Mr. Frederic Dugre reports

H2O INNOVATION REPORTS FISCAL YEAR 2023 RESULTS - MAINTAINED GROWTH MOMENTUM AND STRENGTHENED FINANCIAL POSITION

H2O Innovation Inc. has released its financial results for the fourth quarter and fiscal year ended June 30, 2023.

"Our growth momentum remained strong during our fiscal year 2023 and is among the best in the industry, with an organic revenue growth above the industry average in all our business pillars. The strategy to expand the sales of our specialty products in key locations with the addition of strategic sales resources and distributors, combined with our focus on industrial opportunities for the water technologies and services (WTS) business pillar, has really paid off. We also directed our efforts towards the development of the corporation's O&M [operation and maintenance] customer base through scope of work expansions. Meanwhile, the pressure on gross profit margins represented our main challenge for FY 2023, notably in the maple business line as previously mentioned in Sept. 19, 2023, press release. After managing constant price increases in our supply chain and high inflation in the labour market, we now see more stability on the horizon. We have implemented initiatives to recover and improve our gross profit margin profile in the coming quarters, such as, amongst others, price increase programs, CPI adjustments on O&M contracts and the insourcing of some of our manufactured products. With an improvement of cash flow generated from operating activities resulting into a reduction of our net debt level, we look into the future with confidence in maintaining the sustained organic revenue growth and improved margin profile as per our three-year strategic plan. The corporation's financial position, more favourable market conditions, and our disciplined approach for mergers and acquisitions (M&A) should enable us to capture new organic and acquisition growth opportunities. Over all, we remain committed to our three-year strategic plan and objectives," stated Frederic Dugre, president, chief executive officer and co-founder of H2O Innovation.

Financial results for fiscal year 2023

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 fiscal year ended on June 30, 2023. Consolidated revenues coming from the corporation's three business pillars, for fiscal year ended on June 30, 2023, increased by $68.9-million, or 37.4 per cent, to reach $253.3-million compared with $184.4-million for the comparable period of the previous fiscal year. This increase mainly came from an organic revenue growth of $37.1-million, or 20.1 per cent, and an acquisition growth of $24.3-million, or 13.2 per cent, combined with a favourable exchange rate impact of $7.6-million, or 4.1 per cent.

WTS's revenues for the year ended June 30, 2023, increased by $7.7-million, or 18.1 per cent, coming from organic revenue growth related to service activities and water treatment systems projects combined with a favourable foreign exchange impact. WTS's EBAC (earnings before administrative costs and other items) increased by $700,000 or 17.1 per cent, representing an increase in dollars, but a slight decrease in percentage over revenues. The increase of WTS's EBAC in dollars is mainly attributable to improved project performance, but the decrease in percentage over revenues is due to higher selling and general expenses to support sales important growth.

Specialty products' revenues stood at $85.5-million for the year ended June 30, 2023, compared with $54.4-million for the previous fiscal year, representing an increase of $31.1-million, or 57.2 per cent. This increase was driven by strong sales and an efficient marketing strategy execution combined with the addition of strategic sales resources. Specialty products' business pillar delivered components and consumables to large desalination plants and penetrated strategic regions in the Middle East during the third quarter of fiscal year 2023. This momentum was sustained during the fourth quarter of fiscal year 2023 with a breakthrough in the Israeli market. Furthermore, enhanced sales synergies between the corporation's various product lines were achieved, combined with a growth of $12.1-million from the acquisition of Leader, which led to a significant revenue growth. Specialty products' EBAC increased by $3.1-million, or 20.4 per cent, representing an increase in dollars, but a decrease in percentage over revenues. Even if specialty products' EBAC was positively impacted by strong sales growth, pressure on gross margin and business mix between specialty chemicals, components, consumables and maple farming equipment negatively affected the ratios.

O&M's revenues stood at $117.7-million for the year ended June 30, 2023, compared with $87.5-million for the same period of last fiscal year, representing an increase of $30.2-million, or 34.4 per cent. The O&M business pillar showed organic growth of $12.7-million, or 14.5 per cent, coming from important scope expansions and new projects secured in previous quarters. The acquisitions of JCO and EC contributed to an acquisition growth for the year ended June 30, 2023, of $12.1-million, or 13.9 per cent, combined with a favourable foreign exchange rate impact of $5.3-million.

The gross profit margin before depreciation and amortization stood at $63.8-million, or 25.2 per cent, for the year ended June 30, 2023, compared with $49.6-million, or 26.9 per cent, for the same period of last fiscal year, representing an increase of $14.2-million, or 28.5 per cent, while the revenues of the corporation increased by 37.4 per cent. The decrease in percentage for the year ended June 30, 2023, is explained by high inflation of material costs, pressure on salaries, business mix within the specialty products business pillar combined with the most challenging maple syrup harvest season in many years due to unseasonable weather conditions.

The corporation's selling, general and administrative reached $44.2-million for the year ended June 30, 2023, compared with $33.4-million for the same period of the previous fiscal year, representing an increase of $10.8-million, or 32.5 per cent, while the revenues of the corporation increased by 37.4 per cent. Those increases are 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 SG&A expenses over revenues (SG&A ratio) for the 12-month period decreased by 0.6 per cent, showing the scalability of the company'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 (earnings before interest, taxes, depreciation and amortization) increased by $3.3-million, or 18.2 per cent, to reach $21.4-million for the year ended June 30, 2023, from $18.1-million for the previous fiscal year. The adjusted EBITDA percentage decreased by 1.4 per cent and reached 8.4 per cent for the year ended June 30, 2023, compared with 9.8 per cent for the same period last year. Those variations are mostly explained by a decrease in the corporation's consolidated gross profit margin, considering that the corporation's profitability has been impacted by continuing macroeconomic trends on the supply chain, higher inflation, increased wages and the most challenging maple season in a decade.

Net loss amounted to $1.3-million and 1.4 cents per share for fiscal year ended June 30, 2023, compared with net earnings of $5.1-million and 5.8 cents per share for the previous fiscal year. The variation was explained by the reduction in gross profit margins, higher depreciation and amortization, higher finance costs and higher tax expense, partially offset by other gains related to the debt extinguishment.

As at June 30, 2023, the combined backlog of secured contracts between WTS and O&M reached $189.6-million compared with $163-million as at June 30, 2022, which is an increase of 16.3 per cent. This combined backlog provides good visibility on revenues for the coming quarters of fiscal year 2024 and beyond.

The net debt including contingent considerations stood at $39.9-million, compared with $50.3-million as at June 30, 2022, representing a $10.4-million decrease attributable to a higher cash balance.

H2O Innovation conference call

Mr. Dugre, president and chief executive officer, and Marc Blanchet, chief financial officer, will hold an investor conference call to discuss the fourth quarter and full fiscal year 2023 financial results in further details at 10 a.m. Eastern Time on Wednesday, Sept. 27, 2023.

To access the call, please call 1-888-396-8049 or 1-416-764-8646, five to 10 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 annual financial report is available on H2O Innovation's website and on the NYSE Euronext Growth Paris website. Additional information on the corporation is also available on SEDAR+.

About H2O Innovation Inc.

Innovation is in its 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 and services (WTS) applies membrane technologies and engineering expertise to deliver equipment and services to municipal and industrial water, waste water 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 and maintenance (O&M) provides contract operations and associated services for water and waste water treatment systems.

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