© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. And thank you for standing by. Welcome to the H2O Innovation Conference Call announcing its First Quarter 2022 Financial Results. [Foreign Language] [Operator Instructions] [Foreign Language]Before turning the meeting over to management, please be advised that this conference call will contain statements that could be forward-looking and subject to a number of risks and uncertainties and could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded today, November 10, 2021, at 10:00 a.m. Eastern Time.I will now turn the conference over to your host, Mr. Frederic Dugre and Marc Blanchet. Please go ahead, gentlemen.
All right. Good morning, everyone, and thank you, madam. My name is Marc Blanchet; I am the 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, our President and CEO is joining me today for the call, which duration is approximately 30 minutes. During this call, Frederic will give an update on the business and present the highlights of the first quarter ended September 30, 2021 and I will be presenting the financial results. Please take a moment to read the forward-looking statements on page 2 and the non-IFRS financial measurements on page 3 of the presentation.I'll now hand over the call to Frederic.
Well, thank you, Marc, and thank you to the analysts and the shareholders for joining the call today. We are really excited to present you our financial performance and company's business progression for the quarter ended September 30th. The first quarter of our new fiscal year started really on the right foot, as we're presenting sustained growth and margin expansion, proving again the scalability of our business model.Revenues for Q1 have increased by almost 10% as a result of organic growth initiatives and acquisitions realized in the previous fiscal year. During the same period, we have grown our adjusted EBITDA by 15% faster than our sales. Our adjusted EBITDA stood at $4 million or the equivalent of 10.5% of our revenues. This performance is absolutely in-line with our 3-year plan to change at growing our adjusted EBITDA above 11% by the end of June 2023.The net earnings remained positive at $600,000 despite an increased amount of tax paid. Our consolidated backlog stood at $123 million compared to $121 million in the previous year. The good news is that our consolidated backlog combining the projects and the long-term O&M contract is diversified with industrial and municipal projects and contain projects at superior margin.The balance sheet is really in good shape and is not over leverage. The net debt has momentarily increased in the amount and due to an inventory augmentation in order to face logistic challenges and an increase in our work in progress from the WTS business pillar increase. Marc will cover that later in the presentation during the financial review.Lastly, we're happy to maintain our recurrent revenues by nature to a high level, as our team continues to do everything to retain our customers and sell more products through multiple business synergies. Thanks to our high synergistic business model, we continue to add financial predictability and strength.Moving to Page 5. Let's look at the highlights of our Water Technologies and Service business pillar. As announced in the previous quarters, our WTS business pillar is starting to build good positive momentum. In the first quarter only, we added 10 new capital equipment projects for a total value of $14.7 million. These new projects pushed the WTS backlog to $41 million now, and it represents an increase of 12.3% year-over-year.In the same period, many projects reached substantial completion and allowed us to increase our work in progress and revenue recognition. Our various business initiatives, including the addition of regional account managers to grow our service division, are definitely paying off. Indeed, we are showing an increase of [ 30% ] in the revenues generated from the service and aftermarket. This is really positive as it is directly in line with our objective and mission to retain and grow relationships with our existing and new customers.The capital equipment backlog remains well balanced and diversified with 33% of industrial projects and 67% of municipal-related projects. Looking at the little pictograms, we can see the evolution of the WTS activities compared to the previous quarter. Clearly, our engineering, fabrication and commissioning teams are extremely busy with multiple projects underway. As previously mentioned, it is just a matter of time before seeing these projects moving from the engineering to the fabrication phase, where usually, most of the dollars are recognized.During the first quarter of our new fiscal year, we started to observe an increase, which is starting to impact positively our revenues. Looking at the overall business activity, sales backlog and pipeline of new opportunities, we believe the WTS business pillar is at the beginning of a growth cycle, which will impact positively the current and the following fiscal years. The growth momentum doesn't consider any impact of the large American stimulus plan for water and wastewater infrastructure, which could also accelerate our growth in the coming years.Let's look at Page 6 for the performance of our specialty product business pillar. Even though revenues for specialty products remained fairly stable for the first quarter, our EBAC increased by 30.4% compared to the same quarter in the previous year. The improvement for the profitability is due to a higher proportion of sales coming from the specialty chemicals related products, which are usually characterized with higher gross profit margin products. Not only we are observing an increasing amount of specialty chemical sales, but we are also capturing multiple sales synergies between our business line, Piedmont and PWT and Genesys.These synergies led to new orders and the signature of 5 new distribution agreements in Latin America. Following the acquisition of GMP in February 2021, we are taking more and more advantage of our office and teams located in Santiago, Chile to drive new business opportunities. Our maple equipment product line continues to grow. For this reason, we are ramping up our inventory in order to face this high demand for our products. We are also forecasting a sustained growth in the coming 2 to 3 years, driven by the increase in quota production.Indeed, the Quebec government announced a release of $7 million of new taps, which should increase by 10% to 15% the overall maple syrup production capacity. The addition of these new taps will present a great opportunities to increase our market shares in the coming years. Our specialty chemicals side, the 2 product lines, Genesys and PWT have become 1 single business together, becoming H2O Innovation Specialty Chemicals group. The business combination, while keeping the 2 brands separate, will allow us to gain business efficiencies in sales, manufacturing and product development.Within 6 months, we added 3 new territory managers to interact with existing and new clients in key geographies, such as Southeast Asia, India and the Kingdom of Saudi Arabia. On top of Latin America, we believe that these areas will generate significant growth in the coming fiscal year. Talking about the growth in key markets. We're proud to announce that we started to deliver our PWT specialty chemicals to the largest desalination plants in the world, Taweelah located in UAE.Let's move to our operation and maintenance business pillar, presented at Page 7. Our O&M group is starting the new fiscal year with good momentum with the start-up of 2 new long-term contracts. The first one located in the State of Rhode Island for the city of Warren. For this contract, we are providing the operation and maintenance of a 2 million gallons per day wastewater plant and the maintenance as well as multiple pumping stations both in the city. This represent an increase of $5 million to our O&M backlog. The second contract is for the City of Laurel, Mississippi, which I had a chance to visit a few weeks ago. For this project, a new team is providing public work services to the city.In this case, we are adding $10 million to our O&M backlog with this 4-year O&M contract. As previously discussed, we are in the process of renewing large O&M projects, which should replenish significantly our O&M backlog. We're confident in our ability to renew these contracts based on customer satisfaction.Moving to Slide #8. We see the results of our constant efforts to expand the EBITDA margin faster than our revenues. Indeed, in the last 5 years, the adjusted EBITDA progressed by 37% every year on a compound annual basis due to the solid business execution, strategic acquisition and successful integration. During the same 5-year period, the revenues have increased by 20% on a compounded annual basis, combining organic growth and acquisitions.Moreover, quarter-after-quarter and year-after-year, we are capturing business synergies between our different business lines, allowing us to improve our operational efficiencies, leverage our sales network and most importantly, retain our customers. Talking about customer retention. We see at Slide #9 that we have been able to maintain a high level of recurrent revenues by nature. Going through the pandemic, we validated the robustness and resilience of our business model at multiple times.The strategic decision to focus on growing recurring sales and customer retention have allowed us to significantly de-risk the business and improve our gross margin and adjusted EBITDA. Thanks to the multiple synergies that we have between our different business lines, our discipline in integrating the acquired company and our focus on capturing projects at higher margins and our high customer retention, we have improved significantly our financial performance and predictability.I will now pass it on to Marc Blanchet, our CFO, who will review with you and discuss the financial performance of our company during the first quarter of 2022.
Thank you, Frederic. Now, I invite you to go to Slide 11 to look at the financial highlights for Q1 fiscal 2022. If we look at our revenue, we're reporting revenues of $38.4 million compared to $35 million last year. It's an increase of 9.7% compared to last year. Assuming a constant U.S. Exchange rate during this quarter, the consolidated revenue would have increased by 13.4% instead of 9.7%. So this overall increase is fueled by the acquisition of GMP and also some organic growth. The gross profit margin ratio increased to 28.4% compared to 27.1% last year. This increase is explained by greater proportion of revenue coming from specialty chemicals, which comes with higher gross profit margin.The adjusted EBITDA improved by 15% compared to Q1 last year and reached $4 million, representing 10.5% of EBITDA over revenues. As for the net earnings, we're reporting $600,000 compared to $1 million last year. The variation of these net earnings is explained by higher tax expenses as well as higher other gain and loss resulting from the reevaluation of our contingent consideration. The reassessment of the contingent consideration has been done following the financial performance of GMP that was beyond the initial forecast for the first quarter of 2022.Now let's move to Slide 12, and we'll go over financial results, each business pillar by each business pillar. So the first one is Water Technology and Services or what we call WTS. So the WTS financial performance for Q1 was very strong with 44% growth, both in revenue and EBAC compared to last year. The 3-year strategic plan consists of expanding service activities and prioritizing WTS project with higher gross profit margin. The addition of new resources to expand services activities have allowed us to grow revenue for those service activities by 32% year-over-year.Project has also had a strong organic growth with an increase in revenue of 44% compared to Q1 last year. WTS gross profit margin decreased slightly to 23% compared to 25% last year. It's explained by the business mix. There was more sales coming from water treatment system project compared to the same quarter last year, where we had more sales coming from service and service has higher gross profit margin.Nevertheless, the EBAC remained at 11.1% and increased by $300,000, which is a 44% improvement of the profitability. With $9.9 million of new industrial and municipal projects at the end of the quarter, the backlog of WTS stood at 41.2% compared to 36.7% last year. The backlog is well balanced between industrial and municipal projects. In terms of proportion, it's about 1/3 of industrial projects and 2/3 municipal. The pipeline is very rich in opportunity. As Fred explained earlier, the infrastructure plans that have finally been adopted in the U.S., I think it was last week, should allow the financing of many projects that we have in our pipeline.Even though it may generate many opportunities, we intend to remain disciplined in preserving a decent gross profit margin and focusing on customers that can generate recurring revenue rather than just growing revenues. So now, let's look at specialty products, Slide 13. So even though revenues from specialty products remained fairly stable for the first quarter, EBAC increased by 30% compared to Q1 last year. The improvement of the profitability is due to higher proportion of sales coming from specialty chemicals. Last quarter, I explained the challenge of this business line. Specialty product is a business based on export of products to our distributor networks. Some of our products are manufactured in our facility in Canada, California or in the U.K. and other are manufactured by our suppliers that are based in China, Tunisia and Spain.Due to the messy situation with international logistics, probably you're all aware of it. But as many other companies, we're facing different challenges related to transport and freight of good and related also to inflation and shortage of raw materials. Due to some delays in the revenue recognition at Q4, the revenue of Q1 are slightly boosted by some of those -- that's a mistake in my script. So let's go back to what I was explaining, the inflation of the shortage in raw material. There's still many uncertainty coming from the supply chain and logistics situation. And we're taking proactive measures to mitigate these risks.One of those measures that we took over the last few months is to increase the level of our inventory of raw material and finished goods of our different specialty products in order to be able to maintain the supply of our distributors. As the situation evolves, we will stay agile, proactive and opportunistic to mitigate as much as possible, the risk and differentiate ourselves from our competitors to increase our market share.If we look now at the revenue for Q1, they were pretty stable, as I said earlier, at 11.3% compared to 11.4% last year. The $100,000 decrease of revenue is explained by the foreign exchange. I talked about it, and we're all, again, impacted by unfavorable foreign exchange rate compared to last year. So the impact for that business line is $300,000 on the revenues. The reduction of sales for Piedmont product compared to Q1 last year. So last year, Piedmont has a -- Q4 and Q1 last year, they were very, very strong. This year, they were mostly back to normal. So therefore, business mix here, as I explained earlier, with more chemical sales. So offset, as I said, more chemical sales coming from GMP acquisition, we generated $2.4 million of revenue and other organic growth in the specialty chemical products. So especially Genesys and PWT that had a very strong quarter.So the increase of EBAC is coming from an increase of revenue, the addition of GMP, and improvement of the gross profit margin, which stood at 53% compared to 42% for Q1. And this variation of gross profit margin is -- in EBAC is mainly due to business mix, as I said earlier, high level of revenue coming from chemicals, which comes with higher gross profit margin. So now, let's look at Slide 14, operation and maintenance. Again, this quarter compared to last year, the O&M business pillar was impacted by negative foreign exchange. That's the business pillar that is mostly impacted. The impact for this quarter compared to last year was $1 million on the revenues and $4.1 million on the backlog.But despite this unfavorable foreign exchange rate impact, revenue increased by 4%. So revenue for Q1 of 2022 stood at 18% compared to 17.4% last year, representing an increase of $600,000. This business pillar showed organic growth of $1.6 million this quarter, which growth was partially offset by unfavorable exchange rate. With a constant exchange rate, the growth would have been at 9.2%. The gross profit margin was also affected by timing in some of construction work on map contracts, which caused a decrease in percentage of gross profit margin from 18% to 16% compared to last year.At the end of the first quarter, the O&M backlog stood at $81.6 million compared to $84.7 million last year. We would have seen an increase of $1 million of the backlog, assuming a constant FX exchange rate. As we said on previous call, backlog contains some contracts that are approaching their renewal date, creating important fluctuation on the O&M backlog. O&M long-term contract have a typical duration of 3 to 5 years and have different anniversary dates for renewals. Since we have a very high renewal rate with more than 93% of operational maintenance contracts renewed since the acquisition of Utility Partners.So we believe that we're well positioned to replenish the backlog in the coming 12 months. It's also important to note that the O&M contract of the previous acquisition in Texas for Hays and GUS are not included in this backlog since most of the contracts are with municipal utility districts and are usually evergreen contracts.So let's look at the financial position. So Slide 15. The working capital, which is reconciliated in the Appendix 23, increased by $1.4 million during the first quarter. The variation of the working cap is mainly due to increase in inventory and in contract assets. The increased inventory is partly due to the proactive measures I explained earlier, which is to maintain a higher level of inventory in order to mitigate the risk of the current supply chain matter. The growth of the inventory is also driven by Maple business line, which is currently building its inventory for the upcoming maple season.As for the other working cap items, I won't go over each of them since the variation compared to 30 June balance sheet is essentially explained by the growth of the corporational activities or the impact of the foreign exchange. The net debt, on Slide 16, we can see the evolution of the net debt since Q1 2021. So over the last 4, 5 quarters, we reduced it by $10 million compared to last year. Therefore, on September 30, the net debt stood at $3.4 million compared -- but if we compare it with June 30, which was at $0.5 million, this increase -- there has been a slight increase. And this is mainly due to cash flow used in our operating activities coming for the -- with the increase of the inventory and the higher work in progress in WTS business pillar. So essentially, we increased a bit the net debt used our cash to increase inventory and also to finance the work in progress for WTS activities.Contingent consideration also increased by $800,000. I explained it a bit earlier, but essentially, we had to reevaluate the contingent consideration for the acquisition of GMP since GMP's performance was significantly better. Therefore, we expect to pay a higher earn-out. But essentially, that's a good news for us. It means that they're performing better than what we expected when we bought them. Cash position is still very high at 11.8% on September 30. This balance sheet puts us in a good position to pursue our M&A strategy, which was communicated in our 3-year plan last December.So now, I'll pass over the call to Frederic for conclusion remarks or takeaways.
Thank you, Marc. Let's move to Slide 17 for the conclusion and takeaway. So overall, our company is doing very, very well as we're seeing growth and/or margin improvement in all our business segments. As the recurring revenues maintained high, we are retaining successfully our customers and capturing sales synergies through our multiple sales channels.On the heel of this lasting pandemic, we continue to create value from the acquired companies to strive for innovation, to recruit new customers and found ways to improve our operational efficiencies, which allow us to grow the adjusted EBITDA margin to 10.5% at the end of this first quarter. With our strong financial position, as Marc said, not over leveraged, we can envision the coming quarters and years with companies. We're well indeed positioned to achieve our goals set in the 2023 3-year plan, which is notably to grow the company revenues between $175 million to $250 million organically and with 2 to 4 acquisitions; and second, to grow the adjusted EBITDA margin above 11%.The water industry remains very fragmented and attractive for [Technical Difficulty] water-related companies suggesting a potential upside for H2O Innovation valuation. On the other hand, we want to remain disciplined in the multiples that were paid. And so far, if we look in the past 5 years, we have been able to close 5 transactions with specialty products and O&M companies at affordable EBITDA multiple.Last year only, we closed 2 acquisitions. And we remain confident in our ability to continue our acquisition program as presented in a 3-year plan. As mentioned in my previous presentation, the water sector and its investment thesis is and will remain very attractive for many years. This is driven by strong and sustained fundamental drivers that the planet is currently facing. One, notably, growing water scarcity with more and more drought events in highly developed and populated areas. The second, tightening and more stringent regulations, driven by emerging compounds such as PFAS, microplastic and hormones that we find in the water.Also, the urgent need of investment to upgrade or refurbish or even expand aging water and wastewater infrastructure. This plan in North America is going on these lines. And finally, the constant population growth, which will further push the adoption of water reuse and installation for decentralized water and wastewater plant. All these factors will continue to influence our industry and should continue to impact positively our business.I will now turn it back to the operator for the Q&A session. Thank you very much.
[Operator Instructions] [Foreign Language] Your first question comes from the line of Michael Glen with Raymond James.
So first question, just on the Specialty Product segment. So you're talking about a lot of initiatives taking place there to grow that business. Can you just give some thoughts about how we should think about revenue growth through the balance of this year? Should we anticipate some new business to roll-in, that we could see some upside suppress on revenue? Is there anything there we're thinking about?
Well, there's 2 things we're trying to do in this business pillar, drive and push new products in order to find ways to mitigate in price increase or price decrease or competitive environment. So innovation will allow us to somehow maintain the current margins that we enjoy. Second, as I said, adding more distribution, more synergies within our different sales channels. I think we should be able to position the company in order to beat what the current market is growing at, which we believe, depending on how you look at it for desalination part are not between 4% to 6%. So we're positioning it to accelerate and be able to beat the current market with all these initiatives together. Marc, if you want to add any on the…
No, it's exactly that, Fred. And I mean, recently, I mean, we have launched a new product that was last week, the Piper link for Piedmont. And as we said earlier in the call, we've signed 5 new distributors in Latin America. So those are all key drivers.
And when you bring on these new distributors, is it a function of taking market share? Is that the primary method of growth there?
Yes. So it's taking market shares. Either they're switching, they were distributing, let's say, a competitor product line and now they're switching to us or it's also coping with the growth, because as the overall, let's say, water industry is growing, desalination, water used market is growing globally. And when there is a new plant being put online, this plant requires more components, required more chemicals, more consumables to get it going. So there's the organic growth and the market shares that we're taking.
Okay. Perfect. And then, switching over to WTS. So we're looking at these number of projects that transitions from engineering into fabrication. It does seem like a notable jump that could take place. So are you able to give any indications of what this might mean, how this might impact top-line over the next few quarters?
Well, it's tough to give indication, Michael, because each project has different size and the milestone or the schedule of the milestone of revenue recognition is not something that we expressed, but -- or we disclosed. But obviously, it will have an impact on revenues. We filed on the last quarter. I mean, we've been talking about that over the last year since we pull out that metric last year. So we can see that revenue grew by almost 40%. So I don't want to give too much forecasting. But we should expect to see those revenues at a similar level or even maybe higher as we continue to recognize milestones of revenue recognition.One thing, though, that we all have to pay attention, project comes with a bit lower gross profit margin than service or so as we saw this quarter, in terms of dollar generated, that's great. But just modelized accordingly the gross profit margin for that business pillar.
And then, of the 33 that are in the engineering phase right now, do they -- is there a time launch and should a number of those, can you give an indication of what number of those would transition to, say, fabrication over the balance of the year?
Yes. It's hard to modelize because you may have projects of smaller size, Michael, of let's say, a project of $0.5 million, obviously, the engineering spend on it and the turnaround on the fabrication will be done over -- within 6 months, right? On the other hand, there are massive and bigger projects of multiple millions are currently underway where they will take and they'll be most likely over 2 fiscal years. So it's hard to modelize. We have, let's say, a good, fairly good portion of the current projects I would say, close to 40% that are smaller size that are coming around and would more accelerate the recognition by the end of this fiscal year. And then, we have another more important portion of the product is a bigger size that will impact the current fiscal year revenue and the following one as well.
And on the other hand, we have a -- I don't want to say limited capacity, but we've said it for a long time. We want to stay disciplined in making sure that we address a good project that will make good profit margin and generate recurring revenues. Therefore, the objective is not to grow the top line of that business pillar like super high and relieve that lumpiness that we lived in the past, but really focus on the quality of revenues, with revenues that will be recurring in projects that are flagship projects for us.
Your next question comes from the line of Endri Leno with National Bank Financial.
I believe we can start a little bit with the S&P segment. I was wondering if you can talk about the sustainability of margins that you realized this quarter? Are they sort of a onetime thing? And how will they develop? Or should they be sustainable with the new product that you're introducing?
Yes. I mean it's a great question. Timing seems to me now perfect after all these years. So I think we talked about it previously. We have a group of chemicals in the portfolio that are absolutely in-line with the current challenges that we're facing, the market is facing. There are green chemistries allowing us to make these chemicals at a higher concentration, 11x, allowing also to reduce the cost of freight by 11x. So they are sustainable in 2 ways, reducing from the customers, the cost of freight and then emission, but also because they're made without phosphates. So they're phosphate free chemicals. So we call it the green chemistry. So this is one aspect of really, really right now compelling that we're starting to observe more and more of our distributors internationally are starting to adopt and are looking to have access to the PWT specialty chemical line. So we'll continue to obviously do the both of them. But it seems that right now, we're getting really, really good traction on this product.Overall, the sustainability in the overall market, mostly from industrial customers looking for water reusing solutions is also another driving factor. So projects like we did in the past for Philip Morris, for example, where we had to build on their campus the water reuse facility is an area also that we're starting to see more and more and things that we're going to repeat for other similar industrial customers.And overall, I believe that what we're seeing, generally speaking, in the market that water reuse, so recycling wastewater and reusing it for either irrigation purposes or cooling towers or boilers or other industrial processes, is growing twice as fast as the overall market -- the other market for desalination and wastewater. So drivers are there. We have the technology. We have the track record. We have the products scenario given infusion.
Great. That's good color. I have a question on the S&P segment. I was wondering if you can talk, how much of the revenue delay from the prior quarter? I mean if you can quantify how much of it was recognized in this quarter? And if you've seen any further delays at this point with, let's say, Q2 intended revenues that might be Q1 intended revenues that might be pushed to Q2?
Endri, this would mean that we have a very established schedule, and it's not the case like that. I mean, I cannot quantify how much revenue were delayed. And I won't -- but -- and I understand that you're trying to understand and modelize. But it's really -- I mean, right now, I mean, it's just a matter of meeting the terms and having an order that is ready on the dock and waited for the transporters to come and pick it up. And how much was delayed and how much has still been delayed or have we now created like that delay is just going to catch up. I cannot quantify that, and it's a moving target to try to explain that.
But on the other hand, Endri, I can tell you that it's not that different than what it was on June 30th. So it seems that we're taking into account that there will be, in the coming quarters and coming an amount of products that, unfortunately, will be shifted from one quarter to the other. So what wasn't delivered on June 30th, at the end of our fiscal year, was delivered in Q1. Now whatever chemicals or product wasn't delivered in Q1 will be pushed to Q2 on and on and on. So again, it's not sales that we're losing. It's sales recognition, revenue recognition pushed to following quarters due to the constraint that you well know on the freight.
The other question I wanted to look at, actually, for both WTS and O&M, they had a bit higher compensation costs. And was this what you expected or was it driven by the tight labor markets out there? And as a broader question, how do you feel about staffing at this point?
You said they had a higher what, sorry, I kind have missed it.
Higher compensation costs? Compensation in WTS and O&M, and was this higher, the compensation cost, than what you expected? Or was it driven by the labor market?
Sorry, Endri. I'm trying to understand what you mean by compensation costs?
The SG&A costs were a little bit higher, I guess, in WTS?
So we did some hiring of sales resources, as we said we would do. We were waiting at the end of the pandemic, so we could have those hirings joining the company in order to capture growth. So we had some new hirings. So the objective of those new hirings are sell resources in order to capture more cost, and there has been also some traveling that started. So our sales team start to travel again and meet customers, attend trade shows, which was not in existing last year. So that's where the increase of the SG&A. So it doesn't necessarily come from like increase of salaries that we needed to do. It's really coming from the investment in new sales resources and sales.
The only thing where we have the regional account managers for service and aftermarket business. And similarly, we did the same also with 3 new guys joining the team in the last 6 months on the specialty products as well. So that's why you should see and you will see an increase into expense in there.
And then, a couple more questions on the O&M segment, and then I'll turn the line over. But you mentioned there were some delays in Q1 in construction projects. I mean, have they been caught up and any color you can give there?
Yes. It's really just a matter of timing between -- because we don't do with the same way we do with in projects. So in these cases, particularly base cases, we had the expense, but we didn't invoice. So we couldn't recognize revenue, but we had the expense. So that's the delay there.
And the last question on the O&M. You mentioned the renewing of 1 large project in the prepared remarks. It appears that the bidding has been extended to mid-November from the RFP. I mean is there any color you can give? And when do you think the outcome might be announced?
It's just that the client was asking for agenda based on additional scope of work possibilities. So there's now a number of options that the customer has in front of them to select the final scope of work. So if there's anything, we could see a potential scope increase into our current service.
I think the bidding happened over before the end of the month, and hopefully, we'll get some news, hopefully, before Christmas, and it may even go until January.
Your next question comes from the line of Frederic Tremblay with Desjardins.
I think with the O&M segment. Just wondering if you could comment on the bidding activity for new business, what you're seeing out there in terms of opportunities for that segment?
Yes. I think we have -- I've never seen the team so busy in the last couple of years on new opportunities. So there's 2 things. There's been new, new opportunities that we're currently working on. And as we said previously and explained, in the O&M world, it is equivalent and as important as winning new projects to renew the existing ones. So the amount of time and effort spent by the team to renew the existing large projects we have currently in Mississippi is as important than winning new ones.Now, we're seeing currently activity and growth opportunities in a bit everywhere in our sector in the Northeast, in Mississippi area and in Texas. So I think we'll see organic growth this coming fiscal year for the O&M, and we feel pretty excited about it.
Great. And then, switching to desalination. I know that that market had a bit of a pause recently market wide. What's your expectation going forward in 2022 in terms of level of activity there with contract awards and different projects in that category?
I think the pause now is done and behind us. The GWI, Global Water Intelligence Agency, in U.K. just revealed this week that they're forecasting 2022 as being the largest desalination year of ever for the construction of new desalination plants and water reuse. So the desalination plant and water reuse is going end to end. On top of that, we're expecting to see even continuity of growth for 2023 calendar year.So I think what we're doing right now, what we have done in the last couple of months to add a number of distributors, to push new products to continue to combine our business is going to pay very, very well, not only for the coming years, but the following one as well. So I couldn't be more excited.
Great. And so, I guess, are the near-term opportunities there for you guys more on the Piedmont side and then maybe moving on to specialty chemicals over time? Is that how we should think about it?
Yes. I mean, Piedmont obviously is more sensitive to construction of new desalination plant because they're more component driven. On the other hand, the chemicals is to provide continuously chemicals and cleaners to existing and new plants. So we're seeing growth coming from both opportunities. And this is why we're so eager and aggressive right now in sales and positioning ourselves in Latin America and other key markets to grow and add cousins in these key markets.
And last question for me. I think it was last quarter, you had mentioned some selling price increases to offset the inflation in some parts of the business. Just wondering if you could provide an update on that situation?
Yes, in some cases, we have been able to pass on price increases to customers. On the other end, we do have other contracts that are fixed price. We have been able to mitigate that through our procurement and supply chain and logistic department with various initiatives.And yes, we have been able to also benefit from the O&M side from CPI adjustments on different contracts. So believe me, it's all hands on deck to find ways to mitigate that. And that's why also, as Marc explained, the purpose of us trying to increase a little bit the inventory to be able to benefit from volume, cost reduction, availability of products.So we're taking multiple steps to mitigate price increases and availability of product as well.
Your next question comes from the line of Colin Healey with Haywood Securities.
Congrats on the strong quarter. Just to follow-up on the topic of the increasing inventories to improve deliveries and service levels. Is the supply chain bottleneck that you're addressing really on the logistics side, are you seeing any shortages in raw materials or precursor chemicals that's making it difficult to get stock in shorter time frames?
Well, it's a little bit of both. The inventory ramp-up is mostly driven also by one of our division, mostly around the maple division. We're -- it's highly sensitive to stainless steel. This division is consuming and buying a lot of stainless steel. And we have the pre committed amount of steel that we're buying at fixed buy. So this is where also we wanted to take the advantage. We have increased demand for our product as we speak. We see the season coming up. So we want to be ready and available, and we now have the products available. So this is why you see this ramp up.On the other hand, for the chemicals, the main exposure we have is a price increase coming from phosphate based product. And this phosphate based product, we have been I would say, strategic enough to secure a long-term supply at fixed price with one of our suppliers for the U.K. plant. So right now, we still benefit of the same price. And we have been able to limit somehow the "damages" on this side.But this is why also we have been pushed to make sure we have sufficient products that we can make these products as much as we could at the right price. So it's a little bit of both. I think the mitigation on the chemical side for the profit decrease will be also coming from us trying to push more the green chemistry, which is not phosphate related. So as much as we have seen an increase for the phosphate based product, the Genesys product line, we're seeing marginal increase for the PWT product line, which is not using phosphate, the green chemistry.So I think we have the benefit of having the best of the 2 worlds, having the sold product line. And this is why we're taking more and more advantage of this green chemistry to push it to our customers.
Okay. Great. So would you say that you'd see inventories kind of flowing back then a bit as we kind of -- now that you're prepared for the maple season?
Personally, I wouldn't see that right now. I mean, talking with the procurement department, I mean, he's got the office next to me or close to me to office for me. I mean, I've authorized them to maintain a higher level of inventory. I mean, I remember 3, 4 years ago, we were saying inventory keep it as a level just in time.During the pandemic, we increased it. I think now it's just in case. I mean, we have a lot of revenues that are recurring. There's a recurrency pattern in the products we sell. So those are not going to become obsolete inventory. I think that right now taking proactive measures to increase inventory and making sure that we have the inventory to enter to the demand and buying more cuts the price.So the best defensive measures right now: have products in hand, buy higher -- more product at a lower price for us is our best in strategy. So that's why we've increased inventory. And I don't want to give false expectations and see that inventory reduced at short term.
Your next question comes from the line of Endri Leno with National Bank Financial.
Just a couple of quick ones for me. First, I was wondering if you can talk a little bit on M&A activity. Is this something that you're still actively considering at this point? Or are your hands full with the ongoing projects that you have?
Sorry, can you repeat again because the line cut, I'm currently in a foreign country.
Sorry, yes, I was just talking about the M&A outlook. And what are you seeing out there? And are you still actively pursuing M&A at this point? Or are your hands full with the opportunities that you have in-house?
No, we do -- it's the same somehow the same pipeline that we're working on. Again, we want to remain disciplined. And we have a number of opportunities and clear targets we're working on. What we presented in the 3-year plan saying, we want to do 2 to 4 acquisitions by 2023 is exactly what we're going to execute. We just want to be selective and disciplined again on the amount paid and what these companies bring to the table in terms of synergies and growth opportunities.
Okay. And one last one for me. I mean, you mentioned several times on the call, Fred, on how hot the diesel markets are. And there is recently an announcement by ESI to really increase their capacity for diesel plants in the next few years. So I was wondering if you can talk a bit in terms of what is -- I mean, did you have a representation in the country, would you be able to service it through other countries if you're not there? Or would you need any investments if you'd like to participate in that diesel market?
Well, for us to participate in the diesel market, we're doing it in 2 ways. I mean we're doing it by selling and providing components of different types to EPC companies. So the large Spanish per say, Spanish and French and Italian and American EPCs that are the one mostly building the multi-million dollars of desalination plants of massive, massive size. They are the ones that are buying our components.So this is how we're addressing and participating for the growth. So we do have a number of distributors and agents that are helping us to push these different components to the different EPC companies out there building these large diesel plants.Second, the other way that we're addressing it is to provide the support when it comes to the consumable once the diesel plant is online, they need continuously either anti-scalant, anti-filing products. They need cleaners that will provide -- and filters that we provide on a continuous basis. So it's 2 different type of products, 2 different kind of channels, but dealing sometimes with the same end user. And that's why we need to -- that's how we will benefit from the currency growth and boom that we're expecting into the diesel and water reuse market.
There are no further questions at this time. Mr. Frederic Dugre, I turn the call back over to you.
Well, thank you very much for joining the call today. And I look forward to call again -- to the next call or presentation, which will be December 9th at the Annual Meeting of shareholders. We're going to update everyone on our 3-year plan progress and also present you our ESG plan for the first time. So look forward to catch up with you. Have a great day. Thank you for joining.
This concludes today's conference call. You may now disconnect.