BluMetric Environmental Inc. (BLM) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the BluMetric Environmental Inc. 2023 Q4 Conference Call. [Operator Instructions] A reminder, this call is being recorded on Monday, January 29, 2024. I would now like to turn the conference over to Brandon Chow. Please go ahead.

Thank you, operator. Welcome, everyone, to BluMetric Environmental's quarterly earnings conference call. This call will cover BluMetric's financial and operating results for the fiscal fourth quarter and year ended September 30, 2023. Following our prepared remarks, we will open the conference call to a question-and-answer session. Our call today will be led by Scott MacFabe, BluMetric's CEO and Dan Hilton, the company's CFO. Before we begin our remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested in any forward-looking statements due to a variety of factors, which are discussed in detail in our regulatory filings. There may also be references to certain non-IFRS measures such as EBITDA, backlog, working capital, free cash flow and net cash. These non-IFRS measures are not recognized measures under International Financial Reporting Standards and do not have a standardized meaning prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other companies. Please see our disclosures for further information and reconciliations of these non-IFRS measures. I will now hand the call over to Scott MacFabe. Please go ahead, Scott.

Thank you, Brandon, for the introduction. Good afternoon, and good morning to our West Coast participants on the call. So thank you, everyone, and welcome to our fourth quarter and 2023 year-end earnings call for BluMetric Environmental. We appreciate all of you taking the time to join us on today's conference call. To begin with, please join me in extending a warm welcome to our new CFO, Dan Hilton. Dan joins us with a proven track record as a finance leader in both fast-growing and established technology companies. With his most recent company, Fully Managed Inc. having been acquired by TELUS prior to joining us here at BluMetric. This is our first conference call with him, and we're excited to have him as part of our team. So welcome, Dan. As per usual, I'll start off by providing an overview of the fourth quarter and year-end, and then Dan will go over our financial results in more detail. As a reminder, BluMetric is a full service environmental consulting and engineering cleantech firm. And we focus on consultancy while we also provide agile water and wastewater systems. Through a track record that spans over 45 years, BluMetric has evolved into a full-service integrator of environmental solutions in the fields of water and wastewater treatment and professional environmental services. We aspire to be the environmental solutions and water cleantech company of choice globally. Now let's discuss the quarter and year-end in more detail. In the fourth quarter, we underwent a notable turnaround experiencing improvements in revenue generation, gross margins and profitability. This positive shift highlights the onetime nature of the events that we experienced in the previous quarter. While we expected some of those challenges [ to leak ] into Q3 and over into Q4, our team was able to work very, very hard to deliver on the projects which were initially delayed while also managing our cost as reflected in the quarter's gross margins. Revenues for the quarter and year-end were relatively stable with prior periods, and this stability highlights the resilience of BluMetric's business model, which is driven by its recurring environmental consulting services and agile water and wastewater systems. At this point, we're currently sitting on a record backlog, which potentially sets us up for -- well for modest revenue growth in 2024 and beyond as we execute through it. Furthermore, gross margins were up quarter-over-quarter and trending in the right direction. As mentioned in prior calls, our goal is to get our gross margins back on track, well above our historical range of 20%, which would favorably impact our bottom line. As we've seen in the last quarter, overall gross margin for the year was consistent with the year prior as the stronger margin in the fourth quarter helped offset the weakness in the third. Additionally, the company saw higher operating expenses, which were the result of continuing our key growth investments in our sales team and infrastructure to support higher levels of revenue. We're in a delicate balance of wanting to sustain our profitability while making at the same time, balance these growth investments. Thankfully, we can utilize our strong balance sheet to support these initiatives, which is important in the current market we're in. While some of the sales pipeline has taken longer to convert than initially hoped, we continue to be pleased with the progress of our growth initiatives, which have helped us drive a record backlog. We also continue to explore broader market opportunities for our agile water systems, particularly with new partners who can help us with geographical expansion outside of Canada. In our key markets, commercial, industrial and government, our full year revenues remain consistent with the previous year. Our military market revenues declined 13% year-over-year, but that's primarily due to reduced activity on our shipboard reverse osmosis systems or SRODs, but that contract is awaiting a replacement. Additionally, our $12.2 million contract, which has been increased slightly with Rheinmetall is in the backlog and scheduled for delivery mostly through 2025. The mining market saw a 36% year-over-year revenue growth driven by an expanding customer base and the resumption of work on a large water treatment facility contract that will be delivered to the mine site. Despite facing a decline in revenue in the military market, it maintains our most substantial sales pipeline in terms of order value due to the scale and nature of these contracts. These contracts are typically in the multimillion-dollar range and span multiple years, like the previously announced Rheinmetall Canada partnership. In addition, contracts like the shipboard reverse osmosis desal system, which is upper renewal, help us with recurring base of business to work on. As we win more, we're aiming to reduce the overall lumpiness and introduce more service revenues. We're optimistic that the combination of our unique water technologies and a growing need for resilient water solutions will contribute to wider adoption. Lastly, I'd like to take some time to speak about the resiliency we're developing in our business. For example, in fiscal year 2023, the company completed 1,151 projects compared to 993 projects in the fiscal year of 2022. In addition, no single customer contributed more than 10% of our total revenues compared to one 16% in 2022, showcasing how we're positioning ourselves. What is also important to note is that the number of projects we work on serves as a leading indicator for future business as clients take on more projects with us and [ expand ] existing mandates. Overall, we believe to be well positioned to capitalize on our future growth opportunities with a record high working capital, which also happens to be higher than our current market cap, strong balance sheet consisting of minimal debt and market tailwinds for its consulting services and clean products. I'd like now to hand this over to Dan for some more detailed overview of the quarterly and year-end financials. Please go ahead, Dan.

Thank you, Scott. I would like to take a moment to thank all of you for joining the call and a special thanks to the BluMetric team who've been very welcoming since my arrival last quarter. Today, I'll be presenting to you BluMetric's fiscal fourth quarter and year-end results in more detail. Revenue for the fiscal year was $35.1 million compared to $34.3 million for the fiscal year ended September 30, 2022. The revenue for the fourth quarter of fiscal year 2023 was $10.3 million compared to $9.9 million in the corresponding period in 2022. As Scott mentioned, revenues were relatively stable year-over-year for both the quarter and annual periods. Our gross margin was 22% for the fiscal year, which is comparable to the prior year. The gross margin for the fourth quarter of fiscal year 2023 was 26% compared to 18% in the same quarter of the prior year. The increase in gross margin was attributable to the project mix coupled with the delayed recognition of some revenues due to wildfire activity experienced earlier in the year. We were generally pleased with how the team was able to turn things around in the fourth quarter having expected some of the challenges of Q3 to persist. Our goal continues to be restoring our historical gross margins well above 20%, and we believe this is possible with continued cost controls, price increases and risk management initiatives, which we are rolling out. Operating expenses for the fiscal year 2023 came in at $6.6 million compared to $5.8 million in the prior year. The increase is mainly due to increases in noncash share compensation costs related to awards granted under the Employee Stock Option Plan as well as an increase in marketing travel, IT consulting, recruiting and legal contracting costs. In addition, the company held a strategic employee summit in April 2023 to plan for future growth as operations return to their normal pre-pandemic levels. In the fourth quarter, operating expenses increased slightly to $1.7 million compared to $1.6 million for the same quarter in the prior year. EBITDA for fiscal 2023 was $1.7 million compared to $2.2 million in the prior year. In the fourth quarter, EBITDA increased significantly to $1.1 million compared to only $0.3 million for the same quarter in the prior year. Net income for fiscal year 2023 was $0.5 million compared to $1.3 million in the prior year. In the fourth quarter, net income increased to $0.7 million compared to $0.2 million for the same quarter in the previous year. On September 30, 2023, BluMetric had a net cash balance of $2.2 million compared to a net cash balance of $3.6 million on September 30, 2022. The increase in operating expenses as business activities returned to its normal levels, timing of payments of trade accounts payable and timing of revenue recognition based on milestone deliverables account for most of the decrease in cash. Cash produced from operating activities excluding changes to working capital was approximately $1.4 million for the fiscal year 2023 compared with cash produced from operating activities excluding changes to working capital of $2 million for the same period in 2022. The decrease in cash flow generation is due to the previously mentioned reasons. Cash consumed in investing activities of $336,000 for the fiscal year -- sorry, for the 2023 quarter is related to strategic investments in field equipment and were made to be use in future water treatment-related projects. This is compared to cash consumed by investing activities of $83,000 in the same period in 2022. For the 9 months ended June 30, 2023, cash used in financing activities was $1 million compared to cash used in financing activities of $0.9 million in the same period for 2022. As of September 30, 2023, the company had approximately $5.7 million in immediate cash availability between its operating line and existing cash balances, and the company remains in compliance with all of its banking covenants. We believe the company remains well financed to achieve its objectives and maintains a clean capital structure with minimal debt. This is evidenced by a strong working capital position of $11.1 million up from $10.9 million at the end of the prior fiscal year. That concludes my updates on the financials. I'd like to thank everyone for taking the time to allow us to present our results to you today, and I'll hand it back over to Scott for some final remarks.

Thank you, Dan. That was a great update. We'll now take some questions from call participants and then pass it back over to -- and I will pass back over to the operator. Thanks.

[Operator Instructions] Your first question comes from Roger [indiscernible], a private investor.

Scott, nice quarter. It looks like a real improvement from what we've seen the last little bit. Always, I think we're trying to get a handle on what the outlook is really like. And I guess my question is, when you look at Q4, is there -- any reason to think that this is not a repeatable kind of performance going forward on a regular basis?

Well, Roger, nice to hear from you, and thank you for your compliments on the quarter. The best way to describe Q4 is, I think Q4 represents the way we ought to operate I think Q4 represents a quarter where we pivoted so -- very, very appropriately coming off of a difficult one and then got where we need to be. So it points out a couple of things. One, how we can operate and how we can adjust so quickly to be able to produce the results we deserve. So I would say that Q4 is a nice clean quarter. We didn't have any surprises, any issues from even pre-RTO [indiscernible]. And so as the result, I think that Q4 represents the kind of results that we hope to expect to continue to produce going forward. We worked very hard to get back where we needed to be. And I look at where we finished off, we definitely were the beneficiaries of seeing the results pick back up of any of the delays as well that we had in Q3. So it was a good strong quarter, and I would like to see that, that gets replicated into the future, yes.

Your next question comes from John Lewis, a private investor.

Scott, congrats on a great Q and Dan, welcome to the team. I got to tell you after Q3, I was a little apprehensive about opening my press release this morning, but you blew away my expectations and probably some folks in the market and we're seeing the stock respond. I know it's difficult, small cap to say how things are going to be Q-over-Q. I guess I would ask about when you say record backlog, is there a number you can give? Or can you give it in context of previous quarters?

Yes. I can talk in terms of book sales. Right now, we're looking -- started our revenue around, we've got to get above $35 million, we need to head to $40 million to $50 million and on. And so always a leading indicator is what we see in our pipeline and what we see in absolute backlog. And our sales are lining up now at over $51 million for last fiscal year. So -- and that has -- that really is a key benchmark for us. We pushed hard because as you probably recall, John, the company was not known as an aggressive sales organization. We're still not there yet, but people are looking at our -- internally, we're organizing ourselves better. We've got market sector leads that are pushing on sales goals and delivering on those goals. And so as a result -- and also, of course, we're self-funded. So we're investing in our own cash into a needed area of the business. And so we are very happy to see that currently closed the year at $51 million in sales. Not all of that is available to us in this fiscal year. It will go into the following. So we're also looking at time stamping our backlog and doing the kind of things that I'm used to seeing in larger firms with systems that Dan's used to as well where we can really get a better insight into how it looks. But the bottom line here is we were delighted with our year-end sales and that continues. We're only as good as the last quarter at the end of the day, but we're looking at what we're accomplishing now and what we continue to press on, especially in our cleantech side. I mean, that's always been our -- it may be a boring drumbeat, but the reality is when you look at where our pipeline is really robust and where we said we're going to focus our sales and where we see those long sales cycles starting to come to pass to turn into real backlog, a lot of it is happening there, in our mining as well. That mining sector [ for our ] size needs to be much bigger than it is. And it is diversifying. It is getting better clients that appreciate our value proposition. They're willing to pay for it. I think that's reflected in our gross margins as well. Commercial, industrial remains stable and so does government. So it's not a bad portfolio of market sectors or verticals.

So Rheinmetall, if I pronounced correctly, that's part of the backlog, correct?

It is. Yes, it is.

Yes. Could you remind us because I'm very interested in the cleantech side. Could you remind us what that product is and where -- what the application of our products and what the applications are?

Yes, absolutely. I'll do my best. As you recall, when I first came, now it's, believe it or not, 6 years ago, we had quite a diverse array of technologies that, in many ways, we're a long way of becoming proven and a value to the markets. And so we really targeted and focused on what we're good at. And so it was very clear, especially in the military sector, we're known to be one of, if not the water experts for the Department of National Defence in Canada. If you're drinking water on a boat, chances are it was produced at one of our systems. If you're working with land forces and you're drinking clean water, [ AKA ] has happened recently up [ in the Callaway ] when their systems were contaminated, the Army went up there and fired up a couple of our systems that they own and produced clean water for [ Callaway ] for probably 3 months until their systems were clean. All those are big systems, and [ they have ] a value, and that's what we're known for. But it became clear, there's a high demand for what we call mission ready water and mobility and agile water Solutions, which are scaled down to have the same level of robust engineering, simple operation and the ease of deployment. And so the SRODs contract that we team with Rheinmetall on is a system that is trailer-based. It's meant to support a population of about 200, 250 people on deployment. We're making all the technology. Rheinmetall is the technology integrator. They're pulling together the trailer and the power system or power supply and interface. So what it does is it gets us to stick to what we're really good at. We don't want to be making trailers. We don't want to be doing necessarily all of the other things that the best integrators can. So Rheinmetall, that's what they're known for. So the first units in the flow of this project is just about to be delivered to Rheinmetall. It will be inspected and then eventually approved by the client this year, we expect. And then after that, we get into full production. And I think it's at least 20 systems plus the 1 that we submit for the first approval. So we have at least 4 tranches of 5 units. And most of that production and revenue associated with it will be at the end of this year, at least mostly into 2025. If we see revenue this year, we'll be ahead of schedule. Does that help, John?

Yes. Now one other question, just to follow up on that. We're in a competition with the DND. I think we're paid upwards of $0.5 million to develop a product. Is that a similar product? Or is that something different?

Sorry, John, I'm not sure I understand your question, which -- what you're referring to.

[indiscernible] department, the Pop Up?

Yes, sorry. I understand your question. I apologize. Yes, we were in a competition to support SNC at the time or they called something different now that SNC-Lavalin. And we provided a waste -- a mobile wastewater system and the package where we were plugged into for the rest of the Pop Up City competition. We were given all kinds of props and kudos for our aspect of the system, but the rest that the team presented did not prevail. But what it did is by taking advantage of that opportunity, we were funded by the competition to develop a mobile wastewater system that's ready to go. And we anticipate that, that will be a future need of the DND as well. So we're always trying to get ahead of that sales cycle and make sure we're in the universe of opportunities with our clients understand what we're looking for. So paired with our cleantech, clean water system, we now have a mobile system that we can pair with it for wastewater, which is a high demand for the DND, but also for mining clients as well.

Excellent. Well, you've told me a lot about what you do. Just to let you give you a heads up on the public side of [indiscernible] investing, which I think we've discussed has been bombed out for the last couple of years, definitely seeing some interest these days in profitable growing companies with cash in the bank and you tick all those boxes. So keep that up, keep up the great work, and I look forward to next call.

Thank you, John. I appreciate it because clearly, our strategy is to profitably run an operation produces our own, ability to fund our own growth without diluting our stock and rewarding our shareholders as a result and growing while we do it. In many ways, it sounds like defying gravity, but we can do it. We run a tight business. I'm delighted with my management team. When we say that we're stingy, we're not stingy. We invest. We don't spend and with Dan helping me here, you've got 2 Scotsmen, and I'm not sure if you ever heard [indiscernible], but copper wire was produced by 2 Scotsmen fighting over a penny. So we don't spend frivolously. We invest well, and I hope that, that all comes to bear with our shareholders that are due and new interest in BluMetric going forward.

Your next question comes from [ Matthew Martin ] from [indiscernible].