H2O Innovation Inc.

Thank you. Good morning, everyone.

My name is Marc Blanchet; I am the CFO of H2O Innovation. First, thank you everyone for joining this call an hour later.

I'd like to excuse ourselves; there was a technical problem at the platform that hold the call and we have to adjust, so thank you for joining in an hour later. So this call will be held in English but I'll just say a brief word in French for French audience.

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. Today, Frederic Dugre, CEO of H2O is joining me today for the call, which duration is approximately 30 minutes.

During this call Fred will give an update on the business and will present the highlight of the fiscal year and the fourth quarter ended June 2020. I will be presenting the financial results later.

Please take a moment to read the forward looking statement on page two and the non-IFRS financial measurement on page three of the presentation and also I refer you to some of the schedules which will constitute the non-adjusted EBITDA metrics. I'll now hand over the call to Frederic Dugre.

Thank you.

All right. Well, thank you very much, Marc.

And thank you for joining the call. Again as Marc market explained, we're truly sorry for the technical issues that we have with our teleconference service provider.

Anyhow, let's look at our presentation and results. And it is today with great pride and excitement that we're presenting you our annual and fourth quarter results.

While going through this last thing pandemic, I would say that we did a remarkable job. And we'd like to first thank our amazing team for their hard work, their commitment, their sense of caring and extreme resilience.

Otherwise we wouldn't be here today. In total it is 720 employees in Canada, USA, United Kingdom, Spain and Chile that's continuing to go above and beyond.

And it continues to embrace our company's culture and values in a remarkable way. Thank you very much.

The COVID crisis was possibly the ultimate test of our company's culture and business model. During the last fiscal year, we validated the robustness of our business model and have ensured the continuity of operations and the delivery of products and services to hundreds of customers around the world.

Even though we have to play defense more than office during the last fiscal year. We are presenting you our best year end results with record high revenues, adjusted EBITDA and net earnings.

In addition, we have improved significantly our financial position. We're also pleased with a progress done with respect to the three year strategic plan; we are very well aligned with our targets that we have disclosed at the last AGM.

As we did last year, we're planning to update our rolling three year plan and present our first ESG report at our next Annual General Meeting of shareholders in early December 2021. The last fiscal year was also risks in M&A activity as we completed two acquisitions.

One to expand our O&M presence in Texas, and one in Spain to complement our specialty chemicals and service offering. Thanks to these new acquisitions, and our constant focus to retain our customers and capture sales synergies, 87% of our revenues are returned by nature.

It obviously adds a lot to our financial predictability and robustness of our business model. Lastly, I have no choice but to recall this incredible industry reconditioned that we receive in the last fiscal year, Water Company of the year, as a -- Global Water Works.

We couldn't be prouder of the team achievements. Moving to page 5, let's have a look at the highlights of our Water Technologies and Services business further.

Looking at these little pictograms, we can see the evolution of the WTS activity compared to the last year and the previous quarter. Clearly, our engineering team is busier than ever with our 34 projects, compared to 17 in June 2020 and 32 at the end of March 2021.

It's just a matter of time before seeing these projects moving from the engineering to the fabrication phase, where usually we recognize most of the revenues. Progressively, we're also observing a ramp up in the fabrication and assembly phase.

Indeed, there are seven new projects under its phase compared to the previous year and three more compared to the third quarter in March 2021. There are 11 projects under commissioning phase, 6 less than last year and even with the previous quarter and there was no significant change to report regarding piloting activity.

Our strategies to focus on industrial type of customers continue to pay off. I personally announced we are currently working on a fabrication and assembly of a water treatment project dedicated to the largest electric vehicle manufacturing companies in the US.

This additional focus has allowed us to diversify and replenish the backlog with 26 industrial related products and 74% dedicated to municipal customers. This diversification strategy combined for a strong focus on aftermarket service sales, initiated following the last year reorganization allow us to improve the efficiency or feedback performance for the WTS Business Center.

Looking at the overall business activity, sales backlog and pipeline of new opportunities, we believe the WTS business is at an inflection point for growth. On top of that, the expected investment by the American government in the new water and wastewater infrastructures should also contribute to accelerate our growth in the coming years.

Moving to slide 6, during the last fiscal year, many things have been achieved commercially and on a technological basis. We notably delivered our first SILO and NDR packaged plant for wastewater treatment.

This first system was delivered into individual customers in the Midwest. We also expanded our technological offering by securing one project 14 EDI membrane and one with ceramic membranes, both for industrial customers.

These projects will become great references for us and allow us to secure potentially other similar projects where EDI and ceramic membranes will be required. As we're coming out of the COVID with products, we have resumed attending trade shows in US in order to interact with customers and accelerate growth and to wrap up on some media highlight, we are pleased to see that our focus to grow first assertive side of the business.

According to our three year CD plan is really working Indeed, we're presenting a year-over-year an organic growth of 12% in the service side of the WTS business pillar. So this is a great use, says it continues to increase our recruiting sales and just add more predictability to our business model.

Moreover, the service sales also improve the average gross margin and service sales are usually at higher margins than capital equipment products. Let's move to page 7 at the performance of our Specialty Products business pillar.

The first year for the fiscal year 2021, it was super busy with multiple synergies captured between our business lines and sustained commercial activity despite the limitation in traveling. As most of the company, we also had to adjust ourselves to the new reality and conducted multiple virtual conferences with key accounts and distributors.

We also completed the acquisition of GMP in Spain, which allow us to do essentially three things. First, expand our specialty chemicals and lab service offerings to better serve our customers globally.

Second, was to support more effectively our existing and new customers in Latin America through our office in San Diego and Chile. And finally, to grow ourselves in mining sector also in Latin America.

Looking at the chart on the right hand side, we can observe a constant growth and EBAC margin improvement we have demonstrated year after year. Measures are taken in business pillar to accelerate growth, starting with new hiring in our sales team.

Our intention to grow organically or specialty product sales is a priority as it increases recurring revenues at higher margin. As presented in our three year plan, we intend to recruit unit users, expand product offerings through innovation and licensing, and continue to acquire complimentary businesses.

Looking at Page 8, we can see that we're taking steps according to this growth way. Earlier this year, we announced a 40% increase of our manufacturing capacity to deal with the expected growth coming from the Maple industry.

This is the orange rectangles that you see on the top right picture. Indeed, this growth will be driven by $7 million of new tasks, which will be released by the current governments in the coming three years.

In addition, we want to be able to phase the expected growth coming from WTS business, which will also require more manufacturing and assembly capacity coming from the water. We also created a new position and hire both veterans in the water industry to help us manage and coordinate the multiple distributors that we've had in less than in current year.

Talking about upcoming growth. We also secured five new international distributors including one in Brazil.

Lastly, I can tell you that the synergies between our various business lines are real and captured every day by our team. A good example is the one between Piedmont and Genesys, Chile, who collaborated for the installation of large FRP filter housing in one of the largest economies in planet in Latin America.

This operation allowed us to not only save in traveling and commissioning costs, but also serve our customers with local resources. Let's move to the Operation and Maintenance business pillar presented at page 9.

Fiscal year 2021 was really active and productive starting with the acquisition of Gulf Utility Service located in Texas. This acquisition allowed us to consolidate our operational space for O&M in the Greater Houston area and enabled us to capture synergies, as you can see in the chart on the right hand side our O&M revenues for the year increased by 9.2% to reach $70 million boosted by the acquisition of Gulf.

Our EBAC margin shows improvement and increased by 15%, partially due to the consolidation and merger of our three O&M brands, resulting into operational efficiencies and cost reduction. Through operational leverage, we are capable to grow our EBAC margin faster than our revenues, which essentially demonstrate the scalability of our O&M platform.

On top of having to deal frequently with hurricanes forming in the Gulf of Mexico, our Texas O&M team has to deal with an unprecedented freezing event, which left Texas out in the cold in February 2021. Despite this terrible event, which causes major physical damages on multiple infrastructures, our O&M team did a remarkable job to ensure the continuity of services on water and wastewater utilities that we -- .

As you will see on the following slide, highlighting recent commercial wins, we are confident to grow our O&M revenues faster than industry average of 3% to 4% per year. Continuing with the operation and maintenance highlight at page 10, well, in the last fiscal year, the O&M group won four new projects in different and new geographies, being in Florida and Rhode Island.

Both of these states represented strategic geographies for potential new O&M contracts in the coming years. We also renewed seven existing O&M contracts.

Finally, renewing the contract are equally important than winning new ones. Sometimes it requires the same amount of work by our business development team and project managers.

At the end of June 2021, our O&M backlog stood at almost $70 million getting regression unfortunately compared to the previous fiscal year, despite the addition of four new O&M contracts and the renewal of seven, there is an important multi year O&M project of almost $10 million per year, which is coming up for renewal during our fiscal year 2022. Our business model which promotes synergies with the other business line, and our highest vertical renewal rate of 93% makes us confident in our ability to renew this important and strategic project this year, and conceivably replenished significantly our backlog.

Let's recall that our O&M backlog doesn't include evergreen projects from the MUD business in Texas. On a positive side, we started out use of tools gears with an addition of a four year O&M contract for the City of Laurel in Mississippi.

This project only allowed us to have $10.4 million of backlog which stood at $83.2 million as of July 20, 2021. Looking at the chart at the bottom, we see that continuous efforts of Spain to retain our existing customers and to add new one.

Moving to Slide 11. We see that despite the fact that we had to deal with the COVID pandemic, imposing travel restrictions and limiting business development activities, we continue to strive for growth and profitability improvement.

Even though we had to play more defenses in order to face the unknown and the adversity of the global secondary crisis, I'm really proud of our progression. Not only we have preserved our customers, but we also completed two acquisitions in a challenging business environment.

As a result, we're showing a year-over-year growth of 8% in a five year compound annual growth rate of 23%. In parallel, we have significantly transformed our profitability profile in the last five years.

Over the last fiscal year, our adjusted EBITDA improved by almost 17% and reach $14.6 million or the equivalent of 10% of revenues. In the last five years, the adjusted EBITDA progressed by 38% every year on an annual basis.

Thanks to the multiple synergies that we have been -- that we have within our various business lines are disciplined in integrating the four companies, are focused in capturing projects at higher margins and a high customer retention. We have improved significantly our financial performance and predictability.

Moving to slide 12, we're showing how the level of recurring revenues by nature has evolved over the previous financial period. The strategic decision to focus in growing recurring sales and customer retention have allowed us to significantly derisk the business and improve our gross margin and adjusted EBITDA.

For fiscal year 2021, the recurring revenues represented 87% of our consolidated revenues driven by the acquisition that we have completed, including two in the last fiscal year alone. Going through the pandemic, we've validated the robustness and resilience of our business model.

And our high levels of recurring revenue allow us to navigate that ease with greater predictability. I'll now pass it on Marc Blanchet, our CFO who will review and discuss the financial performance of our last fiscal year.

Thank you, Fred. Now let's look at the financial highlights for 2021.

I refer you to Slide 14. I said in previous calls H2O Innovation is a business we have to look at on a 12 month basis.

Therefore I was more focused on the yearly financial results than on the fourth quarter. First, I'll just say that we're very proud to print our annual report for the first time in our history, net earnings and double digits EBITDA.

We also want to highlight that we're very close by the net cash position on our balance sheet with only $0.5 million of net debt. If we look at our revenue, we're reporting revenues $144.3 million compared to $133.6 million in the previous fiscal year, it's an increase of 8% compared to the previous fiscal year.

Assuming a constant USD Foreign Exchange rate during this fiscal year, the consolidated revenue increase would have been 11.2% instead of 8%. As Fred explained earlier, this increase is mainly coming from the acquisition of Genesys, GUS and GMP as well as the organic growth.

The gross profit margin ratio increased to 27.7% compared to 26.9% last year, this increase was explained by greater portion of revenue coming from Specialty Products, sales service -- yes and from service activities of WTS, which comes with higher gross profit margin. So the O&M also contributed to improve this margin by capturing operational efficiencies following the merger of the three entities of operation and maintenance.

If you remember we merged Hays, [Indiscernible] and GUS in January 1. The adjusted EBITDA improved by 17% compared to the last year and reached a new high of $14.6 million representing 10.1% of overall revenue.

As for the net earnings, we were reporting $3.1 million compared to a loss of $4.2 million last year, this net earning is explained by higher level of revenue, the improvement of the gross profit margin while maintaining SG&A at the same level as came last year. Also last year loss was explained by significant charges related to impairment and more acquisition integration, restructuring and finance costs, which we didn't have this year.

So now, let's move to Page 15, I'll go over each business pillar by business pillar over the next three slides, the first one is WTS, so Water Technology Services, so WTS financial performance for fiscal 2021, improved significantly compared to the previous year, on August 24 last year, so in 2020, we announced a restructuring. The objective of that restructuring was to focus on the quality of their revenue.

We have succeeded with our objective, even though revenue productivity in 2021 increased only by $1.1 million, their profitability increased by $1.5 million. This improvement is explained by the focus to increase revenue coming from service activity and focus on projects that are coming with higher gross profit margin and recurring revenue.

This strategy paid off since we have increased the gross profit margin on WTS from 20.1% last year to 22% this year, and improved the EBITDA from $1.6 million last year to $3.1 million this year. It's also 100% improvement of the profitability of this business pillar.

For the fourth quarter, revenue and EBAC were pretty similar to last year. Revenue stood at $7.1 million compared to $7 million last year, and EBAC for both years was at $600,000.

On June 30, 2020, the backlog of WTS stood at $32.5 million compared to $35 million last year. The backlog is well balanced between industrial and municipal projects.

As Fred explained earlier, it's about 26% industrials, 74% of municipal. The pipeline is also very rich in opportunity, the recent infrastructure plan, adopted by the US administration, the new US administration will allow the financing of many projects that we had in our pipeline.

Even though it may generate many opportunities, we intend to remain disciplined in preserving a decent gross profit margin and focusing on customer that can generate recurring revenue, rather than just growing the top line If we move to Page 16, Specialty Products; Specialty Products had a very busy year, we acquired GMP in February 2021. We integrated all our typical product lines, which are in Genesys and PWT into one division or one brand.

Maple had a strong year, but Piedmont had a slower year than last year, especially products also faced many challenges coming from supply chain and logistic complexity. Overall, we're pretty happy to report as revenue increased by 9.3% and EBAC increased by 11% compared to last year.

The feedback in revenue would have been higher if it had not been for the increase of the raw material, price of transport and many delays in delivery which resulted in postponing the recognition of revenue and reduction of gross profit margin. Specialty Products is a business based on export of products to our distributors.

Some of our products are manufactured in our facility in Canada and California and in the UK, and others are manufactured in -- at our suppliers' facilities that are based in China, Canada and Spain. You're probably all aware of the International logistics has been very messy for the past few months, which has impacted cost of freight, cost of raw material, and it's causing important delay in deliveries of goods.

This logistic and supply chain situation impacting our business, since we had to absorb cost increase before being able to renew our prices. We will adjust this going forward but the last quarter, gross profit margin was impacted by some of these cost increase.

Our revenue was also impacted by the delay caused by transport. Where suites take two weeks to deliver they now take up to two to three months.

Therefore we're seeing the recognition of our revenue, of our revenues being postponed in time due to delay. So revenue for 2021 stood out at $43.9 million compared to $40.2 million last year, the $3.7 million increase of revenue is explained by the acquisition of GMV, which generated $3 million for five months.

The full year contribution of Genesys which generated $3.5 million four 4.5 months, organic growth in Maple offset by unfavorable US foreign exchange rate, it impacted the business by -- the revenues by $800,000. Overall cost increase of raw material and freight which impacted the gross profit margin and delays from revenue recognition as I just explained, and reduction of sales for Piedmont product compared to last year.

Last year fourth quarter and 2021 first quarter where Piedmont has very strong quarters, very strong deliveries. And this year, we didn't see that so they impacted the comparison.

The increase of the impact is explained by the increase of revenue, saving on traveling due to COVID and improvement of the gross profit margin which stood at 44.2% for the year compared to 42.9% last year. This variation of gross profit margin is mainly due to business mix within the business pillar with high level of revenue coming from chemical, unfortunately compensated by increased of cost of raw material.

For the fourth quarter revenues stood at $10.3 million compared to $11.7 million for the same quarter last year representing an increase of $1.4 million or 11.8%, which also impacted negatively EBAC by $200,000. This decrease is due to the logistics and supply chain situation as I just explained.

Operation and Maintenance now at Slide 17, Operation and Maintenance is a division that have been impacted the most by negative foreign exchange rate impact, foreign exchange rate. The impact for this year is $3.1 million in revenue, and $6.9 million on the backlog.

Despite this unfavorable foreign exchange impact, revenue increased by 9.2% and EBAC increased by 15.1%. Revenue for 2021 stood at $70 million compared to $64.1 million last year, representing an increase of $5.9 million.

GUS acquisition which was completed on July 1, contributed during all year at $5.9 million, so 9% and organic growth contributed to $3.1 million or 5%, which growth was completely unsettled firstly, by the FX rate. At a constant FX rate growth would have been 14%.

The improvement of EBAC is due to operational efficiency gain from the merger of the three [Indiscernible] affiliate, which have been effective since January 1. And also due to some travel savings just quoted.

Revenue for the fourth quarter stood at $17.8 million compared to $17.3 million last year, representing an increase of $0.5 million or 3%. This increase is due to GUS for $0.5 million, as well as the value growth of $1.1 million offset by a FX rate impact, which impacted the quarter for $2.1 million.

The decrease in EBAC between Q4 2020 and Q4 2021 is explained by efficiency gains in O&M project in Q4 last year, which resulted in exceptionally high EBAC in '21. At the year end, O&M backlog stood at $69.8 million compared to $90.6 million at the same time last year, this decrease of $20.8 million would have been $13.9 assuming a constant US exchange rate.

The amount of the backlog at year end doesn't include the contract of the City of Laurel that Fred talked about reached out the total of $10.4 for four year since it was only announced in July 2020. So it will appear the next quarter.

This decrease on the backlog is explained by some contract approaching to their renewal date creating important fluctuation on the O&M backlog. As I touched earlier, O&M long term contracts are typically duration of three to five years.

They have different anniversary base for renewal. This increase is boosted by the renewal of three long-term contracts with existing customers.

We have a very high -- and certainly, we've had a very high renewal rate of 93% for the last five years therefore we believe that we are well positioned to replenish the backlog in the coming 12 months. It's also important to note that Hays and GUS won in contracts are not included in this backlog since most of these contracts are with Municipal Utility District and are usually temporary.

So now let's look at the Q4 more specifically, read to our page 18. We present on the left the variation in revenue by business line.

If the exchange rate would have been constant between Q4 2020 and Q4 2021, as a rate last year, it was at 1.3856 for the average of Q4 last year, and this year the rate is at 1.2281. So statically in the gray box on the right is the impact of the exchange rate between those two quarters just for Q4 2021.

So revenue for Q4 2021 decreased by $775,000 compared to the same quarter last year, this increase is explained by two factors. So the decrease of revenue coming from specialty products and FX rate impact.

I already talked about reduction of the revenue from specialty products, which was caused by freight delay and postpone revenue recognition, combined with Piedmont product sales that last year were very high. I also talked about the FX rate impact when I talked about especially products and lab.

I think it's relevant to illustrate that this waterfall how the consolidated revenue for Q4 have been impacted. Even with an increase of revenue in specialty product, revenue with a constant foreign exchange rate would have been at $38.1 million.

Foreign exchange impacted the revenue in Q4 by $2.9 million or 7.5% on FX rate. In the upcoming quarter, the US, CAD FX rate will still be very low when compared to last year.

So that's your average for Q1 was at $133.19. Today the average for the first two months so for July and August is at $125.45.

This is almost $0.08 of difference. As a benchmark metric, every cent of FX is impacting the revenue by about $185,000 and EBITDA by about $40,000.

I mentioned this because in financial model it is something that you guys need to pay attention calculating the growth year-over-year. So let's move to Page 19; financial position for selected information.

Just when I set up the working capital is reconstituted in the appendix slide 28. The working cap increased by $10.3 million during this year.

The variation of working cap is mainly due to the exercise of the warrants throughout the year, which increased the cash and made it possible to repay the bank loan in Q3. As for the other working cap, I won't go over each of them since the variation compared to last year is essentially explained by the acquisition of GUS, GMP and also the impact on FX rate.

If we move to Page 20, net debt; you can see how we decrease the net debt since the last six months. During the last two quarters, we reduced the net debt by $13.6 million therefore, on June 13 the net debt stood at $0.5 million compared to $10.5 million last year.

This decrease is mainly due to the cash flow generated from our operating activity and the warrants exercised throughout the fiscal year. Contingent Considerations also increased from $1.4 million to $6.7 million.

These are payments we are going to make, the current op payments that are due to sellers following through an acquisition of GUS and GMP if performance milestones are met, the contingent considerations will be paid related to these acquisitions respectively $800,000 for GUS and $5.9 million for GMP. Cash position was at $15.4 million on June 30.

This balance sheet reflects in a very good filtration to pursue our M&A strategy, which was commented in our three year plan for December 2020. Now I'll back over -- the call back to Frederic for conclusion remark.

Well, thank you, Marc. And among other things, I think that COVID pandemic highlighted the vital nature and essential services of products.

Water is certainly top of the list with strong fundamentals as you can see on page 21. If anything, the water investment thesis became even more compelling.

Demand for water is expected to increase by an additional 20% to 30% by 2050, pushed by fundamental drivers such as population growth, aging infrastructure, increasing regulations, water scarcity and aging workforce to operate existing infrastructure. Even the bipartisan stimulus infrastructure bill of $1 trillion, which should include $75 billion for water, must be enough to do everything that is required.

Also, the southern states such as Texas, Arizona and California are facing more and more water scarcity problematic pushing for the construction of multiple new water reuse facilities. Looking at these drivers, I am more confident than ever, that we are in the right sector, and that our business model is robust, that our strong membrane filtration expertise will enable us to deal with growing problematic related to drinking water quality and demand for water use, and that were synergistic Business Builders makes us more unique and financially predictable.

Moving to Slide 22 for the conclusion and takeaways. Well, as I mentioned on the previous slide, the water sector will remain very attractive with sustained investment in the coming years.

Over the last five years, we have grown annually the revenues by 23% on a compound basis, boosted by the acquisition and organic growth. Simultaneously, we have strived to grow our adjusted EBITDA by 38% per year on a compound annual basis.

Moreover, our book-to-bill ratio remains healthy at 2x. Our recurring revenues by nature remained high at 87% compared to 55% five years ago.

Obviously, this focus to grow recurring sales first has allowed us to gain financial predictability through the years. The water industry remains very fragmented and attractive for acquisitions.

In the last five years, we have been able to close five acquisitions of specialty products and O&M companies as affordable EBITDA multiple between 5x to 9x. Last year only we closed two acquisitions.

Our life capitals business model allows us to generate continuously free cash flow that we can reinvest in organic growth and/ or tuck-in acquisition that I've presented in our three year plan. In the recent months, we observed an increase in multiple painful water related companies suggesting a potential upside for H2O automation valuation.

On the other end, we will remain disciplined in the multiple that we're going to pay for potential acquisition targets. Finally, thanks to our continued focus to improve our financial profitability, our financial position is in great conditions, with barely no debt as Marc laid out, and thus bringing us the capacity to leverage our balance sheet to conduct acquisitions.

Before I turn it back to the operator for the Q&A session, I want to thank our shareholders for their continuous trust. I also want to thank our 720 employees for their amazing work during the last year.

You stood tall during this global pandemic and shows that our business is robust, which gave me great confidence in our future. I will now turn back to the operator for the Q&A session.

Thank you.

Thanks. Good morning, Fred, maybe just to start can you just talk a little bit about your strategy to grow the industrial side of the business?

Is this something you need to acquire into? Can you grow it organically?

Do you need to use your -- can you use your balance sheet in any way to help grow that side of the business?

Well, actually our strategy is on two things. First, we want to grow it more organically.

We believe that we have all the quote unquote tools within the portfolio of products to conduct and capture more and the soul customers. I think what is becoming instrumental more and more in our ability to grow that portion of the business are the momentum and the references that we're starting to build.

So as we are executing more projects and have a goal to show to other industrial customers, what we have been doing enables us to win new projects. We're also starting to see a general tendency about industrial customers adopting more and more water reuse systems on their facility on their campuses in order to take advantage of, yes, becoming more green following ESG trends, but also making better use of their existing wastewater and then turn it into utility water or water that can reuse for their processes.

With -- by doing so they become less exposed to increase in tariffs, water storage and things like that. So this is a general trend that we're starting to see more and more.

And we have delivered in the last two to three years, multiple projects going on that line so and it's a general trend that we're seeing also. So we're well equipped, and will continue to grow that organically.

And what's the customer when you're looking at selling those systems? What's the customer preference to lease those systems from you and pay you a monthly fee?

Or do they want to own those systems themselves?

Well, what we have seen so far is that they're more looking to own the system itself, it seemed that they're not actually ready to let it go, however, we're starting to see more and more interest towards outsourcing the operation and the service side of it. So we'll be coming in providing the capital equipment.

And as part of our unique business model, we'll be able to provide the operation and maintenance that come with it afterwards for long term service. And this is exactly what we're doing right now for large industrial customers in Virginia on other campus.

Okay. And then, on the slide, again on WTS when you highlight the engineering projects, and then you highlight -- and then you talk about the movement in the fabrication, like historically, what percent of those projects would migrate from engineering into fabrication?

Oh, they will all do I mean, all these projects that we see there in engineering projects, or projects secured into the backlog that will have to be manufactured. So it's just a matter of time to see all these 34 projects moving to the fabrication base, it's just that we have highlighted these four different phases as just to show the level of activity, because usually the engineering portion of a project represents from time to time, maybe 5% to 15% of the total revenue of a project.

So I've imagined when these projects will get out of the engineering phase, when all the drawings, all the smelts will be approved by the customers. And we were start to fabricate, was start to order material.

This is where and when we're going to recognize a large portion of revenues, suggesting that the coming quarters should be pretty busy.

So that's something that we should see take place over the next call it next two quarters or three quarters.

Two, three quarters. And in general, the current pipeline, sales pipeline we have I think it will be pretty sustained for the next 24 months.

Thank you. Good morning, Fred and Marc.

First question for me is on the O&M side. Fred, you mentioned the large customer with an upcoming contract renewal.

I just want to confirm did you say that that customer represented about $10 million annually in terms of revenue?

Fred, yes, Canadian.

Canadian, okay. And just maybe can you talk about your, I guess, historical relationship with that customer and sort of what gives you the confidence that H2O will be successful in renewing that mandate?

Well, it's a customer that we had for probably more than 15 years; we're really entrenched with this customer providing a really large scope of work, going from wastewater, water and public services. So and in every year, also, we're conducting a customer survey and satisfaction for performance.

And the rating has been excellent year-over-year, over year and continuing to improve. So obviously, the city has no choice but to go into a bidding process to be in line with illustration.

But their intention really is to continue to grow with us and maintain the same level of quality of services they have benefit from the last years.

Okay. Yes, that's great color.

Maybe a question for Marc on the freight delays that you saw in specialty products? Are you able to roughly quantify what the revenue impact was from that in Q4?

And are you seeing sort of normalization so far in Q1 of those logistic challenges? Or is that still ongoing?

Yes, hi, it's not that easy to quantify. But when we -- the trend of specialty products has been growing the business around 8%.

If you look at the trend over the last few years it is 8% to 10%. And due to the fact that we weren't able to meet that growth, even though we had GMV during the year, in February, that helps to understand a bit the gap.

I can't tell you more; I was not able to quantify it because what's really causing a delay versus what we forecasted, we forecast to deliver, let's say in mid June, but then no one comes to take the stock on the dock. I mean, yes, I can quantify it, but it's not enough to disclose it.

I mean, unfortunately, I was unable to come up with a number that I was comfortable to disclose. So that for the first part of your question, if, sorry, I cannot be more helpful than that.

For the second part, do I expect to see that still? The answer is yes.

But probably not to that magnitude. I mean there has been an important shift over the last quarter, it shifted to this quarter.

The good news is that revenue that we're contemplating to see last quarter have been recognized this quarter. But the bad news is we're probably going to have some quarter and some revenues than we're contemplating this quarter will shift to the next quarter.

So there's that first shift that happened, that shift will pursue but it won't resume into or spike into one quarter that match I think we are into for two months from what we read. So we also have identified that as one of our main risk for this year, if you look into our MD&A, like the main risk for this year is related to freight and supply.

If I may add something also, Marc, I think on our hands of the customers, they're changing also progressively their behavior with us as a buyer in the sense that now they're starting to order in place their orders ahead of time knowing that the current challenges they're facing with the freight. And also they are increasing their minimum orders that are a jump trend, we're starting to see what they use the order of, let's say for pallet, now they're ordering in for container, again, to avoid any disruption in their own supply chain.

So that's the good news. And still we have with all of our distributors, clear financial targets that we all have for reaching a specific amount of sales each year.

And these targets are tied up, at the end of a financial period, end of each quarter, so they do have the financial incentives themselves, to make sure that the can carry anything their services line, their business plan. So I think we're not out of the woods, there will still be stress on freight full ordering and international shipments.

But I think overall, I think the behavior of our customers is changing and evolving in the right direction.

Which might be the good thing.

Correct.

That's helpful. And lastly, for me, can you talk about your acquisition pipeline and sort of what you're seeing in the industry in terms of M&A activity and transaction multiples?

Well, we're very active; we have multiple targets that we're currently working on at different stage. And I have to say, though, that lately, we have seen an increase in to the current valuation and multiple paid for water related companies.

I think we're not the only one to believe that water is a good place to be. So there are a lot of private equities and a lot of other parties that are indeed interested by water space.

There was a report published by Raymond James according to the overall industry that suggests right now that the overall multiple paper companies now stand between 14x to 17x, 18x times the EBITDA lately, so there was an increase. And on the other end, we want to remain discipline, and the multiple that we're going to pay for.

Certainly, we have been able to find our companies that were under the radar. And that's our intention at this point.

So to stay discipline. And we believe that there will be somehow adjustments as well, moving forward on these multiple pages.

Hey, Fred, and Marc, thanks a lot for taking my call. I just wanted to follow up on the specialty products, the increase in cost of raw materials that you talked about; do you have any color on how quickly you'll be able to pass on those costs to the customers?

How many quarters we might see a bit of margin compression due to that effect?

Yes, well, we're taking definitely steps to pass on some of these increases to our customers, and it will happen over a period of probably two quarters or so. On the other hand, the good news with that price increase, because on the specific chemicals, for example, there is a rupture on particular, phosphate based product that we use for the making of our chemicals, that is increasing tremendously with global shortage and slowdown in production.

And that could become a terrific advantage for us because of our other specialty product line that we have being the PWT. So the PWT product line reliant on green chemistry, and is made of a dendrimer of a polymer not using phosphate based product.

So normally, it's a green chemistry because it doesn't counterweighted phosphate, allowing us to avoid this high increase we're currently seeing on the other product line. But also it's kind of form on a super concentrated formula, allowing us to significantly reduced the freight cost because it's concentrated 11x.

So right now our time to do it to take advantage of this current global situation with price increases on raw material, shortages and challenges related to logistics and freight costs to push forward the strong and compelling advantage we have with those field, product line, if we're able to do that, not only will result into pushing further green chemistry to our customers, but will allow us to even capture better margins, because it's coming up with high margins as a product with high margin. So what it could be perceived as a threat could become a really nice opportunities for us in the coming quarters coming years.

So that's a good mitigation plan we are trying to put together.

Thanks a lot. That's great color.

So do you think that the EBAC margins that you saw in Q4 are kind of sustainable through the first half of 2022 then?

Yes, I mean, the first half, I mean, you have to understand as a business, big aspect to it. So Q4 always has very low revenues coming from April and into that business mix, you got Maple, Piedmont and chemicals.

The fact that chemicals has higher proportion of revenues boost the margin up, therefore boost the EBAC, when you've got more revenues coming from Maple, even though the rest of the revenue stays up, still that margin can be affected a little bit because of the weight of chemicals into the business mix. So I, 44, we're pretty proud of it quite high.

I think it's optimistic considering the pressure we have right now, especially on Q1 and Q2 on our supply. So the mitigation plan, that Fred explained won't happen overnight.

It's really something that we're trying to push. But we're asking big companies to switch from a product that they know when they've been using for many years to a new type of product.

That's not proven, but nevertheless, it's a change in their chemistry. So I think it's optimistic to think that Q1, Q2 will both maintain that profit margin.

On the other hand, for the second half of the year, we're looking to in source one of the product lines for specialty chemicals that we have, in order to increase the margins. But again, as Marc explained, it's not going to happen overnight.

We're currently making the investment into our UK facility in order to be able to capture the savings and improvements in the second half of the year.

Hi, good morning, and thanks for taking my questions. Fred, with the elevated multiples that you're seeing on the M&A front, I'm curious, does that sort of change how you think about the amount of emphasis you want to place on organic growth versus acquired growth as it relates to your three year plan.

Number one, and number two is if there is a shift in emphasis towards more organic growth initiatives. Will that have any impact on your current operating expenses?

Well, two things, first, we started early this year to make investment according to our three year plan, according to our new budget, we're starting to make investment in growing our sales organization. I think in all of our business lines right now, we're taking steps also on pushing for innovation to launch new products, again, to create growth momentum.

What we're doing on the side of the acquisition, well, yes, it has increased. On the other hand still believe that there are out there a category of companies of certain size that are less exposed or quote unquote, less attractive to private equities of the world because they're smaller in size.

So we think that companies have say less than $30 million I'm just trying to draw a line with maybe $20 million or $30 million but certain companies in smaller size might be less attractive for M&A transactions in general, and then making these multiples more affordable than the other large transactions where we see a lot of inflation so that's why we want to remain disciplined according to refer to your plan as we have discussed go after these tuck-in, complement for portfolio production The tuck-in complement or footprint are going out with these tuck-ins and in parallel conduct as I mentioned because now we have the capital, we have a cash flow to conduct there aggressively an organic growth plan as well.

In terms of, I think to your second part of the question was on the M&A ratio, we intend to maintain and as we did for the last few years we've been over 18%.

Hi, good morning. Thanks for taking my questions.

Most have been asked and I apologize if I repeat that something here I was dropping of the line a couple of times but the question I have is go back to the supply chain concerns there from what I've seen from different companies I mean it's touching anything from finished products to raw materials and do you think it might have any impact in terms of even when it comes to product availability for example some of your suppliers might not be able to gather materials and then in turn provide you with what you need to deliver to your customers number one. And just relates to that are there any implications for working capital?

Thank you.

Well, so far as the challenges outside of price that we are observing and it's not necessarily a lack of availability to conduct itself is available but instead of being available that Marc explained in two to three weeks, it might become something in three months so that's the kind of things that we're seeing on some of our products that were buying, but what we're trying to find out alternatives or equivalent products and to overcome all these disorders or be delayed.

But closer for example on if it needs to be built in Europe on the European continent or thing for America, could we sourced ourselves in Mexico instead of China. As Fred said it does not, our suppliers don't have issues with obtaining raw materials or raw materials are not like those chips that Ford, some -- the same issue but the problem is really to get the equipment from one place to another and those type of equipment we can't put on a plane so the equipment or products, we cannot put on a plane.

I guess just one thing probably the best one we did in the last few years was to create and organize our supply chain departments. So this is a new support function that is not -- that does not exist several years ago and now I can tell you that they're pretty busy these days.

But it really helps to mitigate different things related to price or related to sourcing related to delays.

Okay, great, thanks. That's great color.

And on working capital, I mean, do you expect any drag their Marc or it should be more or less, where it has been historically?

No, nothing to expect; some usual kind of the normal growth. So of course, eventually may move with the growth.

Thanks for AR, so maybe on cash; there are still $3.5 million warrants that have not been exercised yet. The deadline for those warrants is November 14.

So maybe we will see those warrants exercised and cash coming in. So it can only be improving the balance sheet.

Okay, well, that's great. Thank you.

And last question for me. I don't know if you can shed any light here or disclose but with the backlog going down, but you've won some contracts, right?

Like since the end of the Q4, are you able to provide a number where the backlog currently stands?

The backlog as of today we will -- September 30, did you have that Fred Yes.

Yes. Well, we updated the backlog for O&M at $83 million following the announcement of a new contract we just won with City of Laurel.

The product backlog for new equipment, capital equipment, and --

We will diligently provide an update around end of the quarter. So stay tuned.

I mean we just have 30 this week.

Specialty will come soon.

Yes, there should be an update soon on that.

Okay, sounds good, will do. Thank you.

Well, we're trying to do that on a quarterly basis in order to, unless there isn't like a major contract. But last time we provide an update it was on July 26.

It was 34.8.

Well, thank you very much for attending the call today. And we're really proud of our results, year end results.

Look forward to talk to you for the first quarter results, which will be announced in mid November for the quarter ending at September 30. Thank you very much.

And stay tuned for more news. Have a good night.

Have a good night, good day. Bye -bye.