H2O Innovation Inc.

Hi. Thank you very much.

Good morning, everyone. My name is Marc Blanchet, I'm CFO of H2 Innovation.

This call will be held in English without just a brief word in French to our French audience. [Foreign Language] And I was just saying in French that normally, before we begin, I invite you to download a copy of today's presentation, which can be found on our website.

But this morning, unfortunately, the entity that host our website seems to have an issue. So they crashed.

So the documents were filed at 8 o’clock this morning. They were available between 8 and 9 and around 9, 9.15, the hosting of our website crash.

So it seems to be difficult. But you can have access to those documents on SEDAR.

[Foreign Language] And also I just heard that it's fixed now, so you can have access to our presentation on our website at the section Investors. So before we begin, I invite you to download a copy of today's presentation.

[Foreign Language] So Frédéric Dugré, our President and CEO, is joining me today for the call, which has a duration of about 30 minutes. During this call, Fred will give an update on the business and present the highlights on the third quarter that ended March 31, and I will be presenting the financial results.

So please take a moment to read the forward-looking statement on Page 2 of the presentation and the non-IFRS financial measures on Page 3 of the presentation. I'll now hand over the call to Frédéric Dugré.

Thank you, Mark, and thank you to the analysts and the shareholders for joining the call today. Despite the volatility of the market in general, we are extremely proud to present you another solid quarter with record high revenues reaching now $52 million and adjusted EBITDA of $5.3 million.

I'm particularly happy to present sustained growth of 32.6% where 15% is coming from organic and 17% comes from acquisition completed over the last 12 months. On top of dealing with the lasting pandemic, supply chain and labor market challenges, as well as high inflation, we strive continuously to improve our profitability.

For our third quarter, the adjusted EBITDA increased by 18% to reach $5.3 million. Consequently, our adjusted net earnings increased by 55% to reach $3.4 million at the end of March 31, 2022.

I want to say a big thank you and congratulations to our team for achieving these incredible results and continuing to find ways to mitigate these risks and obstacles. You guys are just phenomenal.

Not only we did good for this third quarter, but we continue to build financial predictability from the coming quarters with an increasing consolidated backlog of $109 million, and this is without considering the renewal of our single largest O&M contract for the City of Gulfport announced in April. With this single contract, it is $55 million that we're adding to our consolidated backlog.

Also, our high percentage of our current revenue spending at 83% contributes to maintain a strong customer relationship, reduced volatility in the business in general and create multiple cross-selling synergies. Lastly, we successfully graduated to the TSX Exchange earlier in March, which represents another important milestone into H2O's journey and should open up the door to a larger audience of investors around the globe.

Let's review the business activity for each of our business pillars, starting with the operation and maintenance presented on Page 5. First, on top of growing the revenues with six new O&M contracts started in the last 12 months, the renewal of five others, the scope expansion on seven of these existing projects and the acquisition of JCO and EC announced in December 2021, our O&M business continues to receive industry recognition and strong customer appreciation, which are fundamental to the longevity of our business.

We are proud to announce that we received the 2021 Gold Award from Georgia Association of Water Professionals for exceptional service at the Canton water treatment plant located in the state of Georgia. Since July 2021, our O&M business development team worked relentlessly on the renewal of scope expansion of our single largest O&M contract for the City of Gulfport in Mississippi.

This new contract valued at $13.75 million per year is secured for an additional 4-year period, adding $55 million to our O&M backlog. Following this initial term of 4 years, the contract could last up to 12 years following four consecutive renewals of 2 years each.

We are particularly proud to see also a significant scope of work expansion in this contract, which testifies to the quality of the work provided to the city in the last several years. Lastly, our O&M business expansion continues in 11 locations across Canada and in the U.S., including our latest region, the state of New York.

Let's recall that the acquisition of JCO and EC completed in mid-December, allowed us to position our O&M growth in the state of New York, the fourth most published state in the United States. These acquisitions are expanding significantly our footprint in the Northeast region with slightly more than 200 industrial and municipal customers along the Hudson River and bring also multiple cross-selling synergies and opportunities with our WTS business pillar.

Moving to Page 6. Let's let a look at the highlights of our WTS Water Technology and Service business pillar.

Our WTS business pillar is firing on all cylinders. Not only the revenues increased organically by 17.8% year-over-year, but the EBAC increased by 40% over the same period.

This is absolutely remarkable, knowing how challenging project execution can be even more true with the new challenges related to the supply chain. The future looks also promising with a well-diversified backlog of $34 million, composed of one third of industrial projects and two thirds of municipal-related projects.

The other good news is that we finally started to manufacture our single largest project in the backlog. This large water reuse project dedicated to the City of San Diego is valued at $10 million and will deliver - will be delivered progressively in the coming quarters, and this will impact a little bit in the fourth quarter, but most importantly, the following fiscal year.

As you can see through these pictogram, our business activity for the WTS pillar remains high, and our engineering and fabrication teams are extremely busy. We're expecting the teams will remain busy for multiple quarters driven by the robustness of our backlog.

We continue to take steps to further expand our business offering and footprint in the mining sector. We are pleased to report that we completed the commissioning of the first of the three projects in the backlog for the Fermont mining complex in Northern Quebec.

Let's look at Page 7 for the performance of our Specialty Products business pillar. The chart on the right-hand side said at all.

Our business is growing fast and demand for our green chemistry and eco-friendly solutions are gaining momentum. The expansion of our international sales team in South Pacific, Middle East and Latin America is also paying us in a big way.

Despite all the pressure on margins from the supply chain challenges and multiple constraints related to COVID, our EBAC margins remained high and above 25%. Multiple initiatives are taking to mitigate the negative impact of the supply chain and its volatility, including product innovation, frequent price adjustments to customers, alternative sourcing for raw material and plant expansion for vertical integration manufacturing.

On that matter, we announced in March the expansion of our specialty chemicals manufacturing facility in Cheshire, U.K. The $1 billion invested has enabled us to double our square footage in Cheshire, U.K.

in order to add warehousing capacity and in-source the manufacturing of specialty cleaners which should enable us to better control the price, the quality and the lead time of the products made. First batches of these specialty cleaners will be made in the fourth quarter of this fiscal year.

As mentioned previously in the presentation, we're taking steps to increase our footprint in the mining sector with our participation in different trade shows and by combining our talent, resources and expertise from the other business divisions. During the third quarter, Piedmont business line secured 13 other orders for filter housing, couplings and permeate connectors for a total amount of $9.3 million.

The surge in new orders in the sustained growth of our distribution network are mostly driven by the international and desalination market, which is booming right now in the Middle East. Lastly, our Maple Farming Equipment business is doing very well this year.

For this reason, and considering the expected growth in the Maple industry driven by growing demand for the end product, but also by the release of $7 million of new tax in Quebec province in the coming 3 years, we decided to expand our division with the acquisition of 130-years old Maple farming equipment manufacturing company based in Vermont. Once completed, the acquisition of Leader will enable us to expand our manufacturing capabilities, our distribution network and will add complementary products to our portfolio.

We really look forward to close this transaction in the coming weeks and give another boost to our Maple division. Moving to the Slide number 8.

We see the result of our constant efforts to grow the business both organically and through acquisitions. On an LTM basis, our revenues have grown by $22.4 million, equivalent to 15%.

Without the negative impact of the U.S. exchange rate variation, the growth would have been $26 million or 18%.

On a 5-year basis, our compound annual growth rate is almost 19%. But our focus is not only to grow the business, but also to focus on improving our profitability and EBITDA margins.

Despite the nominal decrease in our LTM EBITDA, the evolution of our EBITDA over the last 5 years was remarkable and has been growing 52% on a CAGR basis. Our business model works.

We are capturing business synergies between our different business lines, allowing us to improve our operational efficiencies, leverage our sales network and most importantly, retain our customers. Talking about customer retention.

We see on Slide number 9 that we have been able to maintain a high level of recurrent revenues by nature. Going through the pandemic, we validated the robustness and resilience of our business model at multiple times.

The strategic decision to focus on growing recurring sales and customer retention have allowed us to significantly derisk the business and improve our gross margin and adjusted EBITDA. Thanks to the multiple synergies that we have been able to capture with the various business lines are disciplined in integrating the company's acquired and retaining customers will continue to improve our financial performance and predictability.

I will now pass it on to Marc Blanchet, our CFO, who will review and discuss with you the financial performance of our company during the last quarter.

Thank you, Frédéric. So before we go over the results of the third quarter on Slide 11, I'd like to go over the results of the last 12 months compared to previous 12 months.

Fred talked about it, I talked about the organic growth, and I think that's what we want to point out here. Our effort to go - made over the last 12 months to focus on increasing organic growth allowed us to increase the LTM organic revenue growth from 2.1% for the previous 12 months to 10.1% for the last 12 months.

We invested in growth initiatives in order to achieve the 10% organic growth objective provided in the 3-year strategic plan as explained in previous quarters. To achieve this objective, we hired sales resources and invested in SG&A to generate and support this growth.

This explained the 1.4% increase in SG&A compared to the previous LTM. The adjusted EBITDA remained relatively stable at 16.2% compared to 16.4% in previous 12 months.

The adjusted EBITDA over revenue is lower at 9.7% compared to 11.3% last year. The reduction in percentage is explained by investment in SG&A to generate growth and a reduction of the gross profit margin essentially due to consequences of the COVID pandemic.

The fact that we can rely on three business pillars is a strength for H2 Innovation. It allows us to be able to count on different sources of revenue and thus reduce the risk of volatility on the EBITDA.

Now let's go on Slide 12 and look at the financial results for the third quarter that ended on March 31. We are reporting revenues of $51.9 million to just shy of $52 million compared to $39.2 million last year.

It's an increase of 33%. These results were driven by organic growth of $6 million or $15.3 million and acquisition growth of $6.7 million or 17.3%.

JCO and EC, our recent acquisition that was closed on December 15, contributed to $4.5 million in revenue during this quarter. The gross profit margin ratio slightly decreased to 27.2% compared to 28.3% last year.

The percentage decrease was explained by reduced gross profit margin in Operation & Maintenance and Specialty Products business pillar, partly offset by the improved gross profit margin in WTS. Specialty products and operation and maintenance were the business pillar mostly affected by the impact resulting from the Pandemic.

The adjusted EBITDA improved by 18% compared to Q3 last year and reached $5.3 million compared to $4.5 million last year. The adjusted EBITDA percentage decreased to 10.3% from 11.5% last year.

The percentage decrease is coming from decrease of the gross profit margin and increase of SG&A ratio, which is to grow revenue in the coming year to support the corporation's 3-year strategic plan. As explained in the last few quarters, we have decided to invest in SG&A to generate organic growth revenue, which is giving results, considering that we just generated 15% of organic growth during that last quarter.

As for the gross profit margin this quarter, it has been impacted by the current global consequences of the pandemic. We talked about it in previous quarters.

And also, there is a plan, an action plan to mitigate those cost pressures. That is explained in the first pages of the MD&A.

Finally, we're happy to report an adjusted net earnings of $3.4 million compared to $2.2 million last year. The variation with Q3 2021, and it is mostly explained by the growth in revenues.

So now let's look at the different business pillar. Let's start with Operation and Maintenance on slide 13.

Revenue for the Q3 2022 for Operation and Maintenance stood at $24.1 million compared to $17.3 million last year, representing an increase of $6.8 million. Of this $6.8 million, $4.5 million is coming from JCO and EC acquisition and 2.3% is coming from organic growth.

The gross profit margin in percentage decreased from 21.6% for third quarter last year to 18% this quarter. The gross profit margin was affected by higher labor costs due to overtime hours done to offset sick leave cases related to COVID-19, as well as increase in cost - insurance costs and increase of gasoline.

We have many trucks. So therefore, we suffered from that increase in gasoline price.

At the end of the third quarter, the Operation and Maintenance backlog stood at $75.5 million compared to $66.4 million last year. It would have been $9.4 million higher or 14.2% higher, assuming constant U.S.

exchange rate between the periods. Just want to remind and Fred talked about that, that on April 4, we announced the renewal of the contract with our largest operation and maintenance customer, the City of Gulfport in Mississippi.

It's a 4-year contract that is valued at $55 million, and it brought our operation and maintenance backlog to $131 million. So this is an increase of 73% compared to the backlog just four days earlier at the end of Q3.

It's also important to note that a contract - that all contracts in - most of the contracts in Texas and in the states of New York are usually evergreen and are not included in the backlog. Let's move to Page 14, Water Technology & Services or what we call WTS.

So the WTS financial performance for Q3 2022 was highlighted by 17% growth in revenue compared to Q3 last year. Most of the revenue growth came from water treatment system project activities.

So even though revenues from water treatment project generally brings lower gross profit margin than the service activities, the gross profit margin in percentage has improved from 19% for the same quarter last year to 23% this year. The corporation's 3-year strategic plan consists of priority - prior rightsizing WTS project with higher gross profit margin, a project that can fuel opportunities for other business pillars, so for which we can generate synergies, sales synergies.

Material costs related to projects were impacted negatively by the increase of cost of materials because the projects have generally been sold for 7 months or even a year before. So to mitigate this impact, our sales team included price adjustment class and are negotiating with our customers to for some extra - to compensate the inflation and also the increase of the production cost.

WTS backlog stood at $1.4 million compared to $1 million last year, which is an increase of $400,000 or 40%, driven by the increase of the gross profit margin, as I just explained. The WTS backlog stood at $33 million compared to $35 million last year, which is a slight decrease of 4.6% compared to last year.

And as Fred explained earlier, the backlog is well balanced between industrial and municipal projects. Let's move to Slide 15, Specialty Products.

Specialty Products had a very strong third quarter. Revenue increased by 35% and EBAC increased by 31% compared to last year.

So revenues stood at 15.9% compared to $11.8 million last year, and EBAC stood at $4.3 million compared to $3.2 million in the third quarter last year. These results were driven by higher sales coming from the chemical and Piedmont business line.

The gross profit margin in percentage decreased from 45.8 to 44.3 this quarter. This decrease is explained by the business mix with higher level of revenue coming from Piedmont reducing the proportion of revenue coming from Specialty Products, which Specialty Products are characterized by heavy [ph] gross profit margin.

This business pillar also faced significant challenges caused by supply chain issues and logistics. As explained in previous calls, Specialty Products is a business based on import and export of goods and had to deal with global supply chain matter and increased cost of material.

The gross profit margin was affected negatively. We're taking proactive measures to mitigate this increase and to minimize the impact of the supply chain issues.

Page 16, the financial position. So we're presenting here some selected information on the financial position.

So first, the working capital, which is re-conciliated on appendix at Slide 27. It increased by $1.6 million since June 30.

The variation of the working cap is mainly due to the increase of inventory and accounts receivable. I'll give a bit more explanation on the next slide about inventory and receivables.

As for the other working cap items, I won't go over each of them since the variation compared to June 30 is essentially explained by growth of the corporation activities, the acquisition and measures to counter supply chain challenges and increased the cost of materials. So let's look at Slide 17.

I add that graph to help the investors to reconcile our financial position and working capital items. So as I previously said, the variation of the working cap is mainly due to increase in accounts receivable and inventory.

So from the $8 million account receivable, the first big blue line you see there, increased 1.5% of this increase is coming from acquisition of JCO and EC, which were both acquired in December. The remainder of this increase comes from revenue growth and significant invoicing in the Maple business line, which just ended this season.

There are no significant account over 60 day late. As for the inventory, $4.6 million increase is mainly coming from Specialty Products.

The increase is due to revenue growth, general material cost increase and proactive measures to maintain a higher level of safety inventory to present logistic - to prevent logistic issues and further cost increase. The account payable increased by $5.2 million since June 30.

This is mainly due to the growth again of corporation of the company and timing, along with the acquisition of JCO and EC, which added $900,000 in account payable. Contingent consideration increased by 4.8% since June 30 due to the addition of JCO and EC acquisition and the revaluation of the contingent consideration of GMP since their financial performance was higher than what was initially forecasted - sorry, the increase was partly offset by the payment of gas [ph] consideration in January.

So on Page 18, let's go over the net debt evolution since - since the last year, so the last 12 months Q2 2021. So on March 31, 2022, the net debt stood at $25 million compared to $0.5 million on June 30.

This increase since June 30 is mainly due to the financing of JCO and EC acquisition on December 15, for which we paid $22.2 million from cash on hand. The increase is also due to the cash flow from operating activities.

As announced on December 3rd, 2021, the increase of the revolving facility to $55 million [ph] provide greater flexibility to the corporation's operation and support the acquisition strategy described in our 3-year plan. This concludes my remarks on the financial section.

I will now hand the call back to Frédéric for conclusion remarks.

Thanks, Marc. Let's move to Slide 19 for the conclusion and takeaways.

The organic growth was phenomenal in Q3 and well aligned with our 3-year strategic plan, which is to maintain a double-digit organic growth with an adjusted EBITDA above 11%. All the investments done in the previous quarters to grow our sales team are now paying up nicely.

As mentioned previously, our business model and business synergies among the three business pillars promote customer retention, thus higher recurring revenues. It is our intention to continue to focus on that aspect in the coming quarters.

Also, by the nature of the expenses we have, more than 50% of our business is isolated from the supply chain disruptiveness. Overall, our financial position is in good shape, and we'll continue to focus on cash flow generation.

Despite the pandemic and all the related constraints, we completed three acquisitions in the last 12 months. This is also in line with our 3-year plan.

As announced on April 12th, our intention to acquire Leader, a premium brand in the Maple equipment industry is timely as the market will grow nicely in the coming years, driven by the increasing demand for the Maple products and deliberation of new quota for Quebec producers. With the multiple challenges arising from the supply chain and high inflation, our team is taking measures continuously to mitigate these impacts.

We're talking about negotiating CPI and new price schedules on our O&M projects, adjusting the prices on our specialty products for the customers, negotiating changeovers on projects and price escalation, bundling purchase orders to benefit from volume discounts. In other words, we are taking actions to protect our margins as much as we can.

On the positive side, the water investment thesis is still very positive and attractive for investors due to this essential nature. This should continue for a while as regulators are more stringent, demand for water arising from agriculture and industry continue to grow and because water infrastructures are old and need to be refurbished, replaced or expanded.

Talking about the future, our consolidated backlog is strong and well diversified. The renewal of Gulfport, Mississippi will have $55 million to this backlog on the fourth quarter.

Overall, we are really happy of our financial performance for this third quarter. We are also excited about the growth opportunities secured lately, as well as the new business initiatives deployed in our manufacturing facilities in order to gain operational efficiencies.

On the other hand, we envision that the coming quarters will remain volatile and challenging in multiple ways, particularly with the supply chain, logistics and labor market. For these reasons, we will stay disciplined and selective in our investment opportunities and continue to focus on customer retention, high-margin products and projects.

I will now turn it back to the operator for the Q&A session. Thank you.

Hey, good morning. Thanks for taking the questions.

Maybe just to start, Fred, when you think about the renewal that was done with Gulfport, the scope increases and the structure of that deal. Does that - like do you think that you will look to replicate that type of arrangement with other O&M partners over time?

Well, we do have other long-term contracts with other clients. I mean this one is pretty unique because we do have a benchmark arrangement with the customer where we are being benchmarked on the quality of the service, the efficiency and rapidity of execution.

This is something, yes, that we would like to replicate. It's not necessarily suitable for all customers, but we are currently also in discussions with maybe other customers in the area of Mississippi as well to ultimately replicate similar arrangement.

But we love this kind of arrangement. I think it's the future for public work.

I think it provides a high level of accountability for us and transparency in front of the customer and it's a great arrangement.

And there's some asset purchases, I believe, as part of this arrangement. How should we think about - as we think about the accounting for that, are there some cash outflows that will see take place in the next fiscal quarter as this - as this arrangement begins?

Yes. So two things.

Let me give you some background on how we ended up by adding these assets first to the contract to give you some perspective. So we have been entrenched really with the city for a number of years to execute a lot of public work-related activity for the city.

And during all the previous years, where we're providing and responsible for the labor, but we were using the equipment and the vehicles from the city. And it created some time misalignment in the priorities and our ability to execute the work because we were not in charge of doing the maintenance on these vehicles.

So when, for example, when we were requested to perform a specific work orders and we necessitated a specific equipment when this equipment was not available because it was not properly maintained or repaired, we couldn't perform the work. So during the last several years, we entertained this discussion and this idea about taking over the existing equipment and then becoming accountable and responsible for the maintenance of the fleet, allowing us to create a better alignment between the work we need to execute and the availability and the quality of the equipment.

So this is why we purchased these equipment, the purchase happened in early April for a bundle of all these equipment out there. So now we are in charge of the garage in charge of the maintenance of these vehicles to make sure that we're properly aligned.

Moving forward, there will be fleet replacement progressively, and it's already incurred into our budgets for the coming years, and this will happen on a rolling basis over time.

And if I may add to answer quickly, yes, you will see in the next quarter, probably variation of cash or net debt to reflect the amount we paid, but we don't disclose on low the amount you can figure it out when you look at the probably next financial statements.

Okay. And then a few quarters ago, Fred, I can't remember the exact terminology.

But a few quarters ago, you described a situation where the inflationary environment, there might be some benefits to gain in market share opportunity within your specialty products category, given the product positioning. Have you had - can you indicate if you've had any success in those efforts in terms of promoting?

Yes, absolutely. So not only our - so first, we have two types of chemistry.

We have a more conventional chemistry made out of phosphate. And we have another one which is not made out of phosphate, so it's a dendrimer [ph] the polyacrylate that we do in-house.

And because it's not related to phosphate, the latter one, well, we haven't been exposed to the price increase that we saw in the phosphate price. And we're talking about 40%, 50% increase in the last several months.

So our price resulted into having a more competitive price compared to the traditional phosphate-based products. So yes, we have been able to gain and promote that more to the customer.

But on top of that is that our product is unique in a way that it's a green chemistry because it's not a phosphate base. So we're winning on both ways.

We're winning because yes, we're more competitive. We're protecting the margin because of this phosphate that we don't have into our dendrimer-based product, but also the fact that we're getting more and more traction from the customers to adopt green chemistry, adopt more Pro and environmental solutions, which is a big drive into our market as well in terms of ESG promotion.

And this is being reflected into our numbers. As you look at the specialty products, I mean, the increase that we see is really sustained on the chemical side, and we think it will remain and continue.

Okay. That's great insight.

Thanks for taking the questions.

Thank you, Michael.

Thank you. Good morning.

Good morning, Frédéric.

Congrats on the results. Just on the organic growth, really impressive here.

So I was wondering if you maybe had any comments on the drivers or the composition of the organic growth. I guess I'm just trying to figure out if pricing played a big role in the organic growth rates that we're seeing?

Or if it was mainly volume related? Perhaps you can comment on each of the segments on development?

Well, the increase in the price wasn't much. I mean we have somehow like limitation also on things we can do with customers.

I mean we have been proactive yes, but not as much. It's true organic growth.

I mean if you look at the WTS, for example, I mean, for a number of quarters, I mean, we have been predicting that this business will turn around. I mean, with the quality of the projects we have with the backlog increasing, it was just a matter of time before we start to see kicking in all these revenues and show it to our balance sheet and our P&L.

Similarly, as I was previously explaining with Michael, I mean the growth that we saw into the specialty products coming from Piedmont, coming from the Chemicals coming from the Maple has been very, very sustained over the last quarter. And this is due to the fact that we added nine people into our sales team across the board.

So obviously, it's impacted previously the financial performance because we had an increase into our SG&A, but now we're starting to collect the benefit of that. And this is why we think it will sustain as well moving forward, particularly coming from the specialty products because we have new distributors.

We're growing the distribution network. We're penetrating new customers with these products.

So this is a really exciting moment for H2.

Maybe a way to say it, that we said internally during the previous 12 months, we played defense. Now we're moving offense.

Perfect. That's helpful.

And just to go back on the Gulfport, just wondering if you had any comments on how things are going since the expansion of the scope of work. How did the transition sort of unfold with the new employees that you welcome.

Just maybe sort of comment on that?

Well, I was myself in Mississippi last week. I had a chance to discuss with our project manager there is absolutely in line.

We're really happy of the transition so far. Our customers really happy.

We already started to show the benefit of integrating the - as I explained, the fleet management to our - the rest of our traditional activity, historical activity we have there. So it's happening, and we're happy so far over the first several weeks we have been into this new arrangement.

Perfect. And last question for me on the JCO and EC acquisitions.

I think one of the attractive features of those acquisitions was the cross-selling efforts or the crossing potential. So how is that going?

Have you had any sort of initial success in terms of cross-selling through those acquisitions?

Yes. Yes, absolutely.

This is also very exciting. So we have secured first multiple orders for cross-selling that I'm great, notably on the SCADA side of things where customers needed to upgrade their SCADA, they're more or less control system.

So we're using the expertise and the capabilities of our programming and service team we have in the WTS business. So these are things that we're currently working on.

And there's a few additional great opportunities that we're currently in discussion with a number of customers out there. So we have materialized some of the synergies and many others in front of us right now that we're working on.

And the worth to mention last week was the service meeting and the WTS meeting in Minnesota and Minneapolis, and there was a lot of excitement and guys from JCO AND EC were there present at this meeting and - and was just phenomenal to see the level of energy and the traction between the two groups.

Okay. Thanks.

And congrats.

Thank you, Frédéric.

Hey, good morning. Thanks for taking my questions and congrats on the quarter.

Just a couple for me. I just wondered if you can talk a little bit about staffing at this point.

You added a few people, especially on the sales side. I was wondering how do you think about staffing?

Are you good where you are now? Or do you think you should or can add some more?

Well, staffing, you refer Endri to staffing mostly on sales-related function or staffing across the board?

I'll say sales to start, but then more generally across the board, too.

Yes. So in terms of business development, so yes, we're still on a look for a couple of key guys and strategic personnel, we're thinking about adding in the course of the year, not as much as we had in the last year, but there will be a few additions coming up.

Also, we need to think about engineering support functions. So we need - when you're adding salespeople, you need the back end of it also engineering function to support them in terms of proposal, design activity as well.

So this will happen in the next several quarters. In terms of staffing in general, well, we do have several positions open right now in H2O.

I mean we're talking about position up to 70 or 80 open positions we have currently in the company and this is out there. So it goes from replacing operators to other people in the plans that we have for manufacturing, people in the headquarters.

So it's a bit everywhere. And it is a challenge.

I mean, it's not easy to find the right people. I mean we're being extremely diligent.

We want to minimize as much as we can the turnover of our people. So it's a lengthy and challenging process these days.

But yes, we're taking steps to become an employer of choice. And it's so far has been not too bad.

Okay. That's good to hear.

And other question I had, you mentioned price and CPI escalators for some of your contracts. Is there any lumpiness in them at all during '22?

Or would they be more flat or similar over the next quarters?

So I referred to those adjustment clouds that we have. We have those with WTS and with O&M.

I'm not sure to understand your question exactly, Endri.

Well, what I mean is that do they kick in all in a specific quarter? Or are they more spread out?

Okay. So for O&M, there's a, I would say, a window about once a year where we come into like the anniversary date of a contract.

So that's where the window opens and we can address that with our customers. So you can see that the margin of operation and maintenance is under pressure right now.

And it's also due to the fact that we've not been able to address those increase during the year, and they are being addressed, but some will be addressed only later in the next few months. As for the WTS project, and by the way, for operation maintenance, when we address that, we move the margin, but it's only going forward.

As for WTS, we can sit down where the customers - those windows happens a bit more often when there are change orders and those can be provoked or can be addressed between the project manager, our project manager and the customer's project manager. And then these can be, I'd say almost retroactive where the project manager can say, hey, here's what we're facing, stainless steel went up or pumps or this or that.

So you - we've got this adjustment closed into the contract. And then they agree an adjustment, and that adjustment can almost be retroactive and compensate for the reduction of margin that we faced over maybe a quarter before.

And then - so that can create that kind of lumpiness. Also you can see that we've been able to preserve our gross profit margin for WTS especially this quarter, even though there was more revenue coming from project rather than service.

So this is because our guys are – our project managers are doing a good job to negotiate those change orders and get compensation for inflation. As for operation and maintenance, you'll see them coming forward in the next few months as those negotiations windows can happen at adversary days of each of our contracts.

Okay. Well, that's color.

Thank you.

Hi, good morning. Just wanted to start off with the Leader, maybe you can talk a little bit about how that improves your positioning on the Maple business and maybe other opportunities that you're seeing on the agri side in the U.S.?

Well, two things. I mean, first, this acquisition that we announced our attention first to acquire because we're still working on finalizing it, and we hope to be able to close that within the next couple of weeks or so.

This will be really transformational for our Maple division in a sense that normally will grow the business, we're going to really establish ourself in the U.S. market, and we will become the only cross-border manufacturing of Maple equipment, making equipment in U.S.

soil and in Canada as well. And this means a lot for our U.S.

customers mostly because to buy American-made equipment means a lot for these farmers, the equipment for these farmers and producers. So this will be a terrific addition in that sense.

It will grow significantly our distribution network as well in the U.S. And with that, we'll have close to 100 distributors on a combined basis.

So we'll move from 50 - we're going to double the distribution network and the footprint we have in the U.S. So this is really, really significant.

So you need to think about products that we have where we are really, really strong, for example, the membrane filtration because this is our core expertise. So this will enable us to really push forward the distribution of these products to a larger number of customers in the U.S.

Similarly, with the SmartTrack [ph] product line that we have, which is the monitoring smart division, we have using equipment to monitor the performance of - in the woods of the Maple production. We had great success in Canada, but because we had a limited distribution network in the U.S., we didn't have the same penetration.

So now with this large distribution network, we will also expand significantly our ability to get this product in the field in the U.S. So this is quite nice - we're talking about high-margin product as well.

On the opposite side, their expertise around building top-notch, high premium quality operator as builder renown, as build the name of Leader. And this is what we will have in terms of portfolio and complementary.

On top of that, we're adding a number of employees. I mean we're talking about and entering another question to Endri here about the challenges related to labor.

Well, I mean, we're adding more or less 50 employees and welders. So we will expand with that overnight for our ability to grow the business with the Maple with already people that have the knowledge to make these products.

And we're talking about 35 welders in Vermont that overnight, we'll have the ability to expand with us our volume. So it is great in multiple ways.

I mean we're going to come up with a press conference and not a press conference, but a conference call to further explain the rationale behind this deal when the deal will be closed, but it is very exciting for us in multiple ways.

Hi, good morning. And thanks for taking my question and congrats on the quarter.

Just two quick things for me. First, you guys talked a bit about some of the initiatives that you're taking to address some of the COVID related headwinds on your margins.

I'm curious, at this point, would you expect some of these initiatives to sort of help maintain your current gross margin profile? Or if you're expecting some expansion on that gross margin profile?

And if so, when do you expect that to sort of kick in? Is it more of a fiscal '22 thing or more fiscal '23?

Well, I think two things. Gabriel, will be first to maintain.

I mean, maintaining the gross margin, I think, will be a win in such a challenging environment. And again, it's not the entire business that is exposed to that.

If you look at the Page 8 of our MD&A, you'll see there's a little chart that shows that about 33% of our business overall related to the different nature of costs that we have is more exposed to this high inflation we're seeing in materials because you need to think that a fairly good portion of it is labor related, which has nothing to do with material. And then for other components like the service side of our business, well, we buy product spot and then we give the price water way to the customers, reflecting the latest price we have.

So it's not the entire business that is exposed to it. But yes, the initiatives we took and we're taking will definitely pay off in this fourth quarter starting, but also in the coming fiscal year, notably with the manufacturing of the cleaners in U.K.

as well that we invested close to $1 million. So yeah, our strategy is in place...

Gabriel the example with WTS earlier, where our project managers go and sit down with our customers to negotiate a change order and based on the adjustment clubs that we have in our contracts. So they're able to catch up on some margin erosion that they faced previous quarter, and now they are having it in as a one-off change order.

Specialty products is - the price lists are changing also as this goes. So...

Regularly…

Regularly…

Within multiple price increases to customers for the different business lines we have. And we're working really hard.

I mean we also put together a supply chain and logistics department a few years ago, like 3 years ago. And now we're starting to take shape, it's starting to bring benefits more and more to the organization overall.

So yeah, we're well prepared and addressing it every day.

Got you. Just looking at specialty for second, obviously a strong sequential year-over-year growth profile there.

I'm curious, I mean, it sounds like Piedmont was a nice contributor in the quarter. I'm curious what that currently looks like in terms of contributions for the current fiscal Q4?

Piedmont, I mean we talked about it also they - we don't disclose their backlog, but we did a press release to let everyone know how many new contracts they sign. So only a few of those have been recognized in Q3.

Q4 is obviously - we'll see revenue recognition coming from those and also coming in the first few quarters of next year. Piedmont is driven a lot by the desalination market that is - and there is massive investment done in the Middle East right now.

It started like 3 years ago, it slowed down a bit during COVID, and now it's back up. So it is a big contributor, and we expect to see that contribution coming in the next few quarters.

But also affecting the chemicals where - when we have a Piedmont equipment installed, it means that there will be chemical needed shortly after. And if you remember a bit earlier this year, we announced that we've secured a 1-year contract of supply for chemicals for Taweelah, the biggest desalination plant in the world.

So Taweelah we provided Piedmont equipment about 2.5 years ago or so and which now led to have relationship with the customer and secured the order for chemicals. So a lot of other relationships like that are happening right now and may drive chemical sales in addition to Piedmont or following Piedmont deliveries.

The forecast for the desalination market Gabriel is really promising again for the next 2 years. I mean the overall industry is very positive for 2022, 2023 and beyond.

And I think Piedmont will continue to serve on the way. And this is why we have been pushing also to innovate and come up with new products, which is starting to snowball slowly, so...

That's great. Thanks for all the feedback.

And congrats on the progress.

Thanks.

Thank you, Gabriel.

Hi. Sorry about that, my line that out, let's try this again.

I just had one other follow-up question on pricing. You talked a little bit about it, but can you just give us more details on how you're managing the lag between the input cost and price increases in all three business pillars.

How much upside do you think there is here to margins based on pricing power that you have?

So I think I understand your question. So for all of our business segments, how - like the price increase coming from a supplier, how are we passing it along to our customer.

Is that the question?

Yes. And if there's even potential to go beyond that and improve margins by taking prices even higher, just given some of the dynamics you mentioned such as having more competitive products in the market.

Okay. Well, we're doing it, again, based on the different type of products we have that based on the different type of products we manufacture.

Some - in some cases, we can. In some other cases, we cannot because we have a fixed price.

But also, I mean, we're not only just try to sit there and deal with the current suppliers. We're looking for alternatives.

We're looking for other sourcing arrangements. We're looking to sometimes in-source the manufacturing of some of the products.

So - and this, I think, will do two things, either protect the margins or in some cases, enable us to improve it. So there's a point where we think that we can push it, yes, to customers.

But as anything, we believe that there's a limit to it, and this is why we need to be smart the way we're approaching it. I mean we have also more than 150 distributors around the world that are all business people, they are buying our product and we're selling it to the end market.

So we're using this as well as to receive market intelligence on the price points that we should have on our products, and it's still competitive. But I think we're…

Maybe one of the initiatives, Fred, that you explained a bit earlier that allows us to improve our gross profit margin is when we convert a phosphonate based product to a PWT product. So Genesys has - we've been owning Genesys for 3 years now and have 60-ish distributors.

They were all using exclusively phosphonate-based product. And offering the PWT product, which is dendrimer-based so therefore not exposed to the fluctuation of price coming from phosphonate allowed us to improve our gross profit margin and allows our customers to reduce or limit, the lumpiness of those price increase.

So that's kind of an initiative we're taking to - as Fred said, to be smart is see our customers and say, hey, it's the customer, you may not know this product, but it's as good as the other one, and you'll save on price or you'll at least remove lumpiness related to phosphonate and for us, it improved our gross profit margin because we're making more profit on PWT than on Genesys.

Got it. That's very clear and helpful.

Just maybe one last question. So once you do get a Leader in the door here, just any thoughts on pro forma that deal, what the balance sheet looks like and any appetite or capacity for more acquisitions?

Not yet we're going to talk about the financials when we're going to close the transaction, Naji, sorry.

Okay. No problem.

That's for me. And great quarter.

Thanks, guys.

Good. Thank you very much.

Well, thank you very much for attending the call. Great quarter.

Really happy of our performance. And again, I look forward to update you on following the acquisition of Leader.

So thank you very much. Have a great day.