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Edited Transcript of HEO.V earnings conference call or presentation 25-Sep-19 2:00pm GMT

Q4 2019 H2O Innovation Inc Earnings Call

QUEBEC Sep 30, 2019 (Thomson StreetEvents) -- Edited Transcript of H2O Innovation Inc earnings conference call or presentation Wednesday, September 25, 2019 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

* Gerard J. Sweeney

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

* Nick Corcoran

Acumen Capital Finance Partners Limited, Research Division - Equity 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 fourth quarter 2019 financial results. (foreign language) (Operator Instructions)

(foreign language) 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 that could cause actual results to differ materially from those anticipated.

I would like to remind everyone that this conference call is being recorded today, September 25, 2019, at 10:00 a.m. Eastern Time.

I will now turn the conference over to your host, Mr. Frédéric Dugré and Marc Blanchet. Please go ahead, gentlemen.

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

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Hi, good morning, everyone, and thank you, madam. So my name is Marc Blanchet. I'm CFO of H2O Innovation. As the operator said, this call will be held in English. But before we start, I'll just say a brief word in French. (foreign language)

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, Frederic will give an update on the business and present the highlights of our financial year 2019. And then I'll be presenting the financial results of this last fiscal year, which ended June 30.

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'll now pass over the call to Frederic.

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

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Thank you, Marc. We'll start this presentation on Slide #4 in the same manner that I did for the third quarter results. We are extremely pleased to present the strong results for our fourth quarter and our annual year-end.

These results are showing a significant improvement in our EBITDA performance, into our cash flow generated from our operations and a significant net debt reduction. This performance is supported by a growing proportion of recurring revenues coming from the O&M business pillar, the Specialty Products and the Aftermarket sales. Indeed, these recurring sales reached 76% at the end of June 2019 compared to 70% in the previous fiscal year. Also, through our business model relying on 3 complementary pillars, we continue to promote multiple sales synergies that encourage customers' retention.

The revenue growth of 18.4% was boosted notably by the acquisition of Hays South Utility completed on December 1, 2018. This acquisition not only contributed to the increase of revenues, but also allowed us to establish our operations on -- and strong customer footprint in Texas. Since then, we have been able to capture new business opportunities and materialize sales synergies with existing customers of our O&M activities. Nine months following the acquisition of Hays, we can mention that the acquisition is a success, the synergies continue to take place, our employees are thrilled and engaged in our growth plan, and most importantly, the clients have stayed with us.

Looking at Slide #5, we can see how we have scaled up the business both in terms of revenues and EBITDA performance.

Indeed, over a 3-year period, we have been growing the revenues from $83 million to $118 million, representing a 42.5% growth. Over the same period, our recurrent revenues remained high at 75%, adding significant predictability to our business model, while the EBITDA progressed from $1.8 million to $7.3 million (sic) [$7.2 million], showing a significant shift in our financial performance.

All this wouldn't be possible without the continuous efforts and dedication of an amazing team of people, thanks to our 630 employees based in Canada, U.S.A. and Spain.

Now let's review the performance per business pillar.

Our first business pillar, presented on Slide #6, did very well this year. In fact, our installed base continued to grow as the project team worked on 82 projects in the course of the year and completed the delivery on 37 of them. As our business model is suggesting, these 37 delivered projects will start to generate consumables and service opportunities for the other business lines. The execution of projects continue to fuel opportunities for our aftermarket service team and consumables necessary to the day-to-day operation of water or wastewater plants.

It's worth to mention that among the products delivered in fiscal year 2019, the one of Decatur in Arkansas was our largest wastewater flexMBR ever delivered. Indeed, this new reference of 4.6 million gallons per day will become key and strategic for our future wastewater sales opportunities that we are currently pursuing. It is our intention to continue our diversification with more wastewater and industrial projects.

Also, our partnership with Sustainable Water, announced earlier in March 2019, has enabled us to secure 6 new projects in our backlog. Moreover, it allow us to the leverage our 3 business pillars to create a unique value proposition to the end user, combining system engineering and manufacturing, Specialty Products offering and O&M expertise.

On Slide #7, we can see year-over-year our success to capture more industrial and wastewater projects. Indeed, at the end of our 2019 fiscal year, 38.3% of our backlog revenues were related to industrial projects compared to 31% at the same date in the previous year. Similarly, continuous efforts were spent to also grow our wastewater activity from 25% to almost 30% of the project backlog. These 2 strategic initiatives to grow wastewater and industrial sales will allow us to recognize revenues at higher gross profit margin in the coming quarters.

Moving to Slide #8, we can see how the revenues of our first business pillar have evolved from one year to the other. The revenues have remained almost stable around $40 million, while the sales backlog has decreased from $54 million to $45 million at the end of June 2019. This is not a surprise for us as many efforts were spent by our sales team to pursue projects at higher gross profit margin instead of pursuing volume only. As mentioned previously, the efforts spent in the last quarter to push for diversification has paid off and contributed to improve our gross profit margin generated to projects as the following slide is showing.

On Slide #9, you can see that the gross profit margin increased by $1.2 million and stood at $7.3 million for the fiscal year 2019 compared to $6.1 million in the previous last fiscal year. The gross profit margin in percentage reached 18% as of June 30 compared to 15% for the last fiscal year, showing a significant improvement coming from the project execution and sound diversification. Furthermore, the improvement in the gross profit margin and the reduction of SG&A expenses over sales impacted positively the EBAC, which is the earnings before administration expenses, which reached $3.3 million compared to $1.4 million for the last fiscal year.

Moving forward, our strategy is to continue to focus on growing our wastewater and industrial sales, while also making sure that we don't lose any momentum in the drinking water municipal sector. We also intend to further grow and leverage our sales rep network, particularly in the U.S.

Moving to our second business pillar at Page #10, the Specialty Products for the PWT product line. In fiscal year 2019, PWT sales team was particularly busy with the addition of 10 new distributors covering key and strategic geographies, such as Peru, Indonesia, Spain, Libya, Ethiopia and Tanzania.

Despite the commercial tariffs imposed on the goods of manufacturer in the U.S. and exported to China, our Chinese distributor remained strong and continued to grow its business. Indeed, we had exported to China in June 2019 the largest single order of antiscalant. Also, in the course of the year, we have upgraded our manufacturing capacity by adding a second automated filling station and increased our liquid cleaner manufacturing line capacity.

For the Piedmont product line presented on Slide #11, we can see that the distributors were also added to the sales network. Most importantly, the delivery of large-size filter housing has enabled us to really establish ourselves in the desalination market as a key and reliable component supplier. The efforts spent in growing our product offerings through the introduction of the filter housing product line in 2016 and the addition of the self-cleaning disc and screen filters in 2019 are paying off.

In 2019 fiscal year only, we secured 75 new FRP filter housing projects compared to 48 at similar date in previous year, representing a 56% increase.

Moving to our last product line of our second business pillar, the Maple Equipment presented at Page #12. This year was certainly a challenge for our Maple Equipment team as they faced a decrease of 16.7% in their sales compared to the previous year. This decrease is caused by a general slowdown in the maple industry. The slowdown in the maple industry was due to adverse weather conditions during the 2018 maple syrup season. As a result, maple syrup producers have experienced a challenging year, resulting in a lower production, thus lowering the investments spent in capital equipment purchases. In light of this slowdown, we have scaled down the level of expenses associated to the product line in order to adjust our cost structure to lower -- in order to cope with the lower volumes.

Despite this decline in sales, our Maple Equipment product line remained strong as it maintained to 55 the number of distributors. Simultaneously, we continued to push for product innovation as we introduced an ultrafiltration membrane system for maple sap and concentrate clarification. We're confident that the maple product line will bounce back this year as the maple syrup producers were able to produce 18% more syrup than last year, and that the sales of maple syrup itself are also growing at 12% compared to previous year.

On Slide #13, we see that revenues from Specialty Products business pillar have continued to grow by 9.6% despite the decrease of 16.9% coming from the maple product line.

In a similar fashion, the gross profit margin increased from $9.8 million for the fiscal year 2018 to $10.2 million for the fiscal year 2019, while the EBAC, again the earnings before admin cost, increased from $4.5 million to $4.6 million over the same period. The EBAC and the gross profit margin increased because of Piedmont business line growth. The decrease in percentage of the gross profit margin and the EBAC is explained by the product mix within the business pillar.

Moving forward, we intend to continue our sales network expansion by adding new distributors. We also intend to add new specialty products through internal development, licensing and acquisitions.

Moving to our third business pillar, the operation and maintenance at Page #14. The fiscal year was mostly impacted by the acquisition of Hays completed on December 1, 2018. This targeted acquisition enabled us to not only grow our O&M revenues, but establish ourselves in the fast-growing state of Texas and to capture sales synergies with existing customers a few months only after the following -- following the acquisition.

Fueled by the project business pillar, the O&M group was able to collaborate on 2 projects recently delivered in the state of Virginia and Oregon. Combining Hays and Utility Partners acquired in fiscal year 2017, the operation and maintenance business pillar now rely on 82 contracts, located in 11 states and 2 provinces. In total, we operate and maintain 135 water systems and 44 wastewater facilities.

On Slide #15, we can appreciate how our revenues and O&M backlog have evolved in the last fiscal year. For the 2019, our O&M recurring revenues have increased to $55.8 million, representing a 47% growth over a 12-month period. Of the $16.9 million revenue increase, $12.3 million comes from the acquisition of Hays, while $4.6 million is organic growth explained by the addition of new O&M projects, scope expansion and CPI adjustments on existing projects.

At the end of our fiscal year, the operation & maintenance backlog stood at $82.7 million, representing a 21% increase from previous fiscal year. This increase is boosted by the renewals and addition of multiple O&M contracts that will be executed over several years. It is important to note that Hays O&M contracts are not included in this backlog since most of Hays' contracts with the municipal utility districts, which we call the MUDs, are usually evergreen contracts. This important backlog combined to the high recurrent MUDs customer of Hays are providing us an excellent visibility of the revenues for the coming quarters.

Finally, as mentioned previously, the integration of Hays is moving according to plan. Since the closing of the acquisition on December 1, 2018, we have been able to retain all of our customers and employees. Even better, we have captured sales synergies rapidly after the acquisition.

Let's look at the financial performance of our O&M business pillar at Page #16.

As the revenues have increased by 47% in the last fiscal year, the gross profit increased from $6.1 million in fiscal year 2018 to $9.6 million for fiscal year 2019, representing a $3.5 million increase, equivalent to 57% augmentation. This increase is obviously boosted by the acquisition of Hays, which represents $2.3 million of the increase.

During the last fiscal year, the EBAC of the business pillar also shown an increase from $1.7 million, equivalent to 41.5% growth.

Moving forward, we intend to continue to focus on the renewal of existing O&M contracts. Simultaneously, we will look for scope of work expansion and synergies to fuel growth for the other business pillars.

Finally, as the infrastructures are aging, combining to strengthen compliance requirements from national and regional authorities, we believe that the public sector will turn more and more to the private sector for the operation and maintenance of their public utilities. This should create new sales and acquisition opportunities for us in a very fragmented market.

I will now pass it on to Marc, who will review and discuss our financial performance.

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

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Thanks, Frederic.

Now let's move to Page 18, Slide 18. We're very proud to report a record high revenue for fiscal 2019 of $118 million, this is an increase of 18.4% compared to last year. As explained by Frederic, this increase is mainly coming from the acquisition of Hays as well as the organic growth from the Specialty Products and the O&M business pillars. Hays contributed to $12.3 million of that growth for 7 months of operations since the acquisition, which was closed on December 1, 2018.

The gross profit margin ratio increased to 23% compared to 22.2% last year. The increase of the gross profit margin in percentage is explained by the increase of revenue, the increase of the gross profit margin in percentage coming from the Projects & Aftermarket and the O&M business pillar and as a reduction of the SG&A over revenues.

Now if we move to Page 19, we show here the SG&A expense in dollar and in percentage. So the SG&A expense in dollar increased this year compared to last year. This increase is mainly due to the acquisition of Hays, which contributed to $1.1 million of this increase during the year. The rest of the increase is coming from the general operating expenses coming from hiring that we made to support revenue growth in the Specialty Products business pillar.

In percentage though, the SG&A over revenue decreased at 17.3% compared to 18.6% last year. This decrease is explained by the fact that we maintained SG&A increase below 10%, while over the same period revenue grew by 18.4%.

If we move to Page 20 for the adjusted EBITDA. We finished the year with an adjusted EBITDA of $7.2 million compared to $4.1 million last year, representing an increase of $3.1 million or 75% increase.

Our adjusted EBITDA in percentage increased to 6.1% for fiscal year 2019 compared to 4.1% for the same fiscal year last year -- for the same period last year. This increase of percentage of the adjusted EBITDA is mainly coming from the Projects and the O&M business pillars, combined with the decrease in percentage over revenue of the SG&A. The EBITDA improvement in dollar is also due to the acquisition of Hays, which was made December 1.

If we look to the evolution of the adjusted EBITDA on Slide 21, we can observe that the adjusted EBITDA churn over the last quarter has improved. The significant growth of the -- the significant growth of the corporation and the scalability of the business model over the past year are clearly shown when we compare quarter-to-quarter over last 12-month basis. We expect to continue to maintain a similar ratio of adjusted EBITDA over revenue in the fiscal year 2020.

Now let's look at the financial position, the balance sheet. It's -- we've been able to significantly improve the balance sheet over the last 12 months. That's one of our major accomplishments. We're very proud of it. So working capital increased by 5.6% from 7.2% June 2018 to 12.8% at June 2019. Receivables increased by $1.6 million to $19.4 million on June 2019 compared to $17.8 million last year. The increase of $1.6 million is mostly attributable to the increase of revenue in our O&M business pillar as well as the increase in the Specialty Products business pillar. Invoicing milestones reached in water treatment project before the end of the quarter also impacted the level of the accounts receivable. The acquisition of Hays contributed to $200,000 of this increase.

Inventory decreased by $300,000 to reach $6.7 million on June 2019 from $7 million last year. This decrease is the result of the management measures to reduce the inventory to a lower level in order to increase its capital available for operations. Reduction and control of inventory level will remain a priority moving forward; however, the growing demand on Specialty Products business pillar requires inventory on hand and available.

Accounts payable decreased by $1.1 million to $12.3 million as of June 2019 from $13.4 million last year. This decrease is mainly due to the timing of the project and the payment of supplier giving the cash flow from operating activities generated.

And the net debt decreased by $7.7 million to reach $9.8 million on June 2019 from $17.5 million last year. This decrease comes from the extra equity raised that we did at the same time for the financing of the acquisition of Hays and also the cash flow generated from our operating activities, $5.8 million for the fiscal year 2019. We also reduced the long-term debt by $1.7 million and the bank loan by $2 million.

Now let's move to Page 23, cash flow from operating activity. We're very proud to report that our operating activities generated $5.8 million this year compared to a usage of cash of $2.2 million during the previous fiscal year. This important turnover in cash flow situation is coming from the improvement of the change in working cap items and the advancement of major projects, which reached significant invoicing milestones during the fiscal year.

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

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

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Good. Thank you, Marc. As mentioned earlier in the presentation, we have demonstrated that our business is scalable, meaning that we can grow our adjusted EBITDA faster than the revenues.

Last fiscal year growth was accelerated by the acquisition of Hays in December 2018 in order to expand our O&M presence in Texas. Rapidly after the acquisition, we have been able to keep our customers, retain and motivate our new employees and realize the first sales synergies.

Combined to a significant increase of the Projects & Aftermarket EBAC and the continuous growth of our Specialty Products business pillar, we have been able to increase our adjusted EBITDA to $7.2 million compared to $4.1 million. As a result, our balance sheet also improved from the $5.8 million cash generated from our operations and our focus to reduce the debt.

It's worth to mention that we finished our year-end on a strong note with a strong fourth quarter, showing a $31.9 million in revenues and an adjusted EBITDA of $2.4 million or 7.4%. The combined sales backlog is still high at $128 million on June 30, 2019. In the coming quarters, many O&M contracts will be coming up for renewal and could impact positively the value of this backlog.

Our business model is unique as it brings predictability through the 76% of recurring sales that we have. It also allows us to capture many sales synergies among the 3 business pillars in order to provide value added for our customers.

Since the integration of our latest acquisition is moving according to plan and started to generate good value, we continue to pursue a strategy of acquisitions susceptible to impact positively the second and third business pillar in order to accelerate our growth and create more sales and cost synergies within the business.

Thanks to our loyal, innovative and dedicated team of people who make it work every day.

This now completes the management presentation. I will now turn it back to the operator for the Q&A period. Thank you.

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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 Nick Corcoran with Acumen Capital.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [2]

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Congratulations on a great year. I have a couple of questions on the backlog, the first is with the Sustainable Water. You said you had 6 projects in the backlog. Can you just comment on the timing that these projects will be completed?

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

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So as part of these projects in the backlog, so some are currently on their execution in this current quarter and will continue to impact the rest of the year. They are progressing at various stage, so some actually are into delivering and getting close to commissioning as we speak. I will say we have 2 other ones that are getting into engineering phase, and the last 2 are more at the end of the following year that will start to impact the performance.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [4]

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Great. And then you commented on the Hays contracts with the municipalities that they're evergreen contracts. Can you just repeat how these are included in the backlog?

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

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So all the contracts with the MUDs are not included in the backlog, in a sense that because they are for municipal utility district, and that typically the MUD Boards are not providing us with long-term contracts as the other typical municipalities will do. We don't include this portion into our backlog. So this is why you see the 40, 45 contracts or relationships that we have within the MUD business around Houston mostly, these projects or these contracts are all evergreen contracts. And they have been -- by the way, they have been customers of Hays for -- some of them have been customers for more than 25 years.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [6]

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Okay. That's great. And then you'd released some gross margin of 24.5% in the quarter. Do you see that being sustainable going forward?

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

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In terms of gross profit margin, the fourth quarter was pretty strong as we explained initially. Second half of our year is always a bit stronger because it's due to certain seasonality or -- on the products business. So the product business pillar, as we show -- for the first time this year actually, we show that there is stronger gross profit margin coming from the Projects business pillar -- sorry, the products business pillar. And since there is more product sales on the third and the fourth quarter, generally it drives the gross profit margin up. Therefore, I wouldn't expect to see such a strong gross profit margin due to our history on the first quarter. It doesn't mean that, that on a blended basis, on a yearly basis, it wouldn't look like, like what we've seen this year.

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Operator [8]

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Your next question comes from the line of Gerry Sweeney with Roth.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Congratulations on a great year. I wanted to maybe take a stab -- or a couple of questions on the acquisition front. Obviously, I think you said Specialty Products and I think the O&M are really the focus for the acquisition program. But I just want to get your thoughts specifically on the Specialty Products side. Obviously, they carry some very attractive margins and you're continually adding, I think, distributors at your -- to your, I guess, your channel. So I mean, what does the opportunity look like on the specialty side in terms of maybe making a product acquisition and the ability maybe to start pushing that through this expanding channel? Is this a -- would that be a key focus or -- and/or what does that potential pipeline look like?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [10]

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Yes, let me -- to explain this, I think the best example we could use is the one for Piedmont. We acquired Piedmont in 2013. At that time it was essentially a $2 million business with one single product. Through the years, we have expanded this business line by adding more distributors; so, we went from 5 distributors to 25 distributors. We also realized in the course of the last couple of years that by growing the sales network and new distributors, but by also being able to introduce new products, we were able to leverage our cost of doing sales. So this is why you saw also the improvement on Piedmont performance because in 2016 we launched this new product.

So if you take a step back a second and you see, well, what are the assets now that we have as part of the specialty products, well, we have some products at good margins and we are growing the sales network. If we're able to add and introduce new products either through acquisition or licensing or internal development, we will be able to leverage our cost of doing sales. We will be able to grow this and improve and be able to serve in a better way our existing customers. Because when you're selling these products or specialty products to large EPC companies building these huge mega desalination plants, for example, in Middle East, they want to be able to rely on good supplier and be able to bundle, if I can say, a group of component or products in the same order. So this is why being able to add more products either through acquisition and expand the distribution network with also maybe through acquisition or organically is really important and an area of focus for us.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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Right. How does that pipeline look? Are there some potentials out there? Any way you can comment on that?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [12]

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We do have targets that we're currently contemplating. Within in the past in various form, again through acquisition and licensing and some that we're developing internally, but internal growth of product is always a little bit longer.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Got it. Okay. And then just staying on the acquisition front, obviously, with Hays and Utility Partners that have been very successful, how does the market look today? And are you kicking tires on any potential opportunities on that front?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [14]

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Well, it is still a very fragmented market in the O&M. So as you're probably aware, to be able to penetrate effectively a new region, it could happen through an organic win, let's say, of new specific projects within a specific geography or ideally as we did in the past through one specific acquisition enabling you to penetrate or get yourself established in a region. The O&M market for us will continue to be an area of focus because you look at the free cash flow it can generate, you look at the level of synergies it provides also with the other business pillar. It is a key area of focus for us, and it is still a very fragmented industry where the business owners are just getting older and older. And I think the clients, as I explained in the call, the municipality will be turning more and more to the private sector for the operation of their water and wastewater assets or utilities.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15]

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Got it. And then just final question, maybe 2 parts on the Projects side again. Great result. Any -- were there any onetime projects in that business that potentially boosted returns on the short term?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [16]

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No.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [17]

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Any onetime improvements and things like that? Sorry. Go ahead.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [18]

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I think it is driven by 2 factors. The diversification I mentioned, the water, wastewater versus industrial versus municipal is one of the driving factor of the margin improvement. The other one is just tight execution, and we've been able to capture nice change orders in the course of the year enabling us to get better margin. So it's not one-off projects, in particular, that contributed to that.

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Operator [19]

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Your next 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 [20]

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I have a follow up on -- I had a follow-up on the Hays acquisition. I know you mentioned the yearly contribution, but I missed the number or I'm not sure if you mentioned it. Is there a number of how much it contributed in the quarter? And also relating to integration costs with it, is that largely complete, or will we see still some integration in the coming quarters?

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

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So for the revenue itself, contribution is $12.3 million for the full year, so accounting starting on the December 1 till the end of June.

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

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It's $5.2 million for the quarter -- $5.2-ish, $5.3 million for the quarter.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [23]

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Okay. And integration costs, there is some -- is the integration largely complete or do you still have some work to do? Will we see that hit the numbers in the coming quarters?

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

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No, in terms of expenses, I think we're done. So this was all accounted in the 2019 fiscal year. There is still to come in terms of potentially cost synergies and sales synergies that we're still working on every day. But in terms of integration costs itself, it's all included in the 2019.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [25]

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Okay. Great. And so you mentioned in terms of the margin profile and you clearly performed well in the last 2 quarters. So targeting next year to kind of remain at a similar ratio. But I was wondering how you're thinking about balancing resources in terms of driving growth versus that profitability? Do you have any targets set for the top line, or how do you see that going forward?

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Marc Blanchet, H2O Innovation Inc. - CFO [26]

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So in terms of top line, as you know, we don't provide guidance, but I think we've expressed over the last 2 years that the growth focus are mainly on the O&M and the product businesses pillars. The Projects business itself, the focus has been to be more selective towards higher gross profit margin type of projects such as wastewater and industrial projects. Therefore, we don't expect very important growth on that side. We're still opportunistic if a big project would come in with higher gross profit margin, which generates growth, but the focus has been to derisk the business. Projects business comes with a certain lumpiness, which makes it harder to forecast and budget. Therefore, we're putting a lot of emphasis on recurring revenue and this comes from the second and the third pillars.

Second and third pillar growth, the O&M business, the industrial growth -- the industry growth is 4%. We've been able to maintain 8% to 10% over the last 2, 3 years since we've purchased Utility Partners. So for model perspective, that's what I -- what degree we can base ourself on our history.

As for product business, the product business we've been putting a lot of emphasis on adding new distributors, adding new products. Therefore, we could see some more growth coming on that pillar. That's where we put our focus right now. For different reason, it comes with higher gross profit margin. Sales cycle are shorter. And therefore, this is where we will be putting a lot of emphasis in order to generate faster growth on that side.

In terms of EBITDA, as I said, we need to support that growth of that second pillar, therefore, as I explained a bit, we've made some hiring during the year on the operation expenses on that side and we'll continue to make a bit of hiring on that side as well to continue to develop products, develop the distribution network.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [27]

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On the Sustainable Water partnership, you mentioned you had several in the pipeline. I would assume these are higher-margin projects for you. So I'm wondering is there a potential to push that ratio higher for next year as these projects come online for you?

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

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Yes, we continue to push these projects, and indeed, we enjoy the higher margins. But besides this is that it also brings the contribution of the other business pillars all together. So yes, it comes at better margins, I would say, but it also brings the opportunity for us to carry the operation and maintenance expertise we have and bring the consumables and the specialty products along as well to create this unique value proposition for the customers where there is full responsibility and full accountability when we team up with Sustainable Water. So it is both things. I mean it's, yes, an improvement and better margins on the Projects side, but also the fact that we bring the 3 business pillars together in the design-build-operate business model.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [29]

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Okay. And the last one for me on the balance sheet, so you guys reduced your debt. Do you have any targets in terms of where you want the balance sheet to get to in terms of priorities of cash?

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Marc Blanchet, H2O Innovation Inc. - CFO [30]

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We do have targets, indeed. I mean we'll continue to reimburse -- well, we have a long-term debt schedule and we're reimbursing about, I would say, it's $2 million per year, so $0.5 million per quarter. As for reduction of the line of credit, it will be reduced by the cash generated from our operating activities and good management of our working cap items. I don't provide any guidance there, but I would say that it should follow closely the EBITDA, and I guess that if you look at the cash generated from operating activities this year, it could provide you a bit of an indication where we're aiming.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [31]

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And because of the good performance of Hays as well in December 1, most likely we're going to pay off the contingent consideration.

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Marc Blanchet, H2O Innovation Inc. - CFO [32]

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Yes, there is one thing -- yes, that's true, that's correct. For the second quarter, there will be a payment of contingent consideration, which will affect a bit the cash flow, so there is CAD 1.5 million to be paid on December 1 and...

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [33]

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But due to the good performance...

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Marc Blanchet, H2O Innovation Inc. - CFO [34]

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Due to the good performance of Hays, yes.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [35]

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Congrats on ending the year strongly.

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Operator [36]

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(Operator Instructions) Your next question comes from the line of Raveel Afzaal from Canaccord.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [37]

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Just starting off the with the specialty chemicals division. Can you just remind us, and I know you don't provide a breakdown, but just roughly, the maple syrup, how big is that a component of the overall specialty chemicals revenues? I'm trying to understand how meaningful the 16% drop would have been for the overall performance of the division?

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Marc Blanchet, H2O Innovation Inc. - CFO [38]

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So on the overall division, when we finished the year, out of that $26 million this year, I would say it's about 1/3, 1/3 and 1/3. So Piedmont, strong growth; maple, as you say...

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

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Maple declined comparatively for this year...

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Marc Blanchet, H2O Innovation Inc. - CFO [40]

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Declined. Therefore, so now as of year-end, it was about 1/3, 1/3 and 1/3 of the revenue, plus or minus.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [41]

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Perfect. And then have you guys started to get some leading indicators? As you guys pointed out, that it looks like next year could be stronger for maple syrup investment. Has that started to reflect in the backlog that you guys have at the moment?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [42]

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So we don't -- so all the sales of the maple divisions are not included into the backlog. So only the projects, municipal and industrial projects are within the backlog in the operation and maintenance. So we don't disclose or carry a backlog for the maple itself. But to answer your questions related to specifically to maple, so yes, everything indicates us that the driver this year -- the economical driver for the maple industry in general are much better than it was a year ago, in a sense that the producers last year had a much better season, so they produced more maple syrup in the course of the year last spring, and 18% more than the previous year actually. And second is that the maple syrup sales, so the traction from the consumer about buying more maple syrup is also increasing. So the federation put out some numbers where they're showing an increase of 12% into the sales of maple syrup, meaning that the producers this year will have little bit more cash and will be in a better shape to reinvest into equipment.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [43]

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Makes sense. Perfect. And then just moving over to the Specialty Products division. I know you have touched on this already, but can you just talk about where are some of the holes when you look at your overall portfolio that can be better filled by licensing, acquisitions or organic opportunities? What are some of the areas that you're targeting at the moment?

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [44]

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So as I mentioned earlier in the Specialty Products group, I mean, what we're currently providing to the desalination industry in terms of components is still very nimble and minimal, in a sense that there are thousands of different components that you need and necessitate when you're building a desalination plant, for example. Currently, we're providing couplings, we're providing some auxiliary components and elbows and other parts like this we're providing to filter housing. But to what extent we could provide, for example, some specialty valves or expansion joints or such things that will nicely complement with the Piedmont business line. Similarly, the various chemicals that we could provide to a desalination plant is also humongous. Right now, we have clear focus on antiscalants and some cleaners that we provide. We could expand this portfolio of offering as well by providing a greater diversity of chemicals as well, for example. So the idea is to leverage our sales network, add more to the current distributors so that they can sell more, and by doing it either through an acquisition or licensing so that we can grow this portfolio of offering.

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Operator [45]

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If there are no further questions at this time, I will turn the call back over to the presenters.

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Frédéric Dugré, H2O Innovation Inc. - Co-Founder, President, CEO & Director [46]

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Well, thank you very much for joining the call. We do appreciate your support and we are also extremely proud and pleased with the performance that we just presented you. So thank you, and look forward to catch up with you on the following call for the shareholders as well -- for the first quarter and at the Annual Meeting of Shareholders in November 14. Thank you.

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Marc Blanchet, H2O Innovation Inc. - CFO [47]

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Thank you.

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Operator [48]

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