HEOFF - H2O Innovation Inc. (HEOFF) Q3 2023 Earnings Call Transcript
2023-05-11 15:36:10 ET
H2O Innovation Inc. (HEOFF)
Q3 2023 Earnings Conference Call
May 11, 2023 10:00 AM ET
Company Participants
Marc Blanchet - Chief Financial Officer
Frederic Dugre - Co-Founder, President and Chief Executive Officer
Conference Call Participants
Michael Glen - Raymond James
Endri Leno - National Bank
Frederic Tremblay - Desjardins
Naji Baydoun - IA Capital Markets
Yuri Lynk - Canaccord Genuity
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the H2O Innovation Q3 FY 2023 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Note that this call is being recorded on Thursday, May 11, 2023.
I would now like to turn the conference over to Frederic Dugre and Marc Blanchet. Please go ahead.
Marc Blanchet
Yes. Thank you and good morning, everyone. My name is Marc Blanchet, CFO of H2O Innovation. This call will be held in English, but I'll just say a brief word in French to our French audience. [Foreign Language]
Before we begin, I invite you to download a copy of today's presentation, which can be found on our website at h2oinnovation.com in the section Investors. Frederic Dugre, President and CEO, who is joining me today for the call, which duration is approximately 30 minutes.
During this call, Fred will be give an update on the business and present highlights of the third quarter ended March 31, 2023. And I will be presenting the financial results. Please take a moment to read the forward-looking statements on page two and the non-IFRS measurements on page three of the presentation.
I'll now hand over the call to Fred.
Frederic Dugre
Well, thank you, Mark, and thank you for joining the call today. After such a strong third quarter, we can say that we continue to execute focusing on profitable growth. On top of delivering 31.7% revenue growth for this quarter, we are really proud to post for four consecutive quarters, organic revenue growth higher than 17%, compared to the similar periods. Such growth is underpinned by the repeatable and increasing business with existing customers, as well as new customers. Our business model clearly promotes customer retention thus high recurring sales.
At the end of our third quarter, recurrent revenues stood at 87% with a diversified backlog of almost $203 million, up 86% from last year, combined with the high level of recurrent revenues, we have strong visibility to sustain growth. Managing such growth in a tight labor market with a volatile supply chain makes a challenging environment. However, we achieved a sustained adjusted EBITDA of $6.9 million, representing an increase of almost 29% compared to Q3 of previous fiscal year.
As we continue pushing various initiatives to improve operating margins in all our business lines, we remain more aligned with three-year strategic plan. Cash management and reducing our debt continues to be a focus for the company and we intend to continue to improve our cash conversion cycle and remain selective on the growth capital expenditures. Cash generated from operations reached $10.4 million in the third quarter and led to a reduction of our net debt to $49.4 million.
On a five-year CAGR basis, Our revenue growth and adjusted EBITDA have increased by 19.5% and 33.7% respectively. Our team is executing its business plan and exceeding its objectives. This remarkable performance is not only the result of the acquisition we completed and the new customers we secured, but most importantly the commitment of our 1,000 plus employees, manufacturing products and taking care of our 100 of them customers around the world every day.
The company is experiencing strong sales synergies and most importantly, sustained sales momentum across all 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 scope of work expansion within our renewed O&M customer base. At H2 Innovation, growth is present in every business line and every aspect of our business.
Let's have a look at the performance of each of our business pillar. Starting at page five with our largest revenue generator, the operation and maintenance. Our O&M team can continues to deliver with three contract renewals in the State of New Hampshire, New York and the province of Alberta. On top of that, our team was able to secure the one new O&M contract with Piedmont Medical Center in Georgia. From a water reuse equipment delivered by our WTS division, our O&M team was able to retain this customer through an initial two-year O&M contract. This contract shows once again the synergies that our business lines have among themselves, but also the unique value proposition recognized by the customer.
By having the same company designing, manufacturing and operating a water treatment plant, the end user can optimize its OpEx and reduce its operating risk by having a single point of responsibility. The O&M Group also received two important recognition awards for the City of Canton in Georgia and the town of Warren in Rhode Island. These awards testify to the level of compliance and quality of the work delivered to our customers. This is exactly why we retain our existing customers and why we keep winning new business. We're showing extraordinary care for our customers and we do not compromise on environmental compliance.
On top of that, our business model promote high customer retention and offer multiple sales synergies to create value for the customer. By continuing building our North American platform combining water treatment equipment, services, specialty products and O&M, we continue to monetize the platform with repeat and new business with both industrial and municipal customers.
Moving to page six or slide six, let's review the O&M backlog and the general financial performance of that business pillar. The combination of contract renewals and new contract has enabled us to push the O&M backlog close to $150 million, representing an impressive jump of 96% year-over-year. Let's recall that our O&M backlog doesn't include evergreen contracts, which are mostly located in the State of Texas and New York, which represent about 30% of the overall revenues. All these efforts are reflected into the financial performance of the O&M Group.
On an LTM basis, the O&M revenue stood at $112 million, compared to $87.5 million, representing an increase of 28%. The acquisition of JCO and EC completed in December 2021, combined to the acquisition of -- to the addition not acquisition, but addition of 18 new O&M contracts and 14 renewals in the last 12-months contributed to post this important growth. Over the same period, the EBAC, which is the earnings before admin cost, also moved from $10.5 million to $13.2 million showing an increase of 25.7%. In the coming quarters, we will continue working on the renewal of O&M projects and capture CPI adjustments to improve our gross profit margin and EBAC margins.
Moving to page seven, let's look at the highlights of the Water Technology and Services business, which we call also WTS. During the third quarter, we secured five new water treatment projects totaling $5.5 million, four dedicated to initial customers and one for the municipal customer. The first one is with a data center that manage general data for a customer that the corporation is currently engaged in doing business already with one of the existing projects we have. This new project is located in the Northwest region of the United States. The projects include a two [NGD] (ph) ultra-filtration treatment system, with an exceptional high recovery greater than 98%. This new equipment is in line with the customer, objectives to reduce its water footprint and thus become more water positive.
The corporation was also selected to provide a temporary water treatment system for a first nation community in Canada, for which boil water advisories were issued. H2O deployed one of its mobile assets, but containerized system with a capacity of 100 gallons per minute to supply the community with drinking water. The three other projects were for reverse osmosis systems and green sand filters for customers located in the States of Iowa and Kentucky. Respectively, the systems will treat the water used in a sugar separation process and ethanol plant.
In the same period, three important projects were delivered in Texas, New York and Alberta. The first one was for a 3.6 million gallons per day ultra-filtration plant in Georgetown, Texas, using a FiberFlex proprietary technologies to ensure that line and access to multiple membranes in the coming years and maintain the value of its plan. For the second project O&M H2O Innovation provided a silo to a pharmaceutical company in the Northeast to treat some of their wastewater. The last delivered project was a containerized RO system, I mentioned earlier for the production of drinking water for first nation community in Alberta.
To promote the concept and benefit of water reuse, we team up with the City of Las Virgenes in California and Fox microbrewery to craft the first beer made of water reuse. The beer name, Revival, as you can see on the picture, semifies that the water use as its main ingredient was granted a second like. The sponsorship project is intended to stress the importance of sustainability in the way we use and reuse one of the most precious resource in the world water. The recycled water comes from Las Virgenes water reuse demonstration facility in California, where H20 Innovation supply and ultra-filtration and reverse osmosis systems back in 2020.
Looking at the evolution of our backlog and its diversification between industrial and municipal customers. Our decision to remain membrane agnostic and develop open source membrane platform was a winning strategy and an important differentiator as well. Also, our focus on water use and growing reference list are allowing us to position H20 innovation on the leading edge of our industry in order to solve water scarcity issues.
Moving to page eight, let's have a look at WTS backlog and general financial performance of that business pillar. At the end of our third quarter, WTS backlog stood at $55.1 million, this represents an increase of 65% year-over-year. Now not only the backlog has been growing, but more and more, we're adding industrial projects to diversify their customer base. This diversification should allow us to improve WTS margin profile in the coming quarters.
As we continue growing our backlog, our revenues are also moving in the right direction. We are expecting revenues to continue to grow in the coming fiscal year. Indeed, revenues from WTS have reached $48.1 million on an LTM basis at the end of March 31, this represents an increase of 13.4%, compared to 2022 fiscal year. Most importantly, the EBAC from that business pillar has increased by 10.1% over the same period faster than our revenues. We believe that EBAC margin should continue to improve as we move into the revenue recognition of larger industrial and municipal projects recently signed with prices reflecting the latest material and wage increases.
Let's look at page nine on the performance of our Specialty Products business pillar. The third quarter showed another impressive growth of our specialty products revenues. All our business lines are pushing for innovation and have been capable to attract new customers to our business. More and more, the clients are recognizing the benefits of our green chemistry and are realizing important savings on freight, warehousing, emissions and packaging. These differentiators are definitely driving new sales and attracting new customers looking for sustainable and eco-friendly products and solutions.
Our component business line, Piedmont continues its impressive growth trajectory and sign a new distributor agreement on top of receiving large consumables and spare parts order from previous delivered projects in the Middle East. At last our Maple farming business equipment delivered on top of the largest -- one of the largest membrane filtration unit for SAP concentration to a producer in Ontario. On top of that, the team continues to focus on the integration of leader evaporator, which was acquired on June 30, 2022, and they're trying to focus to rationalize product portfolio, review pricing on products, streamline supply chain and improve operational margin.
All these initiatives should impact more positively the following fiscal year. In the meantime, it is worth to mention that our Maple division reached a new record high revenue for a single quarter. Thus impacting the overall business mix of this business pillar. Through our strategic objective of transforming the maple division into an agri-food division, we intend to lower the seasonality impact and diversify our client base into other auxiliary markets where our expertise in sugar concentration and membrane filtration could be beneficial.
Let's have a look at page 10 on the revenue and EBAC progression of our specialty products business pillar. At the end of March 2023, revenue stood at almost $80 million on an LTM basis, this represent an 47% almost increased, compared to fiscal year 2022. 58% was generated by organic growth. The remaining portion of the growth originated from the acquisition of Leader completed on June 30, 2022. The organic growth is clearly driven by the high demand we are experiencing for specialty products, the strength of our large distribution network and the growing interest of the end user for green chemistry and eco-friendly water treatment solutions. While growing the revenues, the EBAC progress also very well.
At the end of March 2023, the EBAC stood at $19.5 million on an LTM basis. This represented an increase of 28.1%, compared to the previous fiscal year. The EBAC remains under pressure as we continue pushing for price increase on our products, better terms with key suppliers and overall business mix with high margins and lower margin products. Many initiatives are moving along to improve the margins and we remain confident to observe positive outcome in the coming quarters.
I will now pass it on to Marc Blanchet, our CFO, who will review with you and discuss the financial performance of the company for this quarter.
Marc Blanchet
Thanks, Frederic. So before going over the results of the third quarter, I would like to go over the results of the last 12 months, compared to the previous 12 months. As I said in previous call, we must look at our results on a last 12 month basis to capture the long-term evolution of the company.
Our effort made over the last 12 months to focus on increasing organic growth allowed us to increase the LTM organic revenue from 10.1% to -- sorry from 10.1% to 23%. Our revenue on LTM basis reached $240.4 million, compared to $167.5 million for the previous 12 months. We invested in growth initiatives to achieve the 10% organic growth objective provided in the three-year strategic plan, such as hiring sales resources and investing in SG&A to generate and support this growth. Both investment has been successful since the target has been largely exceeded.
This explained the increase in SG&A, compared previous LTM. However, the ratio over revenue is lower from 18.3% to 17.2%, showing the scalability of our business model as revenue continue to grow.
Net earnings reached 3.4%, compared to 2.5%, an increase of $900,000. The adjusted EBITDA increased to $23 million, compared to $16.2 million in previous 12 months. The adjusted EBITDA over revenue is lower at 9.6%, compared to 9.7% last year. The reduction in percentage is explained by reduction of the gross profit margin due to the business mix within specialty product business pillar and due to high inflation of costs from material and pressure on salaries. The fact that we can rely on three business pillars is the strength of each generation. It allows to be able to count on different source of revenue and thus reduce the risk of volatility and EBITDA.
So at slide 13, now let's look over the financial results for Q3. The main highlight is the momentum maintained on revenue growth. We are reporting revenue of $68.3 million, compared to $51.9 million for Q3 last year. This represents an increase of $16.4 million or 31.7%, 18% is organic revenue growth and 8% acquisition growth related to the Leader Evaporator acquisition closed on June 30, 2022.
The adjusted EBITDA also improved by 29%, compared to Q3 last year, reaching $6.9 million, compared to $5.3 million. It represents 10% of revenue, compared to $10.3 million last year. The percentage of EBITDA over revenue decreased due to the decrease of gross profit margin and percentage. The gross profit margin has decreased from 27.2% to 26.3%, compared to last year. Due to high inflation of material cost, pressure on salary and business mix within the specialty products business pillar.
The percentage of SG&A over sale has decreased compared to Q3 last year. Investment made in sales and business development are paid off since revenue are still growing faster than SG&A ratio. The cash flow from our operating activities generated 10.4%, compared to 5% during the same period last year, the variation is mainly explained by the favorable changes in working cap items.
In addition, we want to highlight the importance of -- the important increase of our consolidated backlog is sub by almost 86% and it provides good visibility on our revenue through the upcoming quarter.
On slide 14, we present some P&L highlights for Q3. But on that slide, I'd like to bring your attention of the table on the right. I want to address the FX rate variation impact on our revenue given the opposite fluctuation of certain currencies. For the third quarter, it has a global positive impact of $2.9 million or 5.5% on revenue. The USD Exchange rate was favorable and partly offset by British pound and the euro.
Going forward for modernization purposes each 100 point base of USD cap has an impact on the quarter of $0.5 million on revenue and $55,000 on EBITDA. For the GBP, it has an impact of $36,000 on revenue and $8,000 on EBITDA.
I'll now go over the financial results of each of the business pillar. So slide 15 for the O&M business pillar, revenue for Q3 stood at $30 million, compared to $24.1 million last year, representing an increase of 5.7% or 24.7% -- $5.7 million or 24.7%. 17% is organic growth generated from important scope expansion and new projects secured in previous quarters. O&M backed reached $3.5 million, compared to $3 million for the same quarter last year, representing an increase of $0.5 million or 18%, but represents a decrease in percentage of our revenue.
The gross profit margin and percentage decreased from 18% to 16.5%. [Indiscernible] to create a safe attract -- an attractive environment for our workforce and to create value for our customer by offering them a talented team. We decided to establish a minimum wages of $15 an hour for all during Q1 2023. Since 70% of our employees are working in this business pillar, the O&M gross profit margin and EBAC are more sensitive to factor related to workforce.
In most of the O&M contract, we're entitled to increase the annual fee based on customer price index. Therefore, the channel will see increases are being effective with our customer at each contract reaches its annual contractual adjustment date. We will then continue to achieve price realization in the upcoming quarter. At the end of the quarter, the O&M backlog stood at $147.7 million, compared to $75.5 million. This is an increase of 95.7%. As Fred said earlier, contracts in Texas and in the State of New York are usually evergreen and are not included in the backlog.
On slide 16, let's go over the WTS revenue and improved by 18%, so it grew by 18% which is all organic for service activities and capital equipment projects. WTS, EBAC stood at $1.7 million, compared to $1.4 million, representing an increase of $400,000 or 26.5%. The increase is mainly due to the improvement of the gross profit margin, explained by improved project performance.
Selling and general expenses were higher primarily to new hirings of sales resources, higher labor costs and commission, as well as resumption of travel and our participation to trade shows and conferences. The WTS backlog stood at $55 million, compared to $33 million last year, which is an increase of $65.1 million. As Fred explained earlier, the backlog is well balanced between industrial and municipal project and provide good visibility on revenue for upcoming quarters, keeping the focus on industrial project characterized by better gross profit margin.
Let's move to page 17. Specialty products had a very strong performance from all the business lines for this quarter. Revenues stood at $24.2 million, compared to $15.9 million, an increase of $8.3 million or 52%, which is 23.4% organic growth. Leader Evaporator acquired last June generated $4.3 million or 27%. The FX rate variation had a net positive impact of $200,000 mainly from the British pound and the euro. EBAC stood at $5.6 million, compared to $4.3 million, representing a dollar increase of $1.3 million. The decrease in percentage is mainly explained by the deterioration of the gross profit margin.
The gross profit margins stood at 39%, compared to 44%. The gross profit margin variation is explained by two main reasons the business mix within the business pillars and small revenues are coming from Maple farming equipment following the last acquisition, which are usually at lower average gross profit margin. And the increase of raw material cost and manufacturing of our specialty chemicals. Price increases in procurement strategy has been implemented in the recent quarters, which should impact favorably the margin in the upcoming quarters.
The SG&A increased by $1.1 million, the main reason are the hiring of sales resources, pressure on salaries in connection with the inflation level, the resumption of travel combined with the acquisition of Leader. However, the SG&A ratio of our revenue decreased by 1.6%.
On page, let's move to page 18 and look at the variation on the financial position for selected information. So the accounts receivable increased by 12% since June 30, which is in connection with the revenue growth and 5.6% of this increase is due to foreign exchange variation. If we look at the inventory level, it increased by 10% in June 30, approximately 52% is for the specialty products. We maintain appropriate level to respond to continuing high customer demand as shown in -- by our revenue growth. Foreign exchange explains 3.5% of this variation.
Account payable increased by $1.9 million or 8.4%, mainly due to the foreign exchange impact and timing of payments to suppliers. Regarding the contingent consideration, the decrease is related to the payment related to JCO and EC acquisition, so we did that payment on Q3 and also a partial payment related to GMP acquisition which occurred in Q1.
Let's move to slide 19, cash flow from operating activities. So we want to highlight the cash flow from operating -- we want to highlight that the cash flow from operating activity generated $10.4 million for the third quarter, compared to $5 million for the same period last year. As I highlighted earlier, the fast organic growth of the previous quarter pulled on working cap, but we're starting to improve the conversion cycle of these investments. This last quarter was also invested $3.3 million of CapEx. Most of these investments are growth CapEx and our core equipment required to execute new O&M contract for equipment we manufactured and leased for some of our customers.
On page 20, net debt on slide 20, you can see the evolution of the net debt. As of December 30 -- no, sorry, as of March 31, 2023, the net debt which includes the contingent consideration stood at $49.4 million, compared to $50.3 million on June 30, representing a $900,000 decrease due to cash cycle improvement.
This wraps up my presentation of the financial results. I'll now hand the call over back to Fred.
Frederic Dugre
All right. Thank you, Mark. So we'll move to the conclusion slide at slide number 21.
Well, I can tell you that the water industry is now at a critical inflection points driven by obviously population growth, aging infrastructure, more stringent regulatory measures, water scarcity, aging working force and company's objectives to become more water positive. In fact, of the companies that have identified as pledging to be water positive, the combined market cap exceeds $8 trillion. These factors will continue to contribute to growth in our sales and will certainly generate a lot of opportunities for all our business lines moving forward.
In March 2023, the United Nations convened to discuss the key role of water in achieving its sustainability goals, which was attended by over 10,000 delegates. Specifically in the U.S. the $50 billion stimulus money of investments dedicated to water infrastructure and other sustainable technologies has now reached the agency level and will impact H2O Innovation funnel and backlog over the coming years. The reshoring team is also spurring a surge in job creation and factory construction in the U.S., which will again put additional pressure on existing water infrastructure.
Risk to higher tolls and quota is a business continuity risk for almost every single industry. Sentiment for the water industry and specifically H2O Innovation is also inflected. The company during the third quarter lap its one-year anniversary listed on the TSX and as experienced a 68% increase in trading volumes year-to-date to 191,000 shares daily. While we would like to continue to focus on operations and financial results, it is worth highlighting that share price performance as exceeded the TSX and Russell 2000 by 40% and 45% respectively over the past year and even more specifically over the five-year period. The company has seen more institutional support from new and existing geographies. We would like to thank them, by the way, we would like to thank our shareholders and the capital market partners for appreciating the long-term vision.
Finally, with 126 merger and acquisition transactions completed over the last 12 months, ended March 31, we can conclude that the water sector remains active and very attractive for investors. Indeed, the average transaction shy was around $774 million with an average revenue multiple of 2.7 times and EBITDA multiple of approximately 14 times. Even larger transactions such as the latest one announced by Xylem acquiring Evoqua is proposing a transaction valuation greater than 20 times it did there. We have confidence in our strategy, as we have the right solutions, resources and platform to maintain our growth momentum, while minimizing our risk and improving our profitability. Our business model is very unique with high recurring revenues, representing an important financial differentiators, but also a strategic focus to maximize customer retention and long term value creation.
That completes the call for today. I will pass it back to the operator for the Q&A session. Thank you.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Michael Glen with Raymond James. Please go ahead.
Michael Glen
Thanks. Fred, during your comments towards the end, you talked about that $50 billion of infrastructure money that's now reached the agency level in the U.S. Like if we're thinking about that amount of money like, what portion of that would be relevant to H20 products? And I mean, what is it sort of within the next year? We could see some of that starting to come to the company?
Frederic Dugre
Yes. So as part of that, so there are two things. First, when it start to reach the agencies, I mean, we're still at the planning level. So from the agencies, the customers that are currently into a rush to implement or upgrade existing infrastructure will first hire consumables engineer. So the Jacob of the world, the Stantec, these large or WSP, these large engineering firm will first start to do the planning exercise, prepare specs that we're going to bid on. So there's still for us another window of, I would say, between 24 months to 36 months to see some kind of quantification and tangible projects that we're going to bid on.
Now there's a lot of that money obviously that is going for either, because I said, capital equipment upgrades. So an existing infrastructure that needs to be upgraded, because their treatment is not sufficient or extension, because of population growth or because it's too old. So in both cases whether it is water, wastewater or even PFAS treatment, we can address this with our current offering.
Michael Glen
Okay. And just, you know, looking a little bit closer to in the province of Quebec, we're reading a lot about this massive industrial project that's being proposed in Becancour with its battery metals hub. Is that something where H2O -- I know that there's water treatment that would have to get installed along side. Are those the type of infrastructure projects that H2O would be able to get involved in on the industrial side?
Frederic Dugre
Yes. We're currently delivering water to equipment to one of the largest electrical car manufacturing facility for their battery, you know, in production. Indeed, in Southern Texas. So it is absolutely within reach, it is part of our expertise either from the industrial or from the mining perspective as well. At the mine side, I mean.
Michael Glen
Okay. So we could think of potential at the mine level as well within that.
Frederic Dugre
Yes. These are all opportunities that are relevant to H2O Innovation.
Michael Glen
Okay. And then just on the margin -- the gross margin in specialty products segment. I guess there is some -- as we've brought leader in, there's some seasonality to think about there. Maybe just a little bit of guidance like quarter-by-quarter guidance, if you can in terms of how to think about gross margin within specialty product segment?
Marc Blanchet
So I won't be very specific quarter-per-quarter, but I can tell you and as you all know, there's a seasonality aspect to it. So first, the -- you know, we talked about the fact that the margin is a bit lower due to the business mix -- within the business pillars. So we've significant size significant amount of revenue coming from Leader. So, you know, there is the chemical, the specialty products and the agri and Maple equipment into that business pillar. So the agri and Maple equipment have a lower gross profit margin. So that explains part of the fact that the gross profit margin decreased a bit during this third quarter.
Also, it’s -- where there's that seasonality, second and third quarter. And for the fourth quarter, there is the, I would say revenues coming from that seasonality aspect is not there as much or barely any revenue coming from that right now. Even though we're working in order to improve those revenue with more sales coming from the agri sector in general. So it will affect, so there will still some fixed costs, so it will affect the margin on the fourth quarter as well. So the margin references that you had last year is -- needs to be a bit adjusted. I think you have a good idea what happens during first, second and third quarters. So fourth quarter is generally very similar to the first quarter.
Michael Glen
Okay. Thank you.
Frederic Dugre
The other color, Glenn, that we could have is the fact that when we acquired Leader, on June 30 through this acquisition, we inherited from an existing backlog where there was given margins already built into the price of the equipment that we had to deliver. So now fast forwarding this story, you know, one-year later, a new equipment that we're currently selling, obviously reflect new price adjustment from material, from wages. So the -- if you look at the backlog that now we're building up, you know, for the new season and for the new fiscal year for the Maple itself, is reflecting and built in, you know, better margin. So I would say that the worst is more behind us, let's say from this acquisition business.
Michael Glen
Okay, thanks.
Operator
Your next question comes from Endri Leno with National Bank. Please go ahead.
Endri Leno
Hi, good morning. Thanks for taking my question. I'll start with macro as well, and on the -- yes, I mean, in terms of the projects of the funding that is going, but Quebec has recently announced a pretty large increase in the water and wastewater infrastructure funding. I was wondering if you can talk a little bit what percentage or what dollar amounts of this new funding is applicable to H2O innovation? And how would you compare it to the prior one, and when would you expect the bidding for this contract to start?
Frederic Dugre
Well, it's hard to put exact -- an exact figure on this. However, I can tell you what -- I mean, the overall Canadian market is a market where we're less present than the American market, because this is an area of focus for us where we spend more time in the previous year now to grow and develop. So I think this is relatively new to us, you know, and this represents another opportunity for the Quebec market.
Now I think, you know, there's areas if you compare it to the correct market than other states such as California and Texas. In the Salmon States where they're screaming more urgently for water needs. And this is why at first stage, we decided to focus you know, furthermore on these areas. Now, obviously, this is in our backyard. This is in our neighborhood. So I think we'll be opportunistic for Quebec, as well and try to get advantage of that. But our strategy is not designed, you know, around Quebec specifically, it’s pretty misleading.
Endri Leno
I see. Okay, okay, okay. Okay, thank you for that color. And the other question I had when I'm looking at it's more for related to the Q2 results. But if you're looking at the organic growth especially, are you able to kind of differentiate a little bit? What component of that was pricing and what was volume in there? I mean, the mix basically between two?
Marc Blanchet
Yes. So it's -- so we don't extract and I know some of our other companies of our industry have done it. I mean, but roughly price increase, because not everything applies. Price increase, for example, for O&M is relatively easy for us to identify. And we haven't done it by purpose. We don't disclose it. Price increase for chemical, it's easy to do. And there's a -- it's applicable there. But for the -- for example, the project it's a bid, so there's no price increase, so we have to respect the amount of which we -- that we bid and it's price increase on material that are in and out. It's tough to identify what was the price of last year versus this year. I would say most of it like the big majority of it is volume and probably the price increase would represent around 2.5% to 3% of our revenue growth.
Endri Leno
Okay. That was great to hear. Thank you, Marc. And then kind of if you're looking at forward and I mean, sure, especially when it comes to O&M, you have a small kind of CPI-related and then contract related for WTS. But on the S&P one, do you think you have more room to increase prices there going forward for…
Marc Blanchet
Yes. [Multiple Speakers]
Endri Leno
Yes. Okay.
Marc Blanchet
Yes. Definitely, I mean, you know, I’d say we have some catch up to do. I mean, we did it last year, but inflation is still present in our industry and especially pressure on salaries as I explained. So we still need to have those discussion. But with respect to our customers, we couldn't just increase prices all of a sudden. So we had to work with the customers in order to do it by step, sometime it's by scope increase, sometime it is by reducing cost or proposing efficiency. So I would say it's a two to three year process the way I see it.
Endri Leno
Okay, okay. No, thank you. Thanks for color. And last one for me, I'll jump in the queue, but about Maple, I mean, we're hearing that the Maple season was a little bit soft this year. Any color or concerns there? And that's a bit of a follow-up if you can share sort of what percent of the Maple working capital have already been converted?
Frederic Dugre
Yes, it was indeed, let's say a choppy season for most of the producers in Quebec. It was certainly a shorter production for most of them. They have produced less syrup. However, we've heard that the quality of the syrup was extremely good, despite the fact that it was a short season. So there's two things that currently we could say. First, because in Quebec, you know, the financial stability of the producers rely on the quota, thus the federation, they're guaranteed of payment they're guaranteed of getting, you know, their syrup, you know, syrup paid into a box. So this provide financial stability, that's number one. And Quebec still represent slightly more than 70%, 75% of the overall production in the entire Northeast Canadian and U.S. market, so this is good.
Now the other thing it tells is that because it's very choppy season, and most likely we will continue, I would say maybe in the coming years, we'll see sudden increase in temperature and sudden drop through the season. It means also that more and more producers will have to equip themselves with proper technologies and efficient technologies to be more responsive to deal with these high fluctuations, meaning that they will need to produce more efficiently using best equipment such as reverse osmosis, such as telemetry, as we have, such as bunch of other equipment that will allow them to be more efficient.
So in a nutshell, you know, it says one and, yes, it was a choppy season. Thank God, we have in Quebec some kind of guaranteed provision from the Federation. On the other end, we feel good because we have state-of-the-art technologies to continue helping the producers to gain efficiency. So, I still remain positive for the coming years, I mean, challenges are ahead, but it's still an industry that we enjoy growth and will continue to enjoy growth.
Endri Leno
Thank you, Fred. And then any color on the working capital? How much of that is left or even kind of a direction general idea?
Marc Blanchet
Yes. Can you can you just repeat? You said any color on the working cap, but I missed the second part.
Endri Leno
Oh, yes, yes. No, I was saying, hey, Marc my how much of that working cap of the Maple working cap has been converted and how much is left there even if percentage if not dollar amount?
Marc Blanchet
Yes. I mean, most of it [Indiscernible] a lot of receivables. I mean, you know, at the end of the season like that, so there is always a base inventory. So the way the season works is the inventory that's left there is to start to rebuild the equipment for the next season and what's into and what has been sold is right now into receivables. So I'm sorry I don't have the exact number. I know the number, but I don't want to say anything in -- out of the call. But it's probably, I would say, but you don't have the sales, I would say about 20% of the sales that are still in a working cap roughly.
Endri Leno
So that's great color. Thank you.
Operator
Your next question comes from Frederic Tremblay with Desjardins. Please go ahead.
Frederic Tremblay
Thanks. Good morning. So on the cost inflation, on raw materials and wages, that's been topical for the past two quarters. I wanted to get your thoughts on, I guess, the trajectory of these costs for the next few quarters. Do you have any sort of expectations that you can share on that? Do you expect sort of the wage and cost pressures to diminish as we move forward in the next few quarters?
Frederic Dugre
Yes. So for the wages, first, really, I think we're still under pressure on wages. I mean, we're still “fighting” to keep our talent to recruit. So it's still a challenging labor market that we're experiencing. So I would say we're not out of the woods in terms of, you know, having high salaries. I mean, it's less than what it was last year though, but still, you know, we have to remain on our toes in order to do what is necessary to keep our people. It won't be as massive as it was last year, for example, when we push forward the [Indiscernible] of minimum wage of $15 an hour for some first century level employees in Southern States, but still it is a challenging environment.
Now on material, I think we're starting to see some relaxation on material. I mean, we have seen already improvement, you know, in the price of steel and the price of plastic and then price of different goods. Some raw materials and some transformed products that we're buying. So in a nutshell, this is moving now for us in the right direction. Despite the fact that, yes, supply chain material is moving in the right direction, we are very, very diligent in pushing forward price adjustments on all of our business lines. From the component business, to the specialty chemicals, particularly on the specialty chemicals, I think there's still lot of work to be done. But again, we want to be diligent, we want to do as an aggressive case-by-case, geographies-for-geographies. We have to be mindful also of the different challenges and different reality that countries are facing, you know, most likely if you look at China and India and the Middle East, they're not going to face recessions as we're facing. Most likely, they may have very little recession or even nothing.
On our end, it will be different in North America. So will it be very mindful in the way we're addressing also price increase and price adjustment to our different customers? Marc, do you want to add any color on this?
Marc Blanchet
No, I would have said the same thing, but good.
Frederic Tremblay
Okay, great. And then if I go to slide seven on the presentation, there's a pretty significant increase in the commissioning, the projects in the commissioning stage plus 24 there? Just curious if there was anything special that it would explain that? Is it just timing or productivity or anything else that would have driven that?
Frederic Dugre
It's just timing. Our team is extremely busy. It sounds crazy a little bit, but indeed, the team is extremely busy. We set it for many, many quarters now. I mean, this Python is going through the pipe it’s huge in terms of number of projects we have secured and now moving to the construction, to the commissioning phase. So there is a quite a number of projects that will be started in the coming quarters. And yes, this is what we're currently facing. So -- and we're just starting see an acceleration into it.
The good news is that we're still expecting revenue recognition to increase in the coming quarters from that business pillar. Leading by the way, Frederic to other potential after service sales, because all these customers down the road will require, you know, service contract, will require lot of consumables, membrane, filters, chemicals and so on.
Frederic Tremblay
Okay. Great. And then last one for me still on WTS. I think, historically, and direct me if I’m wrong, I think, you know, the targeted contract size was in the $1 million to $10 million range in WTS. Is that still your sweet spot? Or would you open to looking at large opportunities if margins are attractive?
Frederic Dugre
Yes, it's still most of what we see is within this. I mean, frankly, I mean, absolutely. I mean, we have seen and will continue to explore opportunistic opportunities that maybe higher between the $10 million and $15 million as they come. Again, we want to do diligent in selecting these. But you're right, I mean, the $1 million to $10 million is kind of our sweet spot where we believe that margins are the most attractive for us.
Marc Blanchet
And then, I think it's the -- that's where the industry is leading as well for the last few years. I mean, industrial project will be in this area. It's pretty rare that you'll see industrial projects above that. Even in the municipal, the trend over the last years has been to build the centralized system, so they're smaller. The trend of building like a huge, huge mega plant brings higher risk, especially in California with earthquake can also in terms of risk management, it's a bigger market to -- I would say small and mid-sizes of bigger market than the big size, small mid-sizes is bigger than it.
Frederic Dugre
Yes. The trend is into decentralization for sure around the world.
Frederic Tremblay
Great. That's helpful. Thank you very much.
Operator
Your next question comes from Naji Baydoun with IA Capital. Please go ahead.
Naji Baydoun
Hi. Good morning. I just wanted to start with margins. Seems like they're pretty stable, but SG&A is slowly improving. I'm just wondering what are your priorities for the rest of the year to start to get margins moving higher? It seems like there's a lot of puts and takes, still some cost pressures, but getting the pricing increases? Any other adjustments or other initiatives you think you can implement this year to get the margins moving higher?
Frederic Dugre
Well, this year, I mean, we're still on the fourth quarter. I mean, the year is almost done. So we're going to continue to execute our business plan as we stated, there are a number of initiatives from price adjustment to identify scope of work where we can bring higher margin opportunities. And this is what we're going to execute in the coming quarters. I mean, I don't see anything different or new that we could have to our strategy there.
Marc Blanchet
I mean, Naji, if I may add though, I mean for this quarter, I mean, you have to put in the balance that the Maple division does not generate any revenues on the fourth quarter or barely any. So I mean, it has to be considered in your consolidated margin for this fourth quarter, a bit similar to the first quarter, let's say.
Naji Baydoun
Understood. There's some seasonality in the business. And on the sort of balance sheet, not that is improving. I'm just wondering if this is sort of the right pace of deleveraging for you sort of do you think $4 million to $5 million a quarter, is that, sort of, a target in terms of reducing the net debt?
Marc Blanchet
Yes, exactly, yes. And we should see conversion -- we will -- the way I see it, there will continue to have a conversion of working cap during the fourth quarter as I explained on the previous question. We will casual receivables, we won't need to increase inventory as much and same with invoicing that has been done the projects. So your assumption for that [Multiples Speakers].
Naji Baydoun
And just related to all of this is I guess you're going to be lapping one more quarter with M&A contributions and more FX tailwinds. I understand organic growth is still strong and that's the focus. But once you lock those quarters and you continue to delever you mentioned in terms of trends M&A that's very helpful. But those types of high multiples are on larger deals. So I'm just wondering, you know, things continue to go in the right direction as your appetite on M&A changed and what's the pipeline looking like today for more smaller businesses that you would target?
Frederic Dugre
Yes. Our pipeline, I mean, we do have one. It's very alive. I can tell you this on multiple opportunities more in the tuck-in side, because you're right that what we reflected from the latest report is more from higher transaction or bigger transactions. And on the tuck-in side of things that will qualify the businesses, below the $25 million revenue a year, we still believe that there is good opportunities for us to acquire them at multiples that are affordable. In order to create accurate transactions on day one for H2O. So transactions that we will acquire that lower multiple than what we're trading at.
Naji Baydoun
Okay. So pipeline is still active on that side. Just one last question. Seems like you're tracking to the top end of your guidance for this year, which is great to see. I'm just wondering if you can give us an update on sort of organic growth outlook for next year? Are you still kind of targeting, call it mid-double-digit for fiscal 2024? And where else could you see from upside?
Marc Blanchet
Well, we you know, the backlog talks by itself first. I mean, that's a good indicator of what's coming up. A lot of the revenues are in a specialty products, which are recurring in nature. So -- and in terms of growth, I mean this year was -- we all agreed was very, very good year. We put everything in place to continue to generate double-digit growth, will it be in a high-double-digit. You know, that's not the way I plan. I hope for it, but I won't plan for it. I will -- I'm a bit more conservative and the way I see it as well, if we slow down a little bit that growth, it'll generate more cash conversion of the working cap, allow us to free cash also for M&A. So but nevertheless, it'll be in the double-digit plan. That's the way we see it. All indicates -- everything indicates towards that.
Naji Baydoun
Okay. That's great. Thank you very much. And congrats on a good results.
Operator
[Operator Instructions] Your next question comes from Yuri Lynk with Canaccord Genuity. Please go ahead.
Yuri Lynk
Good morning, guys.
Frederic Dugre
Good morning, Yuri.
Yuri Lynk
Good morning.
Frederic Dugre
Good morning.
Yuri Lynk
I don't think the margin topic has been brought up enough, so I'm going to go at it a little differently. Is the 10% EBITDA margin goal that you had set under your fiscal 2023 strategic plan. Is that something we should still be you know, with just a month or so to go here, something that we should be planning on? And I'm asking because it that would imply a fairly big step up in this current quarter on EBITDA margin, and so just any clarity on that?
Frederic Dugre
Yes. Well, I would say the game plan hasn't changed as part of our three year plan and the one that we updated as well. Did we face additional headwind from unexpected or stronger wage increases? Yes. Did we face additional headwinds from the acquisition or restructuring or integration of leader acquired on June 30? Yes. So are they fixable? Absolutely. Are we going to secure and improve price? Are we going to secure and improve CPI as we have adjusted our employees first and then we're going to adjust our contract. Yes.
So it's hard to say, you know, whether June 30 will be exactly on the money. I mean, for me, I look at it still on a three-year perspective or even, you know, a little bit longer. But we're doing multiple things to improve margins continuously and this hasn't changed and this won't change. So for us, our three-year plans we said to move towards 11% up is what we're striving and working really, really hard every day.
Yuri Lynk
Okay. That's all I have. Thanks guys.
Operator
There are no further questions at this time, please proceed.
Marc Blanchet
Fred, I think you want to say thank you to [Indiscernible].
Frederic Dugre
Yes. Well, that completes the call. I wasn’t sure that was another one coming. So that completes the call for today. Thank you very much for attending it, and we look forward to catch up with you in the end of our fiscal year, June 30, results will be presented in September. Thank you. Have a good day.
Marc Blanchet
Thank you everyone. Bye-bye.
Operator
Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.
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H2O Innovation Inc. (HEOFF) Q3 2023 Earnings Call Transcript