Mr. Frederic Dugre reports

H2O INNOVATION REPORTS THIRD QUARTER RESULTS-MOMENTUM MAINTAINED ON REVENUE GROWTH

H2O Innovation Inc. has released its financial results for the third quarter of its fiscal year 2023 ended March 31, 2023.

"We continue to execute, focusing acutely on profitable growth with another strong performance for our third quarter of fiscal year 2023. For four consecutive quarters, we are realizing organic revenue growth higher than 17% compared to similar periods. Such growth is underpinned by repeatable and increasing business with existing customers, as well as new customers. The Company is experiencing strong sales synergies and most importantly, sustained sales momentum across all our business lines. We are delivering on new capital equipment sales to major industrial customers, capturing significant orders for specialty products delivered to some of the largest desalination plants in the world and broadening the scope of work expansion within our renewed O&M customer base. Managing such growth in a tight labor market with a volatile supply chain makes for a challenging environment. However, we achieved a sustained adjusted EBITDA growth rate of 28.6% compared to the same period last year. Cash management and paying down debt continues to be a focus for the Company, and we intend to continue to improve our cashflow conversion cycle and remain selective on our growth capital expenditures. The cash generated from operations reached $10.4 M and led to a reduction of our net debt to $49.4 M. With a diversified backlog of $202.9 M combined with a high level of recurring revenues, we have strong visibility to sustained growth and improving margins and are aligned with our Three-Year Strategic Plan", stated Frederic Dugre, President, President and Chief Executive Officer of H2O Innovation.

Third Quarter Results

With three strong and complementary business pillars, the Corporation is well balanced and not dependent on a single source of revenue, enabling it to generate a sustained revenue growth for the three-month period ended March 31, 2023. Consolidated revenues coming from the Corporation's three business pillars, for the third quarter ended March 31, 2023, increased by $16.4 M, or 31.7%, to reach $68.4 M compared to $51.9 M in the corresponding period of previous year. This increase mainly came from an organic revenue growth of $9.2 M, or 17.8%, and an acquisition growth of $4.3 M, or 8.4% following the acquisition of Leader Evaporator ("Leader") on June 30, 2022, combined with a favorable exchange rate impact of $2.8 M, or 5.5%.

WTS' revenues for the third quarter of fiscal year 2023 increased by 18.2%, coming from organic revenue growth in water treatment system projects. The Corporation's WTS team strives to develop relationships with industrial clients for whom water reuse solutions could alleviate operational concerns emerging from water scarcity and water tariff increases. This is becoming a growing trend as many industrial companies are now taking steps to become net water positive in their manufacturing processes as part of their respective Environment, Social and Governance plans. WTS' EBAC3 increased by $0.4 M, or 26.5%, representing an increase in dollars and percentage mainly attributable to the improved project performance.

The Specialty Products business pillar delivered a strong financial performance for the third quarter of fiscal year 2023 with a revenue growth of 52.3% compared to the same period last year. This increase came from an organic revenue growth of $3.7 M, or 23.4%, which arise from supply contracts to deliver components and consumables to large desalination plants and the strategic breakthrough in certain regions of the Middle East. In addition, Leader contributed to $4.3 M, or 27.3% of acquisition growth. Furthermore, the Corporation achieved more sales synergies between its various product lines creating a positive momentum. Specialty Products' EBAC2 increased by $1.3 M, or 31.3%, representing an increase in dollars, but a decrease in percentage. This variation in percentage is explained by two main reasons: the business mix within this business pillar since more revenues are coming from maple farming equipment, following the last acquisition, usually at lower average gross margin; and the increase of raw material costs for the manufacturing of the specialty chemicals.

During the third quarter of fiscal year 2023, O&M's revenues stood at $30.1 M, compared to $24.1 M for the same period last year, representing an increase of $6.0 M, or 24.7%. The O&M business pillar showed organic growth of $4.1 M, or 16.9%, coming from scope expansions and new O&M projects secured in the previous quarters, combined with a favorable foreign exchange rate impact of $1.8 M.

The Corporation's gross profit margin before depreciation and amortization stood at $17.9 M, or 26.3%, during the third quarter of fiscal year 2023, compared to $14.1 M, or 27.2%, for the same period last year, The decrease in percentage is explained by high inflation of material costs, pressure on salaries and business mix within the Specialty Products business pillar.

The Corporation's SG&A reached $11.5 M during the third quarter of fiscal year 2023, compared to $9.1 M for the same period last year, representing an increase of $2.4 M, or 26.2%, while the revenues of the Corporation increased by 31.7%. The increase is due to the pressure on salaries, the hiring of additional resources as well as higher stock-based compensation costs. Despite the increase in SG&A expenses, the percentage of expenses over revenues for the three and nine-month periods decreased respectively by 0.7% and 1,1%, showing the scalability of the Corporation's business model as revenues continue to grow. Investments made in sales and business development are paying off since revenues are growing faster than the SG&A ratio.

The Corporation's adjusted EBITDA increased by $1.5 M, or 28.6%, to reach $6.9 M during the third quarter of fiscal year 2023, from $5.3 M for the same period last year, while the revenues of the Corporation increased by 31.7%. Consequently, the adjusted EBITDA % decreased and reached 10.0% for the third quarter of fiscal year 2023, compared to 10.3% for the same period last year. This variation is explained by the gross profit margin decrease considering that the profitability has been impacted by ongoing macroeconomic trends on the supply chain, higher inflation, increased wages, and freight and logistic costs.

Net earnings amounted to $0.4 M or $0.004 per share for the third quarter of fiscal year 2023 compared to net earnings of $1.3 M or $0.015 per share for the comparable quarter of previous fiscal. This variation is mostly explained by the reduction of the Corporation's gross profit margin, higher depreciation and amortization and higher finance costs, partially offset by other gains related to the debt extinguishment.

As at March 31, 2023, the combined backlog of secured contracts between WTS and O&M reached $202.9 M compared to $108.9 M as at March 31, 2022, which is an increase of 86.3%. This combined backlog provides good visibility on revenues for the upcoming quarter of fiscal year 2023 and beyond.

The net debt stood at $49.4 M, compared to $50.3 M as at June 30, 2022, representing a $0.9 M decrease attributable to a higher cash balance.

H2O Innovation Conference Call

Frederic Dugre, President and Chief Executive Officer, and Marc Blanchet, Chief Financial Officer, will hold an investor conference call to discuss the third quarter financial results in further details at 10:00 a.m. Eastern Time on Thursday, May 11, 2023.

To access the call, please call 1-888-396-8049 or 416-764-8646, five to ten minutes prior to the start time. Presentation slides for the conference call will be made available on the Corporate Presentations page of the Investors section of the Corporation's website.

The third quarter financial report is available on www.h2oinnovation.com. Additional information on the Corporation is also available on SEDAR (www.sedar.com).

About H2O Innovation

Innovation is in our name, and it is what drives the organization. H2O Innovation is a complete water solutions company focused on providing best-in-class technologies and services to its customers. The Corporation's activities rely on three pillars: i) Water Technologies & Services (WTS) applies membrane technologies and engineering expertise to deliver equipment and services to municipal and industrial water, wastewater, and water reuse customers, ii) Specialty Products (SP) is a set of businesses that manufacture and supply a complete line of specialty chemicals, consumables and engineered products for the global water treatment industry, and iii) Operation & Maintenance (O&M) provides contract operations and associated services for water and wastewater treatment systems. Through innovation, we strive to simplify water. For more information, visit www.h2oinnovation.com.

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