BluMetric Environmental Inc. (BLM) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the BluMetric Environmental, Inc. FY 2025 First Quarter Conference Call. [Operator Instructions] This call is being recorded on January 30, 2025. 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 2024 fourth quarter and fiscal year ended September 30, 2024. Following our prepared remarks, we will open the conference call to a Q&A session. Our call today will be led by Scott MacFabe, BluMetric's CEO; and Dan Hilton, the company's CFO. Before we begin with the formal remarks, I'd 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 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'll now hand over the call to Scott MacFabe. Please go ahead, Scott.

Thank you, Brandon. Welcome, everybody, to our fourth quarter and fiscal year 2024 earnings call for BluMetric Environmental. We appreciate all of you for taking the time to join us on today's conference call. As per usual, I'll start off by providing an overview of the fourth quarter and fiscal year, then Dan will go over our financial results in more detail. BluMetric creates a better environment for business. And what does that mean? Well, BluMetric is a full-service engineering WaterTech and environmental consulting company, focusing on agile water and wastewater systems and professional services. 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 WaterTech company of choice globally. As you may have noticed, we're now using the term WaterTech to refer to our overall Cleantech manufacturing division. We felt that this wording more accurately reflects the solutions we're bringing to the market. Before we begin, I'd also like to take a moment to welcome Mr. Mohsen Mortada to our Board. As you may have seen in the press release just yesterday, he's a distinguished leader in the water utility management, water engineering, desalination and professional services. He has a lot of experience in the fields of work that we do, and he's currently the Chief of Staff at the Metropolitan Water District of Southern California, the largest water utility district in North America. Now let's discuss the past fiscal year in more detail. This year, we saw stable revenues and increased professional services billings as we executed during a period of transition. As you may recall, we've been working hard to drive incremental improvements in our overall business while we invest in our WaterTech product portfolio and service capabilities. Higher costs can be attributed to an investment in business development and the acquisition of Gemini Water in fiscal Q4. We expect to see these investments to start to pay off in 2025 and well beyond. While the sales and delivery cycles continue to be a bit longer than expected for WaterTech, particularly in the Military market, we've made sure that the production excellence, capacity and business development and investments are in place to ensure continued growth. We continue to build key relationships within the main markets in Canada, Europe and the United States as we deepen our pipeline with a broader list of international partners with proposals in those geographies in various phases. To address the longer sales cycle for the Military market, we announced the acquisition of Gemini Water in the fourth quarter, and we're expecting an accretive partnership that will start to contribute to results in the fiscal first quarter of 2025. Gemini Water designs, builds, installs and commissions large-scale desalination and wastewater treatment systems using membrane-based technologies for use in commercial and remote applications that operate with shorter sales cycles. They have designed and built systems delivering millions of gallons per day of potable and wastewater treatment capacity across 22 locations in the Caribbean and Texas. Currently, their specialty is providing water systems with a capacity of up to 3 million gallons per day. With this acquisition, we saw an opportunity to diversify our WaterTech customer base and enter new industrial and commercial opportunities. We now have customers such as private island developers, cruise operators, municipalities, utilities and resorts in the portfolio. Gemini's service offerings were complementary to what we offer and we saw a mutual benefit to strengthen both of our offerings through shared expertise. As we've disclosed throughout the last fiscal year, we've been wanting to increase our reach geographically and this allowed us to establish a manufacturing beachhead in the U.S. with access to the U.S. and Caribbean-based customers. We immediately recognize that BluMetric has resources to help support the growth and customer demand that Gemini was seeking, and we could leverage that to help them execute. We've already begun to see some customer traction from this acquisition with a system sale to a Tier 1 cruise operator coupled with the larger scale of sale to St. Kitts and Nevis, which closed in the fiscal fourth quarter and an increased level of interest from a broad range of customers in the region. In addition, we're in the contract phase with a landlord in Gainesville, Florida to potentially increase the manufacturing facility from currently 10,000 square feet to 25,000 square feet by the end of February. This will be an important year of integration and execution. In our announcement yesterday, we also mentioned the addition of critical senior management supports needed at Gemini to focus on business development, sales and operations. This is to ensure that we are responsive to client inquiries as they pertain to new installations and ongoing operations and maintenance support with the goal of leading to more recurring revenue streams. Since the acquisition, our recruiting team has assisted Gemini with the placement of a number of key resources that have approximately doubled the Gemini head count in preparation for the delivery of contracts in hand and increased demand from the market. This year, we saw an investment in sales and business development to enhance market reach. And while these investments required us to incur higher costs and overhead, our goal is to make sure that they pay off in due time as new contracts materialize. Now diving in deeper, our revenues for the fiscal year were stable and up 8% for the fourth fiscal quarter from the same period prior year. Despite our higher cost invested in growth, we continue to maintain our positive net income and $2 million in adjusted EBITDA this fiscal year. Dan will discuss this in more detail, but we saw some material changes to the balance sheet in the fiscal fourth quarter with the acquisition. We also didn't see any contribution from Gemini to the income statement due to the timing of the transaction. The first fiscal quarter in 2025 will be the first quarter that Gemini reports any material revenues since the acquisition. Overall, we're making good progress on our manufacturing ramp-up and are awaiting the final approvals for Rheinmetall partner -- our Rheinmetall partner to start volume of the agile mission-ready water systems for the military contract. Fiscal 2025 is shaping up nicely as we have a record order -- book order to execute on. We expect to start manufacturing Rheinmetall and see the contributions from our Gemini acquisition. Turning to professional services. In 2024, we saw fewer lower margin pass-through contracts, a material improvement in net fee revenues leading to a higher gross margin in '24 when compared to prior year. Replacing low-margin work with higher skilled based services is a critical component of our ongoing strategy in professional services. We're pleased that gross margins for the fiscal year were higher at 40% compared to 35% for the prior year. Across the company's key markets for the fiscal year, the Commercial & Industrial markets revenue declined year-over-year due to the completion of a very large remediation project in the prior year. BluMetric is making strategic growth investments in this market, particularly in the Greater Toronto area. The government market has a slight decrease due to the recategorization of one client to the Military market, but remains stable. The Military market increased significantly by 75%, mainly due to increased activity related to the refurbishment of water purification systems and initial development and testing under the Rheinmetall contract. The Mining market decreased to a shift towards higher value services and improving the client portfolio in areas such as Northern Quebec. While we see fluctuations in the market, the team has to provide support in growing markets while we address the declines in others. Fiscal 2025 will see us execute on our record order book, which includes some of the previously mentioned projects and contracts. We believe demand is strong for our WaterTech, prompting the moves to continue to increase our capacity. Ultimately, we're optimistic that the combination of our unique water technologies and growing demand for resilient and decentralized water solutions will uniquely position the company. I'd now like to hand this over to Dan for a more detailed overview of the financials. Please go ahead, Dan.

Thank you, Scott. Today, I'll be presenting BluMetric's 2024 fiscal fourth quarter and fiscal year-end results in more detail. Revenue for the fiscal year was $34.8 million compared to $35.1 million in the prior year. As Scott mentioned, revenues were stable. Revenue for the fiscal fourth quarter was $11.1 million compared to $10.3 million in the prior year, representing a modest increase. Our acquisition of Gemini has been consolidated on the balance sheet, but this quarter has had no noticeable positive impact on the income statement due to the timing of the transaction. Acquisition costs have been expensed in the quarter. We expect to see the value of Gemini realized in the next fiscal quarter and beyond. Our gross margin was 40% for the fiscal year compared to 35% in the prior year. The increase in gross margin is mainly attributable to lower overall subcontractor usage throughout the year as well as an increase in billing rates and billable hours. Gross margin was 34% in the fiscal fourth quarter compared to 36% in the prior year. This decrease was mainly attributable to a higher reliance on subcontractors within the quarter. Operating expenses for the fiscal year came in at $13.4 million compared to $11.3 million in the prior year. The increase is due to an investment in business development and marketing activities, training, acquisition costs, a onetime bad debt recovery in 2023 and an increase in amortization and finance charges that are tied to a 10-year lease agreement that took effect for the Ottawa head office location. Operating expenses for the fiscal fourth quarter came in at $3.7 million compared to $2.8 million in the year prior. The increase can be attributed to the same factors, including the acquisition costs, which are primarily realized in the fourth quarter. Adjusted EBITDA for the fiscal year was $2 million and consistent with the prior year despite the increased investment in business development. The adjusted EBITDA for the fiscal fourth quarter was $0.4 million compared to $1.1 million for the same period in the prior year. Net earnings for the fiscal year were $64,000 compared to net earnings of $507,000 in the prior year, but cash flow from operating activities was $57,000 compared to a cash outflow of $340,000 in the prior year. On September 30, 2024, BluMetric had a net debt balance of $157,000 compared to a net cash balance of $2.2 million for the period ended September 30, 2023. The change in net cash is a result of the extension of the line of credit to $4 million, which was subsequently used for the acquisition of Gemini Water along with the investment in the development of intellectual property and some minor changes in noncash working capital. As of September 30, 2024, the company had approximately $4.2 million in cash availability between its operating line and cash reserves and is not bound by any debt covenants. Subsequent to the quarter, we closed an oversubscribed financing to both retail and institutional investors, raising gross proceeds of $4 million. During the fiscal fourth quarter, we also started trading under the OTCQX Board under the symbol BLMWF for the benefit of our U.S.-based retail investors. As disclosed, we intend to use the net proceeds of the offering for general corporate and working capital purposes to strengthen our balance sheet, to pay down the operating line and to reduce interest charges while we provide resources to help execute our growth plan. I'm happy to report that as of today, the line of credit has a 0 balance and our working capital is on track to return to historic levels. Overall, BluMetric is entering a critical year as we strategically invest in professional services opportunities in Toronto and other critical markets while we expand our production capacity in both Canada and the United States. We are investing in new management reporting systems in 2025 to ensure that better decisions can be made by our frontline teams to ensure client success and an improved bottom line. We are world-class environmental consulting and water technologies delivered by world-class people to do meaningful work every day. 2024 to 2025 is an inflection point for the business. Water is ever scarcer and the environmental concerns of our clients continue to require our world-class assistance. I'd like to thank everyone for taking the time to allow us to present our results for today. And I'll now turn the time back over to Scott.

Thank you, Dan. Great update as usual, and I echo the excitement surrounding the opportunities that lie ahead in the year ahead. We'll now take some questions from call participants, and we'll pass it back off to the operator.

[Operator Instructions] Our first question comes from the line of Bruce Lazenby from Ottawa Investor Group.

Scott, congratulations on a great report. A lot of moving parts with the acquisition, multiple locations, multiple solutions, as you move from sort of the consulting basis to the product basis. And it sounds like Dan is putting a new ERP system on top of that. That's a lot of moving parts. Can you give us some understanding about how you're going to prioritize some of these things?

Well, Bruce, nice to hear from you, first of all. Secondly, I would like to say that having spent the first 8 years cleaning up the business, getting it focused, turning it, stay in the black, focus on profit while we grow. The level of effort and the necessary level of management and focus to get us that far to where we are today makes what we have ahead of us enjoyable. We've got some great leadership internally. We make sure that we keep the main thing, the main thing. And then there are some things we've been waiting on, especially our new systems we need to invest in mainly because, A, they become obsolete. I don't think that they give us the kind of necessary detail we need to manage even better than we do. And we have people in place. Dan's done a great job retooling our accounting and finance group. We've got a great stable of leadership within the organization, both here and down in the States. We've just recently made some very key hires as we noted the other -- in our press release from last night to support down in Florida. And then we've added an exceptional new Board member as well, who is a familiar old colleague of mine coming out of California, moving back to Toronto, who will also provide us some support. So I give you my word that when I say we're executing what we state what we can execute on, we'll deliver on the execution of those improvements and with the full intent that they'll pay off dividends for many years ahead.

Well, certainly an exciting space and exciting time, Scott. So that sounds awesome. Can you translate some of what you just said into future revenues? Can you give us some guidance forward-looking?

No. Honestly, I can't at this point. This is very early on in the year and it's not typical for us to do so. But in terms of the forward-looking statements. I think when you take a step back, you look at the stability of our revenues. You look at the accretive benefit of what we've just purchased with Gemini, add some modest growth. And I think you can see a fairly nice path towards a better lift than running at around a top line of $35 million to $34 million a year. We have plans to head towards much higher than that. But at this point here, we'd rather just stay modest and work hard and produce results and stay in the black, too.

Yes. Yes. Yes. Well, I think, Dan did a good job raising some extra cash around that and obviously put to good use. Well, I mean, I think for one investor, I'm very optimistic. I think the opportunity is massive. I acknowledge a great new Board member, some new hires and it's a magnificent space with lots of opportunity. You've got great credibility. And I think execution is going to be the key. And I wish you very best of luck with that.

Thank you so much, Bruce. I appreciate your investment. Thank you.

Our next question comes from the line of John Lewis.

I got a handful of questions from a few folks that couldn't be on the call today. I guess the first one, the word record backlog. Can you give some sort of context to that? How much of that would hit in the '25 year, that sort of thing? Anything you can give on that backlog would be appreciated.

Sure. Let me take a step back because I think what's worth mentioning is certainly, when we look at the stability of our top line, it's not showing exponential growth yet. It's consistent with the year prior. And our statement historically has been that we had a little over $50 million in backlog, absolutely true. We burned about $35 million of that, and we've got carryover as well into this fiscal year with that backlog. So there is some from the last year's $50-plus million, and we're looking to be as good or better than that into this fiscal year, especially when we're bringing Gemini on board. So I think there perhaps are some market expectations that we burn all that we book, and we don't necessarily do that. Some are multiyear assignments. And that's actually helpful. It's healthy to have that because we're not having to market, sell, win, close, deliver on everything we need to every fiscal year. So back to the $50-plus million in that range is steady and increasing. And because we still haven't closed the books on -- we just finished the first quarter with Gemini, we'll have a much clearer outlook on that once we get those numbers analyzed and audited.

Got it. And you mentioned the Gemini will -- some of that business will hit in Q1. Is that correct?

Yes. Yes. Just the timing of the acquisition, we closed virtually days before the end of fiscal year 2024. So for the fourth quarter of '24, it shows all the costs and investment and no revenue, no benefit. So now the first quarter will show both. It will show the benefit of the acquisition, but it will show the revenue and the profit.

And you report by the end of February, so we don't have too long to wait.

No, you don't. We don't. Yes, we're pretty excited. We're trying to land that out for you. But yes, we're just -- we get 1 day to breathe after getting our full year in, and then after that, we're back at it.

With all these projects and the new business from Gemini, projects such as Nevis, do you have insurance against overruns? And I'm just wondering how that's handled because there's some nightmare scenarios that engineering companies have faced in overruns and these sorts of things. And just curious about that.

I think the best way to describe how we handle that is the managing principle down there is at least 40 years' worth of experience and a very good reputation of delivering on time and under budget. And the size of the projects that we're looking at are around 3 million gallons per day, give or take. And those are very manageable sized contracts and they're well within this comfortable wheelhouse. And then the other side of that is this very, very respected in contracting that we usually get a sizable amount of the money upfront and we build against that. The third aspect to it is the systems that they develop down there, part of their processes, they design it and then they soft-build it at the location in Gainesville. They pack it up, send it to the site in containers and then final build it on site. So there's a nice step for QA/QC before it hits a container and heads over to where it needs to go. And based on our evaluation of how they operate and do business, they're very profitable, they're very mindful of overruns and we also budget in contingencies as well. So I think the bottom line here is to maintain a bottom line, you stay within your wheelhouse, you make sure you run and operate projects that you're not way over driving your headlights. And then I think the next step we're already delivering on is that's bringing more leadership to the table there that will give them a much broader bandwidth to be able to pursue more and bigger assignments. The one individual that we -- of the 2 that we brought on recently for Gemini is relocating to Gainesville from Australia, and he is a former coveted colleague of the managing engineer in Gainesville. They've known each other a long time. He has 30 years' worth of experience. He's starting to finish on these projects. Those are the kind of people that give you the confidence you can deliver on time and on budget and make money at it.

Yes. Unless he's a fugitive, that's quite a commitment to go to Gainesville from Australia. Question, Rheinmetall, how is that going? And how hopeful are you that revenue starts in 2025? And any care to guess on a quarter?