Water Intelligence plc (AIM: WATR.L)

Interim Results

Water Intelligence plc (AIM: WATR.L) (the "Group" or "Water Intelligence"), 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 ended 30 June 2023.  

Results are in-line with market expectations with strong profit growth as the Group continues to execute on its long-run growth plan.

Financial Highlights

·    Revenue increased by 9% to $38.7 million (1H 2022: $35.6 million)

o  Franchise Royalty income grew 2% to $3.63 million (1H 2022: $3.57 million)

o  Franchise Related sales grew 14% to $5.9 million (1H 2022: $5.2 million)

o  Corporate Store sales grew 9% to $29.2 million (1H 2022: $26.9 million)

§ US Corporate store sales grew 8% to $25.2 million (1H 2022: $23.3 million)

§ International Corporate store sales grew 10% to $4.0 million (1H 2022: $3.6 million)

o  Network Sales (implied gross sales of franchisees from which reported royalty is derived plus direct sales of corporate locations) grew 5% to $89 million (1H 2022: $85 million)

·    Statutory Profit Before Tax increased by 21% to $4.2 million (1H 2022: $3.5 million)

·    Statutory EBITDA increased by 12% to $7.0 million (1H 2022: $6.2 million)

·    PBT Adjusted* increased by 18% to $5.4 million (1H 2022: $4.6 million)

·    EBITDA Adjusted** increased by 12% to $7.7 million (1H 2022: $6.9 million)

·    EPS Basic increased by 18% to 16.4 cents (1H 2022: 13.9 cents)

·    EPS Fully Diluted increased by 22% to 15.9 cents (1H 2022: 13.0 cents)

·    PBT Margin increased to 11% (1H 2022: 10%)

·    EBITDA margin increased to 18% (1H 2022: 17.5%)

·    Cash and equivalents at 30 June of $18.7 million

o  Net Cash of $1.75 million (cash minus bank borrowings)

o  Bank borrowings amortized through 2028 at a blended fixed rate of 4.9%

o  Net Debt (including both Bank Debt and Deferred Acquisition Payments) to EBITDA ratio: 0.65x

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

**EBITDA Adjusted (adjusted for share based payments and non-core costs)

Corporate Development

·    Accretive re-acquisitions:

o  Franchise Acquisition:  Nashville, Tennessee

o  Subsequent to 1H:  Franchise acquisition of Covina, California

·    Technology: 

o  Commercialisation of New Technology Offerings

§ IntelliDitch (Liner for open channel water conveyance and storm water run-off)

§ Pulse (Sewer diagnostics for municipal and residential customers respectively)

§ LS1 (Rapid municipal area surveys)

§ CreatorSuite (Video ecommerce of water and wastewater products & services; distance learning)

o  Salesforce.com implementation: on-boarding of all locations continuing

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

"We continue to deliver strong results while navigating market volatility produced by rising interest rates and inflationary pressures. Profits increased strongly. Margins improved. Our balance sheet remains strong enabling us to make investments for future growth both in terms of more trained technicians, new technology solutions for customers and software infrastructure to enable continuous customer engagement and operating efficiencies.  We remain positive about the future as market demand for water infrastructure solutions continues to grow."

Enquiries:

Chairman's Statement

Overview

Our fundamentals remain strong despite volatile conditions in the broader marketplace.  Business is growing, profits are strong, earnings per share is up and we have a balance sheet that provides the Group with flexibility to be opportunistic.  Moreover, market demand for water and wastewater solutions is only expected to grow over the next decade around the world. The concerns expressed in the UK media during early July over the significant capital investment required for water infrastructure in the UK are generally shared with respect to national water infrastructure around the world. 

During 1H, we continued to execute our long-run growth plan to build a "One Stop Shop" for customers needing water and wastewater solutions; a strategic concept that we first articulated over a decade ago when we first came to AIM.  Our plan continues to recognize two core attributes of our market presence. First, we solve problems for customers across the United States with over 200,000 customer visits annually.  This is a significant installed base from which to grow the business through follow-on offerings.  Second, we are uniquely positioned at the starting point of any customer's journey by having proprietary solutions that address the customer's first concern: "Do I have a leak and can you help me find it with minimal destruction?" As a trusted advisor to the customer from inception, we have the opportunity to upsell various solutions for related water and wastewater problems.  Because of this unique value proposition or "USP", we have a scalable model that has lower customer acquisition costs.  Our results reinforce these key attributes for achieving a "One Stop Shop" distribution platform. 

Results

During 1H, overall revenue grew by 9% to $38.7 million (1H 2022: $35.6 million).  All key performance indicators  grew.  Franchise royalty grew by 2% to $3.63 million (1H 2022: $3.57 million).  Franchise related activities grew 14% to $5.9 million (1H 2022: $5.2 million) with the sub-component of the insurance business-to-business channel growing by 15%.  US Corporate stores grew by 8% to $25.2 million (1H 2022: $23.3 million).  International corporate store sales grew by 10% to $4 million (1H 2022: $3.6 million). 

The sharp rise in interest rates did adversely affect revenue growth, particularly US corporate store sales as  new construction slowed dramatically. However, the biggest impact was concentrated in three regions: Texas, Kentucky and to a lesser degree Florida.  In these corporate locations, sales declined by approximately $1.5 million versus 2022 1H sales.  We are currently redeploying leak detection specialists to other water and wastewater projects in those same regions and are confident in the future growth rate of these locations.  For example, instead of new construction, consumers and property managers are focusing on rental properties which also need pinpoint leak detection solutions. Moreover, our proprietary new offerings with respect to residential sewer diagnostics should assist with our adjustment to market changes regarding new construction by providing solutions for older properties.

As we navigate volatile market conditions, we are also mindful of profitability and operating efficiencies.  During 1H, despite sharply rising interest rates, persistent inflation adversely affected our cost structure, particularly in terms of wages and health care benefits.  However, we have navigated this backdrop successfully.  Profits grew along all measures, whilst margins also grew along all measures.  Statutory profit before tax (PBT) increased by 21% to $4.2 million (1H 2022: $3.5 million).  PBT adjusted for non-cash amortization and share-based payment expenses and non-core costs grew by 18% to $5.4 million (1H 2022: $4.6 million).  Earnings before interest, taxes, depreciation and amortization (EBITDA) grew by 12% to $7.0 million (1H 2022: $6.2 million).   EBITDA Adjusted for share-based payments and non-core costs grew by 12% to $7.7 million (1H 2022: $6.9 million).  PBT margins grew to 11% (1H 2022: 10%); EBITDA margins grew to 18% (1H 2022: 17.5%).

In navigating the dual shocks of rapidly rising interest rates and persistent inflation, we have been prudent in our corporate finance.  Our balance sheet remains strong, enabling the Group to make both operating adjustments to navigate the short-run markets and the proper investments for long-run growth.  In addition, we continued to reacquire franchises - Nashville, Tennessee and Covina, California - in strategic locations.  Such acquisitions are fully accretive to our shareholders.

At 30 June, the Group had $18.7 million in cash and cash equivalents.  Net cash after taking into account bank borrowings was $1.75 million.  The Group's bank facilities, locked-in prior to the interest rate hikes, are favourable with borrowings amortized through 2028 at a blended rate of 4.9%.  As a result, Water Intelligence has flexibility to increase its credit facilities if needed as the Group is under-leveraged.  The Group's Net Debt (including both bank debt and deferred consideration) to EBITDA ratio is 0.65x.   Such prudent corporate finance, combined with our results, enabled us to grow EPS - both basic and diluted.  EPS (Basic) increased by 18% to 16.4 cents (1H 2022: 13.9 cents).  EPS (Fully Diluted) increased by 22% to 15.9 cents (1H 2022: 13 cents).

Strategic Outlook

We will continue to execute our long-run growth plan to create a One-Stop Shop because we operate in a market where customer demand for solutions to water and wastewater problems will remain strong given the rising price of water and the reality of aging water and wastewater infrastructure.  Because of underlying market demand, we are still hiring to put more service vehicles on the road and training more technicians to deploy our minimally-invasive technologies.  Such new hires are an operating expense but should be considered an investment given the length of time it takes to train a leak detection professional and the importance of fully-trained technicians for future revenue generation based our USP of pinpointing water and wastewater leaks with minimal destruction. While we have the resources to make this investment, we will be prudent and monitor the general macroeconomic picture. 

Our prior technology investments will help manage our people investments in growing the business.  On 11 September, we released an update on our new technology offerings that we are building into our sales plan for 2024:  IntelliDitch (irrigation and stormwater run-off); Pulse (Resident and Municipal); LS1 (Municipal); CreatorSuite (ecommerce). 

First, each of these offerings will add to our matrix of solutions - residential, commercial, municipal, clean water, wastewater - and enable us to further position ourselves to customers, whether homeowners or insurance companies, as a One Stop Shop.  For example, with our Pulse product, rapid sewer diagnostics is a natural upsell during a visit to a home for water leak detection as most homeowners have insurance or warranty policies for both water damage and sewer blockages.  This offering will also help to drive our business-to-business channels.

Having a matrix of solutions also helps with navigating changes in market segments and the management of our workforce.  As noted above, the slowdown in new construction because of the spike in interest rates may be offset by a focus on aging rental properties, with problems such as sewer blockages. Our technicians are all cross-trained on the various technologies, making it easier to redeploy the technicians we have invested in.  It should also be noted that our proprietary LS1 product for rapid, automated municipal surveys is geared for deploying headcount with less training than is required for pinpoint leak detection.  As this offering is rolled-out, we are planning on using such surveys as a bridge for technicians to generate sales while training for full leak detection capabilities.

Second, our software infrastructure enabling customer relationship management (Salesforce) and video ecommerce (CreatorSuite) applications positions us to be part of the customer's entire journey across their lifecycle with sales opportunities to provide solutions to various problems related to water and wastewater.  Given our sales footprint across the US and in the UK, Australia and Canada, we can also work with partner companies anywhere in the world to recommend their products to homeowners or property management.  Related to demand for water and wastewater solutions, the development of the smart home is another sectoral trend that is expected to continue.

Our software infrastructure will also help with workforce management. With our Salesforce application, we will be more efficient with job scheduling for our technicians and achieve higher levels of service responsiveness to residential customers and business-to-business partners.  We will also be able to better integrate work crews with trainees for on-the-job training.  With our CreatorSuite video technology, we can not only use it for ecommerce but also for distance learning with short form training videos housed in a secure environment for our technicians.  Cutting the time for training will enable the Group to accept more sales opportunities instead of managing backlogs of work.

In navigating market conditions, we will continue to execute our growth plan.  However, we are mindful that it all starts with fundamentals, especially profits.  As we build on the fundamentals by simply adding more trained technicians and service vehicles because of market demand for water and wastewater solutions, we will be integrating prior investments that make our operations more efficient and lower customer acquisition costs.

Patrick DeSouza

Executive Chairman

September 19, 2023

Interim Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2023

Consolidated Statement of Financial Position as at 30 June 2023