Water Intelligence plc (AIM: WATR.L)

Interim Results

Water Intelligence plc (AIM: WATR.L) (the "Group" or "Water Intelligence" or the "Company"), a leading multinational provider of precision, minimally-invasive leak detection and remediation solutions for both potable and non-potable water is pleased to provide its unaudited Interim Results for the period ending 30 June 2022.  

Consistent with its historic trajectory, results are comfortably in-line with market expectations as the Group continues to execute on its long-run growth plan while navigating short-run market volatility.

Financial Highlights*

·    Revenue increased by 44% to $35.6 million (1H 2021: $24.7 million)

o  Network Sales (implied gross sales of franchisees from which reported royalty is derived plus direct sales of corporate locations) grew 12.5% to $85 million (1H 2021: $75.5 million)

·    EBITDA increased by 15% to $6.2 million (1H 2021: $5.4 million)

·    PBT Adjusted** increased by 10% to $4.6 million (1H 2021: $4.2 million)

·    Cash and equivalents increased to $21.9 million (1H 2021: $7.2 million)

o  Net Cash at $5.3 million (cash minus bank borrowings)

o  Bank borrowings amortized through 2027 at an average fixed rate of 4.9%

* To make proper like-for-like comparisons, the above comparisons of Statutory EBITDA and PBT Adjusted exclude the 1H 2021 one-time gain of $1.9 million

**PBT Adjusted (amortisation, share based payments and non-core costs)

Corporate Development

·    Operations:  Increase of 45 headcount, mostly technicians in training for growth plan

·    Financial:

o  Expanded bank credit facilities by $17 million (with headroom of approximately $7 million as of 30 June 2022)

·    Accretive acquisitions:

o  2 Franchises re-acquired:  Fort Worth, Texas;  Midland, Texas

o  Bolt-on acquisition:  Connecticut Plumbing

·    New Locations:

o  Greenfield territory launched as corporate location: Wichita Falls, Texas

o  Additional territory sold to Franchisee to be developed: central North Carolina

o  New Technician Training Center launched in Seattle

·    Technology: 

o  Field trials in US for proprietary new technologies: residential sewer diagnostic tool and video e-commerce

o  Salesforce.com implementation: on-boarding completed for all corporate locations; franchise locations currently on-boarding

Dr. Patrick DeSouza, Executive Chairman of Water Intelligence, commented:

We delivered strong results while navigating 1H market volatility.  We remain positive about the future and see opportunities ahead even as we manage prudently in the short to medium-run for both inflation and threats of future recession from rising interest rates.  We are pleased to have expanded our credit facilities early in 1H and locked-in an attractive fixed rate through 2027.

Ironically, now is a good time for us to capture more of the market given our market leading position and competitive advantages that we can exploit. Market demand for water and wastewater-related infrastructure solutions remains strong whether we face Covid-19, inflation or potentially recession. Long-run, climate change is adversely affecting water infrastructure whether manifested by droughts, floods or deterioration of pipe materials.  In attacking the market, which is characterized by fragmented, local service providers, we have operating efficiencies to leverage:  our multinational sales footprint; business-to-business channels; proprietary technology; Salesforce.com implementation; and available financial resources for sustaining our long-run growth plan.  Moreover, in the short to medium-run, because most of our operations are in the US, we are additionally assisted by the strong US dollar and have the ability to be opportunistic internationally."

This announcement contains inside information for the purposes of Article 7 of the UK version of Regulation (EU) No 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018, as amended ("MAR"). Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

Enquiries:

Chairman's Statement

Overview

                Once again, as has been the case consistently since 2016, our operating fundamentals are strong.  And market demand for our green economy brand and water infrastructure solutions only looks to be getting stronger given droughts, flooding and an inability of aging infrastructure internationally to cope. We appreciate our shareholders commitment to building a leading world-class growth company over the long-run.  Nonetheless, during 1H we implemented important steps to get ahead of marketplace challenges threatening various stakeholders - employees, customers, shareholders - including rapid inflation and the threat of future recession from rising interest rates geared to stem inflation.  We expanded our credit facilities by $17 million during 1H and locked-in an attractive blended interest rate for all bank borrowings at 4.9%. We have made prudent budget adjustments during 1H while staying true to our long-run growth plan because it will create the highest value for all stakeholders.  For example, in putting capital to work, we have continued to hire and train technicians to capture market demand for solutions and at the same time we have managed other expenses. Fortunately, our asset base gives Water Intelligence a competitive advantage and management an ability to navigate short-run, medium-run, and long-run operating windows.      

Analysis

We remain on-track for another good year with respect to revenue and profits.  To present a comparable period-over-period analysis of operations, we have excluded a one-time gain of $1.9 million in 2021 for the forgiveness of a PPP loan granted at the onset of Covid in 2020.  This loan forgiveness was treated in our 2021 audited accounts as profit before tax.  In that report, we explained the IFRS requirement and communicated that even excluding the one-time gain for 2021, full year 2021 revenue grew by 44% to $54.5 million and adjusted EBITDA still grew 48% to $10.3 million.    To provide a meaningful comparison between operating performance for 1H 2022 and 1H 2021, we need to make the same adjustment.  Revenue grew in 1H by 44% to $35.6 million (1H 2021: $24.7 million), profit before taxes adjusted for non-cash and non-core costs increased by 10% to $4.6 million (1H 2021: $4.2 million) and EBITDA grew by 15% to $6.2 million (1H 2021: $5.4 million).

While strong, we note that our EBITDA growth percentage over sequential periods from full year 2021 to 1H 2022 decreased.  In part, EBITDA margins declined somewhat to 17.5% from 21.9% because of rapid inflation of direct costs from labor, gasoline for service vehicles and supplies.  However, it should also be noted that part of increasing expenses was actually the timing of reinvestment due to increased hiring and training of operating personnel including 45 technicians.  Such execution personnel will become fully productive in 2023 to capture increased market demand for water and wastewater solutions and contribute revenue and profit over the medium and long-run. As part of our growth plan, we raised equity capital during 2H 2021, committing to institutional shareholders to put capital to work to accelerate market capture given the global market opportunity for providing water infrastructure solutions.

Short-run Window.  In the near-term, despite navigating market volatility with care, we are continuing to grow organically both the Water Intelligence (WI) brand and that of our core American Leak Detection (ALD) business.  In breaking down WI revenue growth, each business line tracked well given our growth plan and key performance indicators (KPIs) set forth in the Strategic Report as part of our annual Accounts. 

The core of our strategic plan focuses on growing the American Leak Detection brand both organically by adding service capabilities at each of our 150 locations across the United States and by the reacquisition of franchises and converting such locations to corporate operations.  Converting franchises into corporate operations unlocks significant shareholder value by bringing underlying franchise revenue and profits directly onto Water Intelligence accounts instead of as royalty income.  We use the concept of "Network Sales" to evaluate our growth plan because it illuminates the growth of total sales to customers under our American Leak Detection brand - both direct sales from corporate operations and gross sales from franchisees from which royalty income is reported. Both corporate and franchisee personnel execute in the same branded vehicles and uniforms for customers. For 1H 2022, Network Sales grew 12.5% to $85 million (1H 2021: $75.5 million).

                Each KPI tracks our growth plan well.  Franchise royalties declined by 3% to $3.6 million (1H: $3.7 million) as a result of the franchise reacquisitions during 2021, which reduced the available pool of royalty income for 2022.  At the same time, however, the franchise system still grew.  Despite there being fewer franchises, franchise-related revenues grew by 5% (1H 2022: $5.2 million vs. 1H 2021: $4.9 million).  Our business-to-business insurance channel component of franchise-related revenues grew by 7% to $4.8 million (1H 2021: $4.5 million).  It is worth noting that our business-to-business channel is growing faster than 7% because we do not report insurance jobs executed by our corporate-operated locations. Meanwhile, US corporate-operated locations grew 75% to $23.3 million (1H 2021: $13.3 million) reflecting both organic growth and growth through reacquisition of franchisees as discussed above.  With respect to organic growth, same store sales increased by 30% to $17.1 million (1H 2021: $13.1 million). Finally, international corporate operations (UK, Australia, Canada) grew 27% to $3.6 million (1H 2021: $2.8 million).

Medium-run Window.  We remain positive about market demand for our water infrastructure solutions even in the medium-run scenario of recession. For reference, during the first year of Covid-19, when US GDP shrank, WI revenue still grew by 17%. We have made, and are continuing to make, investments to capture a greater share of the market over the medium term given strong demand for our offerings.  Firstly, we are adding more capacity - trained service professionals - across all of our franchise and corporate locations, especially in the US.  At the beginning of 1H 2022, we invested in creating a new training centre in Seattle.  By the end of 1H 2022, this centre has already trained several classes of new technicians who are now deployed to different parts of the US and gaining experience using our leak detection technology.  These new technicians will be contributing to revenue and profit in a meaningful way during 2023.  Secondly, to enable ALD to operate more efficiently with more capacity, we have invested over the last two years in Salesforce.com customer management technology and related applications (together "Salesforce").  With the Salesforce suite of applications, the entire American Leak Detection workflow across its 150 locations will be automated from receipt of jobs from customers to scheduling and delivery, report writing, payments and follow-on sales.  Importantly, all data will be secure with the highest level of compliance; an attribute critical to our insurance business-to-business channel.  At the end of 1H 2022, all corporate locations were successfully on-boarded to Salesforce. Prior to year-end all franchise locations are scheduled to be on-boarded.  Thirdly, we have invested in proprietary technologies, such as a new sewer diagnostic tool, that will increase our range of offerings to meet market demand for wastewater services.  A version of this proprietary tool is currently being used commercially in the UK for municipal customers such as Thames Water and a version for residential users is currently being tested in the United States for use by our American Leak Detection brand.

Outlook

Water Intelligence is well positioned for the future whether it is characterized by persistent inflation or a shift to recession from higher interest rates.  Our balance sheet is strong with $21.9 million in cash as of 30 June 2022.  Cash, net of bank borrowings, is $5.3 million as at 30 June 2022.  Credit availability under our expanded facilities is $7 million as of 30 June 2022.  The terms of the bank debt are favorable with a fixed rate of approximately 4.9% and amortization spread through 2027.  Deferred consideration to franchisees from reacquisitions at 30 June 2022 is $13.7 million with payments spread through 2026.  Given EBITDA growth and readily available cash and credit, Water Intelligence has sufficient capital to meet its obligations, reinvest in growth and even consider selective acquisitions.  With a strong US dollar forecast through at least 2023 and since Water Intelligence generates cash from operations largely in dollars, we are reviewing opportunities internationally that have become relatively more attractive.

In evaluating any tactical changes, Water Intelligence does have operating flexibility.  If the medium-run is marked by inflation, Water Intelligence has made significant investments in its Salesforce.com infrastructure that is expected to deliver operating efficiencies in 2023 and beyond.  On the other hand, if the medium-run is marked by recession due to rising US interest rates, Water Intelligence also has the ability to navigate this given its diverse matrix both in terms of solutions covering water and wastewater and in terms of the variety of its customers from homeowners to businesses like insurance to municipal.  Both private and public spending for water infrastructure solutions are expected to increase irrespective of macroeconomic trends.

Long-run. We are mindful of macroeconomic variables.  However, we remain optimistic about the global opportunities in front of us and management's ability to adjust as we move from short-run monitoring to medium-run tactics.  For our long-run outlook, global market demand for water and wastewater infrastructure services continues to increase.  To a degree, we are acyclical because of the importance of water and wastewater solutions especially as climate change creates more anomalous conditions that puts stress on infrastructure at all levels - residential, commercial, municipal.

Importantly, as a competitive strategy matter, in a largely fragmented market of local service providers, we are distinguished from our competitors because we have: a well-recognized American Leak Detection national brand; proprietary technology; established US business-to-business channels; an installed base of operations in over 150 locations across the US and in the UK, Canada and Australia; and investments already made in the leading customer relationship management system in the world that will come on line fully during 2023.  With these operating attributes and against a landscape of smaller less-adaptable players, we should be prudent as to tactics but confident in our growth plan and ability to capture the market with a platform company as the market leader in our category.

Patrick DeSouza

Executive Chairman

September 22, 2022

Interim Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2022

The gain on PPP loan forgiveness was a one-time extraordinary item related to the Covid-19 pandemic. Under IFRS guidelines, we were required to present this as a one-time gain in profit before tax. However, this gain is not reflective of our underlying operating results, and as such has been excluded from our period over period analysis.  See note 5 for adjusted EPS calculation.

Consolidated Statement of Financial Position as at 30 June 2022