurring revenues reached a new high of 88%, driven by our specialty products that we manufacture and export in more than 80 countries, by the operation and maintenance, we're providing to 200-plus water and wastewater utilities in North America and by our after sales market, we're providing to our product installed base.

Moving to Slide #11. We see that our business mix has a strong impact on our adjusted EBITDA improvement. For the third quarter of 2020, looking at the last 12 months, we continue to observe an organic growth, mostly fueled by the growth of our second and third business pillars. On an LTM basis, consolidated revenue reached $129 million, while adjusted EBITDA continue its progression to reach $10.1 million. The strategy to grow first the specialty products in the O&M business pillar had a direct and positive impact on our adjusted EBITDA.

I will now pass it on to Marc Blanchet, our CFO, who will review and discuss the financial performance of our company for the third quarter ended March 31.

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Marc Blanchet, H2O Innovation Inc. - CFO [4]

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I thank you, Frédéric. So if we move to Slide 13, first pillar project and aftermarket. The revenues of the third quarter for this pillar stood at 6.7%, which is a decrease compared to 8.9% last year. On a last 12-month basis, revenue stands at 31.5%, which is again a decrease from 41.6% last year. The weight of projects on consolidated revenues significantly decreased. On the last 12-month basis, project revenue represented 38% of the consolidated revenue in 2019. Now it represents 24%, which, as Frédéric expressed or explained, it's in line with our strategy to focus more on revenues that are recurring in nature, such as specialty products and operation and maintenance. This decrease is explained by the fact that on a last 12-month basis, consolidated revenue increased by 17%, while the LTM project revenues decreased by 24%. As for the gross profit margin, we can see the result also of the strategy of being selective on project we did, where the gross profit margin stood at $1.3 million or 18.6% compared to 16% last year. Therefore, we can see that being selective on project with higher gross profit margin projects in towards wastewater industrial is paying off. This decrease in revenue impacted by the project -- impacted the Project EBAC negatively. Project EBAC stood at $100,000 or 0.8% for this quarter compared to $0.5 million last year or 5% last year, representing again a decrease.

On the third quarter, the corporation suffered from delays of some specific projects. And the -- at the previous quarter call in mid-February, I mentioned that the project was suspended and that we expected to have $3 million to $5 million of revenue being postponed to next fiscal year. Unfortunately, we have recently been notified that this project has been canceled. On May 5, we announced the cancellation of this $10 million project, and we removed this from our backlog. The backlog now stands at $33.3 million, which is a 30% decrease from last year.

Over the last few weeks, we have also suffered a delay in some projects due to the COVID-19 prices. Therefore, revenues that we expected to recognize this year are going to be postponed to the next fiscal year. At the end of this fiscal year, management expects that the project and aftermarket business pillar will finish the year with about $10 million less of revenue compared to last fiscal year. This project cancellation and these delays due to the COVID-19 pandemic forced the management to review the forecast of this business pillar with new growth assumption. As a result of this analysis, management recognized a noncash and nonrecurring impairment charge of $5.3 million against goodwill impairment and intangible assets.

Management maintained its objective of improving the corporation's profitability and will remain selective on projects on which the corporation intends to bid, focusing on projects with higher gross profit margin and projects that may generate recurring revenues, such as operation and maintenance contracts and aftermarket revenues. Management also maintained its strategy which aims at growing the second as a third business pillar in order to continue to grow recurring revenue, in particular, specialty products revenue, which are characterized by high gross profit margin. If we move on Slide 14. We will talk about specialty products. So the revenue for this business pillar stood at $12.9 million during the third quarter compared to $8 million last year. It's an increase of $4.9 million or 60% increase compared to last year. This increase is supported by the acquisition of Genesys, which was closed on November 15 and generated $3.1 million for the third quarter, also, we've had significant orders of Piedmont that were delivered during this quarter. And as Frédéric explained, the sales of Maple, which recovered from last year's low season.

On the last 12-month basis, revenue also increased significantly from $22.4 to 35.3% this year. This 58% increase is the result of our effort we've done to increase the revenue from specialty business pillar. Investment done in Piedmont, combined with the acquisition of Genesys, will continue to generate growth of the revenue from this business pillar in the upcoming quarters. The gross profit margin stood at 5.9% or 45.4% -- sorry, the gross profit margin stood at $5.9 million, it's 45.4% for this third quarter compared to last year where it was at 38%. It's an increase of $2.8 million and, of course, an increase in percentage. The gross profit margin increased by 88%, while the revenue increased by 60.5%. Specialty product EBAC stood at $3.6 million or 27% compared to $1.7 million last year or 20%, representing an increase of close to $2 million and 115% increase. This is due to high level of revenue, good control on operating and selling expenses as well as addition of the Genesys acquisition.

If we move to Slide 15, operation and maintenance. So there is -- the revenue for this business pillar, which are very recurring revenue have decreased by 16.4% compared to -- sorry, 16.4% compared to 15.3% last year, with 7% growth. This increase is due to the organic growth seen in both Utility Partners and Hays. On the last 12-month basis, we've also increased significantly from 62% compared to 46%. This is 35% increase, mostly coming from Hays. The gross profit margin is pretty stable at 19.6% the year. Last year was 19.5%. But it generated a $200,000 more, so the 7.6% increase compared to last year.

The EBAC stood at $2.2 million or 13.6% this year compared to $1.9 million or 12.6% last year, it's -- and again, an increase of $300,000 or 15.4%. This variation is due essentially to high control on expenses, this pillar. On March 31, the O&M backlog stood at $103 million compared to 13 -- so it's a 13.6% increase compared to last year. It's important to note that at Hays, the contract are not included in the backlog. This significant backlog, combined with the high recurring revenue coming from Hays customers are providing us an excellent visibility on the revenue for the upcoming quarter.

Page 16, if we look at it on a consolidated basis. So we report revenues of $36.1 million, it's an increase of 11.6% compared to last year. As explained earlier, this increase is mainly coming from the acquisition of Genesys as well as organic growth from specialty products and operation and maintenance. The gross profit margin ratio increased to 28.7% compared to 23% last year. This increase of the gross profit margin percentage, as explained by the increase in the gross profit margin coming from specialty products, notably affected by the positive acquisition of Genesys, improvement of gross profit margin from the project and aftermarket and adoption of the new accounting IFRS 16 accounting rule. For those who are less familiar with this new accounting rule IFRS 16, what it does essentially on the accounting perspective, it considers lease the same way as assets are considered. So the P&L rent expenses has been replaced by amortization expenses and interest accretion. On the balance sheet, we will be able to identify it in the new section right-of-use of assets and lease liabilities.

The net loss is mainly due to the impairment of $5.3 million taken on the project and aftermarket business pillar, as I explained it earlier, we've had to reduce the value of the goodwill and the intangible assets. The COVID-19 pandemic forced the management to review the forecast of this business pillar with new growth assumption, notably for the business pillar of project, mostly impacted by project being canceled or delayed. The project being canceled and delays in other projects. To those new projections, the result of the test concluded that the recoverable value of the project and aftermarket division is not sufficient to support the book value. Therefore, we have to write off goodwill and intangible coming from previous acquisitions. It's only specific to this business pillar. Without the impact of the nonrecurring and noncash impairment, the corporation -- we have presented a net earnings of $1.6 million for Q3.

If we look at Page 17, SG&A expenses. They increased this quarter, essentially due to the acquisition of Genesys, so it's an addition of $700,000. We've also, since last year, created a new procurement department and hirings have been done in Piedmont and aftermarket sales team and also in the admin team to support the growth. The adoption of IFRS 16 also has an impact here of $200,000. It decreased SG&A by $200,000. So even if the SG&A in percentage increased during the third quarter, the objective of management is still to maintain the objective to finish the year, so our financial year, which ends June 30, with SG&A over revenue that are below 18%.

Adjusted EBITDA, so the adjusted EBITDA increased by $1.6 million and reached $3.8 million during this quarter. Our adjusted EBITDA in percentage is now at -- was at 10.5%, which is a significant increase compared to 6.8% last year. This increase of adjusted EBITDA is driven by the increase in revenue, the increase of the gross profit margin, essentially coming from Genesys and Piedmont and the impact of IFRS 16. The adoption of IFRS 16 reduced the -- sorry, the adoption of IFRS 16 contributed to reduce by $400,000, the operating lease expenses for the third quarter 2020. Excluding this adjustment, we would have been at 9.4% compared to last year, with the same -- without the accounting rule IFRS 16 would have been at 9.4%.

In previous call, in November and in February, I expressed the objective of the management to reach an adjusted EBITDA of 7% to 8% of our revenue for this fiscal year. After 9 months, the adjusted EBITDA now stands at 7.9%. Therefore, we're confident that we will be close to the upper threshold of this objective for 2020, which ends June 30.

Financial position, Slide 19. So the working capital increased by $4 million. It was at 12.8% on June 30, 2019, an increase to 16.8% on March 31. The working cap is mainly impacted by IFRS 16, which added, on March 31, $1.3 million in the current portion of the lease liability. The increase in the working cap is due also to the acquisition of Genesys on the balance sheet. The receivable increased by $7.6 million to $27 million on March 31st compared to $19.4 million last -- on June 30. The integration of Genesys added $3.4 million and the growth of Piedmont explains most of those variation on the balance sheet, also this increase. I just want to say that although the level of account receivable is higher than usual, all significant accounts receivable are insured by EDC, and most of them have been collected in April. I want to highlight that in the context of the COVID-19 crisis, a very special attention is given to collection of receivables. Inventory increased by $300,000. This increased inventory is mainly due to the acquisition of Genesys, which contributed to $600,000 of increase and offset by the reduction of inventory in the Maple business. Account payables were at 14.4%, which is an increase of 2.1%. This increase is mostly due to Genesys.

Page 20, the net debt. So the net debt now stands at $18 million, which is pretty similar than last quarter. It's an increase compared to June 30, and most of this increase is coming from the new debt we secured with National Bank for the acquisition of Genesys on November 15. The amount of debt new debt was $12 million. As of March 31, all bank covenants were respected. The main ratio we have to reflect are the debt/EBITDA ratio and FCCR. And just to communicate it, the debt/EBITDA ratio was at 2.5x on March 31 and FCCR was at 1.65.

So we continue -- we've never stopped reimbursing our long-term debt with National Bank. So we've made all our payments so far even through the crisis. And we expect to reduce the long-term debt by about $2.50 to $3 million by June 30. On March 31, we had $6.7 million in cash, and we had also availability on our line of credit of $5 million.

So talking about cash flow on Slide 21. The operating activities generated $900,000 in cash for Q3 compared to a use of $200,000 last year, $200,000. The increase in cash flow from operating activities is coming from the improvement of the earnings before income tax and impairment. As you can see on this slide, the cash flow from operating activities before change in working cap items was at $4 million, which is $2 million higher than last year. Again, I want to reiterate that given the current COVID-19 situation, we are closely monitoring our cash flow.

This concludes my remarks on the financial section. And I'll now hand the call over back to Frédéric for conclusion remarks.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [5]

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Thank you, Marc. Moving to Slide #22. Well, we do have blue sky ahead of us. So we believe that many opportunities will emerge coming out of the COVID-19 crisis in the coming months and years. First, our project and aftermarket business pillar remains well positioned to capture future infrastructure projects in Canada and in the U.S. So this federal government decides to invest, as they did in the past, money towards infrastructure programs in order to upgrade or extend their aging infrastructure. We should be well positioned to capture some of these opportunities. Second, our large distribution network of specialty products demonstrated that we have a winning strategy. Indeed, we observed that our 120-plus distributors of Genesys, PWT and Piedmont, have been able to supply end users more efficiently since they all carry inventory available locally with minimal lead time for the end user.

Also, they have in-house technical expertise that speak the local language and understand the culture, again, in order to support in a better way, the end users. We prefer to channel our sales through our distributors than having salesmen traveling, and actually they wouldn't be traveling, and flying around to seek for new businesses and maintain remotely client relationship.

Finally, for the O&M business pillar, we believe that small and midsized municipalities, private facilities and industries will rely more on experienced contractor operators such as H2O Innovation. Contractor, the operators can better manage these water and wastewater assets to ensure a greater continuity of operations, compliance and safety in the services provided to ratepayers. We believe we could mitigate operational risk for many utility owners facing limited resources that remain exposed to interruption in their services. In such case, we can become their #1 contingency plan to ensure continuity of services and compliance with a large team of certified operators at competitive cost.

In summary, at Slide #23. Well, we are really proud of our third quarter results. With a decent growth of 11.6%, supported by 88% of recurring sales coming from revenues generated by the aftermarket, the specialty products and the O&M side of the business, we can say that our business model is solid and resilient. Our focus to grow predominantly our specialty products offering, and recently through the acquisition of Genesys, is paying off. Through our one-stop shop business model, we are promoting multiple sales synergies and high customer retention. At the same time, it allows us to significantly derisk business.

We are presenting an adjusted EBITDA of $3.8 million, equivalent to 10.5% of our revenues, up 72% compared to the same quarter in previous year. This is an historical high for the company, and it shows the scalability of our company. Our sales backlog combining projects and O&M, long-term contracts, remains high at $136 million, again, giving us excellent visibility for the coming quarters.

One thing is sure, water is essential towards day-to-day. And therefore, we have been able to maintain the continuity of our operations during the COVID-19 pandemic. By ensuring the continuity of our operations, our financial situation remains strong, and our balance sheet is not overleveraged, allowing us to continue to navigate through the COVID-19 crisis in a positive manner with multiple opportunities ahead of us. Finally, it's worth to mention that earlier in February, we have been nominated as Water Company of the Year by the Global Water Intelligence Agency in U.K. for the impressive and transformational '19 year we had. It is truly an honor to be nominated in this category, particularly as we are celebrating our 20th anniversary. The winner for this category will be announced later this fall.

I thank you for attending the call today. And now we'll turn it back to the operator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Daniel Rosenberg with Haywood Securities.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [2]

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I had a question regarding the Project division. So in terms of the outlook for you guys, how you adjusted your expectations going forward. I understand there's some accounting things with the impairment charge that for you specifically is an opportunity. Have your thoughts changed given the current environment?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [3]

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Well, our focus remains the same, to look for projects with more sustained gross margin. So that's the #1 priority. And look for opportunities, again, that will idly fuel opportunities for the other business pillars. So things we have done like in the past with Sustainable Water, our partner, where we're doing projects in a design-build and operate mode, will remain a priority. And we do have projects that we're currently working on that will become tangible projects in the coming quarters. So that's an area of focus we have.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [4]

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Okay. And to-date, the quarter was good, and you guys definitely have some resiliency in your business lines. I was wondering if there were any -- if there's any color you could share on what you've seen to-date in April and May as we've seen some other sectors being more impacted in those months.

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Marc Blanchet, H2O Innovation Inc. - CFO [5]

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Yes. If I may take this question. I mean, it is -- most of our revenues are recurring in nature. As Fréd explained, I mean, people won't stop flushing their toilets and use water. So the manufacturing of chemicals won't stop providing chemicals, the manufacturing of specialty products either. We still need to provide spare parts, service and obviously, which is 50% of our revenue now is the operation and maintenance, this hasn't stopped. So...

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [6]

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He asked if we've seen deterioration.

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Marc Blanchet, H2O Innovation Inc. - CFO [7]

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So no deterioration there. As I said, I mean we -- I gave a bit of an idea where we expect to finish the project business. We still have projects in our backlog, bidding activities are still going on, and we will be working to replenish this backlog. But for the rest, I think it's pretty much in line with what we've done so far.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [8]

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And do you guys see a bottoming backlog? I mean, obviously, hard to predict, but early indications on maybe the back half of the year, where it could start growing again? What are your thoughts on that?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [9]

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Yes, we do have still -- it's very active for the selling team as we speak. So there's many projects. Again, we're trying to be selective. The good news, unfortunately, yes, we saw this profit being canceled. The good news is that now, I mean, the backlog, obviously, is removed from uncertainties, if I may quote it this way. Back in the second quarter. If you remember, we have this project that was on hold. Unfortunately, we received a news that now it was canceled. So now it's clean, if we can put it this way. So the $33 million backlog we have is the same backlog that will become revenues in the coming quarters. But we're going to replenish the backlog. I mean we're working on it. And we announced, by the way, in April, we announced 7 new projects we secured for $7.6 million. So -- which shows that we can still secure projects even though the current conditions of the global economy.

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Marc Blanchet, H2O Innovation Inc. - CFO [10]

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And Fréd, you've said it also, I mean, if government's -- the government's money goes down, again, to infrastructure. I mean we could capture that. But it's early to say at this point. I think we'll have better idea in September.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [11]

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Again, our strategy today is less and less relying on the volatility of the product itself. So that's the beauty of our business. If we have projects, even better. If it's less busy, we're still doing great.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [12]

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Okay. That's great to hear. Last one for me. Just the Specialty Products division did very well this quarter, ahead of expectations. Is it cross selling that's occurring? Is it Genesys that's outperforming? What's the driver behind that division?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [13]

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Well, as we said, there was a couple of drivers behind. Indeed, we started to capture a little bit of sales synergies among the distributors. And obviously, Genesys contributed very nicely, as expected and a little bit more. Piedmont very, very, very strong and still will be till the end of the year. And then, obviously, we saw a nice, I would say, come back from previous year in the Maple division. So they had a strong year as well, and we have been able to deliver the revenue that we expected before the end of March. So that was great.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [14]

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Congrats on a good quarter.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [15]

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Good. Thank you, Daniel.

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Marc Blanchet, H2O Innovation Inc. - CFO [16]

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Thank you, Daniel.

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Operator [17]

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Your next question comes from the line of Raveel Afzaal with Canaccord.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [18]

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Congratulations on a very strong quarter and hope you guys are keeping safe. This first question, just going back to the performance by Specialty Chemicals division. This 45% gross margin, do you see this number as being sustainable going forward? Or do you think the product mix was more shifted towards a much more higher-margin subdivision, which caused the margins to be close to 45%. How should we be modeling this out going forward?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [19]

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Well, there's a little bit of product mix influenced into that. I mean, the different -- for example, I mean, the margins we're making, where we're selling couplings or where we're selling at filter housings or where we're selling chemicals is slightly different. Even within the chemical groups, we do have different product categories that are driving higher margins or lower margins. And the Maple division also, in itself, has different margin profile than the chemicals will have. So if I can say, it's great, but don't modelize it on that for the next 4 quarters, please. It will remain high. Will it be all the time at 45%? Maybe not, [punctuality], we're -- functionally, we're going to hit that. But yes, it remains strong.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [20]

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Got it. And your outlook for the desalination industry and maple syrup industry for next year? Any color that you can provide on that?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [21]

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Well, the maple industry...

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Marc Blanchet, H2O Innovation Inc. - CFO [22]

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Is it maple or desal?

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [23]

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Both of them, both of them actually.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [24]

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So let's start with the maple. The maple industry, overall, the producer had a fairly good season in terms of production. The challenge we're hearing, and we're just starting to receive a little bit of information that it is, for them now, a challenge to be able to sell their maple syrup production to the end user market. The good news is that now the federation in Québec, where it still represents a fairly good 80% of the maples that are produced around globally -- around the world, but globally, is capable to support financially in a better way their producers. So unfortunately, it is still a little bit early to know exactly what will be the impact for next year. We're taking also a conservative approach developing our next fiscal year budget and plan. But overall, I feel optimistic looking at it because we do have -- we did have a good year. So, so we'll see how it develops. We'll know more by the end of June, for sure.

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Marc Blanchet, H2O Innovation Inc. - CFO [25]

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Maybe mostly steady than growth, though. That's on a conservative basis, it's mostly steady than growth.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [26]

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For the desal market, well, we're expecting to see a peak into this market for the year 2024 as the industry, globally, is forecasting it. We may see a little bit of shift. So this curve of peaking, for 2024, to new infrastructure launch will probably shift a little bit in time. The good news is that this curve, instead of being very steep, will probably be more amortized over a number of years moving forward. But as we speak, I can tell you that we do have multiple projects we're currently delivering in the Middle East because this is where most of the desalination opportunities are. And we still have a very good visibility on the sales pipeline that we're currently working on as well. So, so far, so good, I would say.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [27]

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And then just moving on to the projects business. Do you see any opportunities for expanding this business outside of North America? Any color on that will be really helpful. Or do you think this is going to be more of a North American-centric story for years to come?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [28]

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Well, looking at our past experience, Raveel, I mean, I would say, been there, done that. We try. It's a challenge to execute projects within margin, within delay, within schedule in North America. And to do it internationally, it's even harder. We will continue to focus in North America. We have plenty of opportunities that are within the reach. U.S. market is still a huge market. We're, I would say, barely covering the entire country. So we're going to focus there. And as I said, if the governments are launching infrastructure plan as they have done in the crisis in 2008, 2009, we're extremely well positioned to benefit from that in our domestic market.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [29]

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Perfect. And just finally, on acquisitive opportunities, is COVID-19 resulting in some acquisitive opportunities for you guys? And how are you thinking about them in terms of how to finance such potential opportunities? Any color on that?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [30]

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Yes. So yes, I mean, we do have still targets for small, I would say, tuck-in opportunities that we can bolt-on to our existing platform, both for the O&M and the specialty products. Again, that's the 2 areas of focus because we have the platform to integrate that. We have the team to integrate it, and we understand these markets. But I would say in terms of how we're going to finance it, obviously, we're very prudent in the way we want to approach it. At this price point, when we look at the price of stock, I mean, we want to be also creating value for the shareholders and we want to remain accretive. So any dilution at this point is something that we're not envisioning.

On the other hand, because we're not overleveraged into our balance sheet, again, on a prudent manner, we're going to see what we can do by using our current balance sheet that we have.

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Operator [31]

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Your next question comes from the line of Gabriel Leung with BEA Securities.

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Gabriel Leung, [32]

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My apologies, I came on the call late, but I saw only the tail end of your comments, Marc. Did you talk a little bit about on the project side, what your expectations were in terms of the potential deliveries in the current June quarter and what your project backlog might end up at by the end of the quarter?

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Marc Blanchet, H2O Innovation Inc. - CFO [33]

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Yes. I didn't provide any objective of the backlog or any guidance or anything. But what I said is due to those delays coming from -- in the last few weeks with the pandemic and also due to the cancellation of this project, this $10 million project, we expect to finish the year with about $10 million less of revenue coming from the project business compared to last year.

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Gabriel Leung, [34]

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Got you. Okay, that's helpful.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [35]

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We're starting to observe that construction sites are slowly reopening. So as we speak now, this week, for example, we have some of our commissioning people that are going back on-site to get projects moving because everything was on hold on the side of the business. So that's encouraging.

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Gabriel Leung, [36]

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Got you. So obviously, you will be able to recognize the revenue milestones in the project for fiscal Q4?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [37]

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Yes.

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Gabriel Leung, [38]

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Okay. Perfect. And then just a follow-up question on the project side. Obviously, you guys have talked about being -- taking a more focused approach in terms of new bookings that you take on the division. But I'm curious to know whether or not there might be an opportunity for you to potentially -- to spin out that side of the business? Or is it too strategic to the other 2 pillars for it to spin out?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [39]

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Well, it's a good question. I mean, we're always on the look to see what's the most appropriate thing to do for the company. Again, it fuels the need of opportunities for the other business pillars. If fuel opportunities very obviously for the aftermarket. And aftermarket, it's not a small portion of our revenues. I mean, it's still a fairly good portion. So as soon as we put online a new project, yes, it automatically creates opportunities for the aftermarket and for the other business pillars as well. But yes I mean we see what the future will look like for the project division. So far, it's part of our business model.

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Gabriel Leung, [40]

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Got you. And then moving over to specialty. Obviously, you had a strong quarter. Seasonality, I guess, helped you. You had strong business at Piedmont. And actually on Piedmont, can you tell us how much of that $3.5 million large order came out in Q3? And how much is left to be recognized in Q4?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [41]

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For Piedmont you're talking about?

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Gabriel Leung, [42]

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Yes.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [43]

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Yes. We don't...

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Marc Blanchet, H2O Innovation Inc. - CFO [44]

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It was, for Genesys, at $2.3 million.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [45]

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Yes, $2.3 million was Genesys, contribution of Genesys. But for Piedmont, I mean, we're still expecting quite nice delivery, very active quarter for Piedmont it will be. So yes. But we don't disclose it for a different type of product. So -- but I mean, there are 3 drivers in the growth. Recovery from the Maple, Genesys and Piedmont. So if Piedmont is $3.1 million, then you can do the math. I'll let you just math.

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Gabriel Leung, [46]

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And in the quarter, in the March quarter, I'm just curious whether or not you guys experienced some specialty anyways, just inventory building from your customer side that might have helped out with the revenue growth in the quarter.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [47]

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If we have what? Sorry, repeat that from a...

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Gabriel Leung, [48]

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If you experienced just inventory buildup from your clients' perspective, just accelerating orders ahead of the COVID pandemic?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [49]

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Yes. From the distributors, mostly on the chemical side, yes, we saw that a little bit at the beginning of it. But now it's more like steady orders. Most of our distributors, particularly the one for PWT, they had specific sales targets that we need to respect each year. And on the specific sales target, when they hit them, we're giving them a financial incentive. So whether we place the order accelerated in Q3, what matters at the end of the day, for us, is are they going to meet their year-end target for June 30? So -- so yes, there was a little bit of stocking orders at the beginning of it, I would say, mostly in March, but now it's more back to...

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Marc Blanchet, H2O Innovation Inc. - CFO [50]

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To normal.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [51]

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To normal.

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Marc Blanchet, H2O Innovation Inc. - CFO [52]

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But I think the pandemic has established a new standard in stock inventory. So customers' inventory, due to all those logistic issues and all, I think that are...

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [53]

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Declining a little bit more...

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Marc Blanchet, H2O Innovation Inc. - CFO [54]

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Slightly more ahead, yes.

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Gabriel Leung, [55]

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Got you. And then one last question on the O&M side of things. Obviously, that continues to do well. I'm curious to hear about, in terms of new bookings within O&M, do you anticipate any sort of new opportunities to arise between now and maybe at the end of the calendar year and where things are at on that front in terms of the pipeline and potential new signings?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [56]

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Yes, we do have a very active sales pipeline on the opportunities we're working on. What could happen between now and the end of June. Obviously, it's long tail cycle business. So we remain optimistic. But the overall, I think, as I did at the -- my closing remarks, I think that the contracted operators, such as H2O, will become a #1 choice for different small/mid-sized municipalities, private utilities when they will look on how they're going to operate their water and wastewater assets. Because they have a small team, if only one of their guys gets contaminated or is out of work, they're screwed. So if they rely on a team like us with professional certified operators, we can ensure continuity of their operation, ensure them that they will be compliant all the time, and we can dispatch, on a very effective basis, different operators in the field because we do have a critical mass, a number of operators currently.

So globally, I think that we'll see more and more traction towards this service offering, which, by the way, represent only less than 9% of the municipalities or utilities currently operated by the private sector. So there's still a huge gap that we can capture and grow.

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Operator [57]

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And your next question comes from the line of Gerry Sweeney with Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [58]

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I apologize to you, I was little late jumping on, just technical difficulties. I guess that's what happens when you have a couple of kids doing distance learning and you're on a voice over IP. Bandwidth becomes a commodity. Just a couple of follow-up questions. A lot of might have been answered. But obviously, specialty products, great quarter. There's definitely some seasonality in there, Genesys adding a little bit extra to it as well. But on the Piedmont side, what's driving the orders there for the -- in the third and fourth quarter? Just curious if you give a little bit more detail on that.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [59]

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Well, the business of Piedmont, today, mostly relies on 2 things. I would say it's almost half an act, but it's the couplings, which is fundamental to Piedmont, and the large filter housing. If you remember, we announced earlier also that we have secured the largest -- the supply of filter housing for the largest desalination plant in the world, Taweelah, in the Middle East, in UAE. So part of that is being recognized a little bit in Q3, most likely will be recognized, the rest of it, in Q4. So these large orders for filter housing represents a fairly good portion of the drivers behind Piedmont growth. And it's something we had planned. If you remember, we launched the filter housing business a couple of years ago. And rapidly, we have ramped up this business. So it's finally paying up. I mean, we had a year of investments and development of technology, development of design. And now we have among the best referenced list in the world for large filter housing. So one reference allow us to win another project, which fuels the backlog, which fuels the opportunity to win another one, so it's snowballing.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [60]

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That's right. Now it is a unique and great timing, so that's helpful. Then switching over to the project side. Obviously, the backlog has come in. As you look at resources allocated to the project side, is there ability to maybe flex that up, flex that down as maybe the backlog comes in and maybe it becomes de-emphasized? Maybe ability to maybe some of the engineers, like reallocate to other areas and then bring back when -- if you see an influx of orders? Or how do we look at that on a go-forward basis?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [61]

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Yes. So you are absolutely on the money, Gerry. We have been -- because we announced on Q2 that this project was kind of on hold. Now we have clear visibility that this project is canceled. It was a large one. So indeed, we are currently brainstorming and evaluating all the different possibilities for the project group in itself, including reassigning some people to do other things as part of the company to push for additional revenue in short term, supporting existing customers.

So we launched also, earlier this month, what we call the reconquest customer. So it's a program we're in line because we know we couldn't travel, so we took the opportunity to be on the phone and reengage with old customer of ours. If you remember, we do have a large install base of 750 customers. So we decided to take the opportunity and assign to each of the different people we have in the project group, a list of customers with specific targets to call them up and seek for supply of spare parts, of any kind of support to create a little bit of revenue for the short term, and again, for the benefit of supporting the existing customers. So we're going to shift a little bit of resources. We're going to make sure that we rightsize it for the right size of business we have now. And it will be a combination of different actions we're going to take in the coming weeks and months to make sure that this project will get back on track properly.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [62]

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Got it. And then you've been deemphasizing some of the municipal projects in that area. If there were some larger governmental infrastructure projects, obviously, they may come at some lower price points. How do we -- how do you look at that from a maybe a strategic perspective? And do you go after them entirely? Or do you just look at your rest of the backlog and availability of engineering and go after a piecemeal per se so as not to -- maybe to lower margins or get into a big backlog situation that, a couple of years ago, that you worked pretty hard to get out of as well as well as your margin profile?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [63]

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So we want to remain very diligent on the project we want to go after in terms of margins. So as we said, it took us years to move this margin upwards by being more and more selective. So we'll tend to remain selective and focused on higher margins. If a project -- on a given project, it might be a little bit lower than our average targeted margins and usual margins we had, we may give consideration because it may fuel opportunities for the other business pillar.

But on the other hand, there are some projects where it's just low margin. It doesn't bring any potential chemical sales. It doesn't bring any products for the other business lines or opportunities for operation and maintenance, we're not going to bid on it. So that's the kind of discipline we have today, looking for margins, if margins is a little bit below, we may give consideration because it has no backend opportunities to it, mostly from the chemicals because it drives our margins, because it drives opportunity ultimately for the operation. Otherwise, I mean, it's a no go.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [64]

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Got it. That's it for me. And just congratulations. It was a really great quarter, especially on the Specialty Products side. So great to see Genesys. It looks like it's working out well and...

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [65]

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We're very happy of our quarter and the contribution of Genesys, very nice. Thank you, Gerry.

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Operator [66]

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And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [67]

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Well, thank you very much for attending the call. As we said earlier, we're really happy of our financial performance for the third quarter. We invite you to look at all the documents we file on our website and look forward to talk to you soon. Thank you. Have a great day. Bye-bye.

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Operator [68]

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This concludes today's conference call. You may now disconnect.