Envirosuite Limited (EVS) Earnings Call Transcript & Summary

[Audio Gap] which is a strong quarter. Again, a good, consistent quarter for the business. And that's broken down with Aviation being $0.9 million; Omnis, or now we call it industrial, $1.1 million; Water, though was fine. EVS Aviation, it had a strong quarter. So this -- and if you look at it over the last 12 months, a 21% growth on PCP, excluding churn. However, there was a churn event in this quarter, and that was with the Australian Department of Defense. As you can appreciate, defense isn't part of our core strategy within Aviation. Our strongest product here is airports all around the world. But Australian Department of Defense has been a customer for a period of time. That churn event is 3 sites and going through a process there, there was a significant change in scope from Department of Defense. And in the end, that resulted in those 3 sites churning. So that will take effect from Q4 moving forward. We'll touch a little bit more on that later on. On the flip side to that, though, we did re-sign Aena. Now Aena is a significant customer for us. And they have got certainly a really strong footprint and we've been able to grow with them over the many years. They went through a rigorous approach to their RFP process, and we came out winners on that. So that's a 3-year, plus 1, plus 1 contract. That is very much reflective of our core strategy as well. Strong project sales as well. So that's a good sign for the business. The Q3 is certainly strong and the outlook for Q4 is getting stronger as well. We also decided to get some good traction with our partners around the world. So we're certainly working now closely with GHD and with SGS on multiple opportunities, which is certainly a positive movement. Our land, expand and scale has continued to pay dividends, Aena being one example, but also we've now got sites coming through in South Africa. So let's go a little bit deeper into the aviation sector. So total ARR of $34.5 million, up 8.5% on prior corresponding period. Again, 21% will exclude the anomaly on the churn. So with the multiyear contract with Aena, let's go into that. That's EUR 8.9 million TCV. Now that is the largest airport operating group in the world. And we've been a strong supporter and partner with them. We're also rolling out InsightFull as a community engagement tool. You would have heard us talk about this software product before, but they are at the front of rolling that out. And there's a strong European Directive 2003/4/EC, which is really talking around noise and the community. And something that, from AENA's perspective, this is an important part of their business model. Carbon emissions also was an important part in their business model and they have been very proactive in the way they do this. So what we're seeing with Aena is atypical of our customer segments around the world. Going into the churn event for a little bit, so this has been historically a great customer for us and Department of Defense. We are still contracted for 2 fronts, and that goes into FY '25. However, defense, as we've said, isn't part of the core strategy of the business. It is your normal commercial aviation efforts. And so that's the part that we're going to continue to focus on within our aviation sector. We will continue to deliver the services to Department of Defense and make sure that we're providing the best service we can. In events in the past where we haven't lost sites, we've also been successful in winning those back. So certainly our ambition to be back in the front seat of this front in the future. But for the moment, we will continue to focus on this area, the airport segment. Interestingly, we also had a new site signed up in China. Now we're actually doing that through a partner over there that we've had a relationship with. And so that's a meaningful win for our APAC region. It also is highlighting additional opportunities that are going to come out of China in the future with this partner. So some positive momentum in Aviation, and what we're seeing from Q4 and also leading into Q1 for next year, is a really healthy pipeline of new customers coming on board and also upsell of existing annual renewals. In the industrial sector, we had total sales of $2.5 million. So that included the $1.1 million of ARR and the balance there in project sales. So that brings us to $20.6 million in ARR, up 24% on prior corresponding period, as we've maintained on this ease the growth engine of Envirosuite. And once again, we've shown a really strong quarter. The project sales, the way to read that, is certainly to have a look at the way that, that will then generate into ARR and the commitment from customers into the investment into our technology and how they use it on their sites. So this gives us a lot of confidence that this trend is continuing. In the U.S., there's a term environmental justice. Now this recent legislation has come in and is benefiting us in a significant way. So what we're starting to see is facilities in waste and wastewater actually driving much stronger demand, particularly in the U.S. So we'll continue to support the legislation and help our customers achieve what they need to achieve on that path. Americas contributed 50% of growth in the industrial sector. Again, a consistent approach there. That's been the heartbeat of it and it will continue to be. We also had our first aviation customer use Omnis. So this happened in the U.K. And we have been working with this particular customer to see how air quality will play a part. Now there's a lot of learnings that will come through this as the first aviation customer using Omnis, but we hope that this will scale out to many more customers around the world. Mining sector is strong, has been strong for us the whole time. And so what we're seeing certainly within that mining sector is a strong value proposition that's also a strong average revenue per site basis. It's also driving additional project revenue coming through. We've now signed a site in South Africa, and that is with a global mining customer. It's part of our land, expand and scale. So that's an exciting opportunity for us. Again, we're leveraging partner network down there to actually make that a cost-effective, scalable and repeatable model. Churn has also reduced in this quarter. One of the things that we're focused on as a business is to remove the low gross margin contracts that we have in place as well as the type of deployments that were highly costly to support. So now we're starting to see that tail off, and the reduction down to 4.4% is a good indicator of that. The customer story we went with in the release is Byers Scientific. Now you probably remember the video that we've done on Byers Scientific, but this is where we're working together with an older mitigation company to actually reduce the amount of chemicals to get sprayed. Now this is absolutely within the environmental justice and waste facility and reducing the impact of that. So this customer has now significantly expanded the use case of the Omnis product. Water was flat from a new sales perspective. And whilst that's disappointing in isolation, we are working on multiple opportunities around the world and is simply a procurement process. Certainly, there's a learning with the industrial customers and the infrastructure customers that procurement does take time and effort to move through. Albeit, once you're contracted in, it becomes a very sticky business model. But the important milestone in Water is now having the reference sites in all 3 regions: so the Americas, APAC and EMEA. Starting off in Paris. Paris now gives us a reference site. So they're using the SeweX product. Their understanding is providing the right information to the customer group. And we're now able to use that as a reference and show other European customers how it's working in the city of Paris. Paris itself is also now looking at how they can expand this solution out to other parts of it. In North America, we have Kalamazoo that is starting to use this. And we also have the POC that we have done with Evocra and so that is also starting to show positive insights. And I will be going on a U.S. trip shortly, and hope to meet some of these customers and see how we can actually progress this into a meaningful relationship. In Australia, Water Corporation has continued to be a strong supporter of the product and rolling that out. Also been a strong advocate in the Australian water utility market, which is an important one. That collaboration will continue to move through. So the customer story for this is around SA Water, I recently did meet with SA Water, and we spoke about the problems that they're trying to address and the issues around H2S and also odor is a significant one. And so we're happy to work with SA Water and support them on their future growth plans. Moving to project sales. Project sales have been strong. So certainly in the first half, they were a little down, but Q3 and a little bit on outlook in Q4, we're starting to see really strong traction in that. Q4 has historically been a really strong quarter for us, and we're starting to see that, that is again going to be the case in this financial year. The project sales is largely driven through the aviation sector and also the mining sector as well. So our team have really been focused on making sure the products are being -- are able to be implemented and scaled efficiently, effectively and also give value to customers in a timely manner. That's been a really strong focus from our project teams. We have numerous new projects coming online at the moment. Our recent project win in the ANSP that we spoke about is absolutely on track and getting really strong engagement from the customer. So hopefully, we'll be, in a short space of time, [ double-down ] on our success stories around that and the progress that we have made. Customer success is a top priority for us, and we do engage with our customers all around the world. So if I touch on the aviation customers, we've got really strong engagement with our customers, and certainly from our top 10 customers within the aviation sector. We've got good strong engagement. We know where we're going, and we're seen very much as a trusted partner for those customers. In mining, we've got very strong product validation. And as you've seen, with water, we're getting strong efficacy around the world. So look, our outlook is unchanged. We are committed to the transition to adjusted EBITDA in FY '23. And even with the churn event, this does not change that. We've been focused on cost management through the year, which has got us to a strong position to end the year strongly and well positioned for FY '24 in that continued path as well. We are continuing to renew customers, and we've got line of sight on several of those in Q4. We'll be working through that. So I feel comfortable in the fact that we have got strong engagement with our customers, a really strong quarter. We'll finish Q4 very strong and close out the year in a healthy position than where we were last year. So with that, we're really wanting to take some questions from the floor. There is a Q&A function within the program. So you're able to write that in or if you've got questions that you'd like to ask, please feel free to raise your hand and we'll come up to you and we'll take that question.

Thanks, Jason. [Operator Instructions] Got a few questions that have come in already. [ Paul Bridgeford ] has asked about competition in the Department of Defense. Would you like to comment on who picked up that business and perhaps some of the history?

Yes. So we don't necessarily name the company, but they're certainly from Europe. So it's a Dutch company and is operating primarily out of there. They have got some customer segments in there. They tend to operate on the smaller end of the airport space. We don't understand necessarily why there was a change of scope from Department of Defense, but that certainly did happen.

A question from [ Lachlan. ] Do you think Q4 can hit the largest new ARR growth quarter for the year?

Well, certainly from line of sight at the moment, Q4 is very strong, and we are looking for a record quarter. Obviously, there's time involved with procurement. In the last quarter, we haven't got that one right. But certainly, the pipeline supports a very strong finish to the year, and we think Q4 probably will be a record quarter, with that given guidance.

Chris Savage has raised his hand.

On the last quarterly call, you said there were a few potential contract wins that got delayed. Did they then fall into Q3? And if so, were your expectations that the ARR -- or the new ARR in Q3 would have been higher?

So certainly, with Aena, so Aena was originally forecast a little bit earlier, but that came into Q3. So that was a good solid win for us in that quarter. There were those, some water deals, that we're still working through. We did anticipate that would be closed into Q3. And it's not that we've lost them. It simply is the contract procurement process.

Okay. That's a good segue into my second question around water. Is there any reason why it's taking longer than perhaps thought to close some of these deals?

I think reference sites in the different regions is certainly one of those factors. And so I think the key part there is going to be having the reference sites in place. And I think that's really what makes them, how do you actually get the reference sites in and so that you can take the customers through so they can see it. And we also understand that sort of jurisdictional process. The other part is you're dealing with some large -- very large infrastructure companies. So when you look at the desalination play for Optimiser, these are some of the world's largest water utilities. And so you're bringing in a SaaS product. They are generally used to buying pumps, valves, pipes. And so you're bringing in AI and deterministic modeling. And so even from a terms and conditions perspective, there's different parts to it. We are working proactively in ways to reduce that time. And so that might be different go-to-market opportunities. There might be different terms and conditions that we engage on. So they're probably the 2 key things, Chris, that sort of come to mind.

And if I just bring up Water Corp. They were obviously quite an early adopter with their proof of concept. And then they seem to roll out SeweX across several sites, but then they seem to have stopped. Is that a fair comment? And if they have stopped, why so?

Yes. I mean it depends on when they stopped. They've certainly stopped adding re-sites, but what we have been working on is deploying those sites. And so we're in the early stages of doing this, and I remember back to the timing, SeweX was very, very early release to the market. And so what we have worked on in the last 12 months is the ability for SeweX to connect into sewer networks. And in some of those situations, you're dealing with hydraulic models. So we had to work with them to actually understand the type of hydraulic models that are dependent. So what we've now got is a model that can quickly turn on sites, understanding the customers' data set. So we have worked with Water Corp. to make that scalable, repeatable and time to value. But that's not to say that they do not plan to scale it out further. It's quite the opposite. We are working with Water Corp. on how to solve this problem and to far more catchment areas in West Australia.

And then can I assume that one of the water deals you're trying to close is with SA Water?

I met with SA Water myself. So they have got their first site up and going, and there's certainly other opportunities going through there. But other opportunities are actually in the U.K. and in North America.

A few questions relating to cash flow positivity after achieving the adjusted EBITDA. When do you think the business will be cash flow -- and this is from [ Mark and Jake. ] When do you think the business will be cash flow positive?

Thanks for those questions. And as Jason pointed out before, we are holding firm in terms of the reaffirmation of our transition to adjusted EBITDA profitability. And likewise, as we exit FY '23 and going to FY '24, we see the transition occurring around sort Q3 of FY '24. What we're in a position with at the moment is we've had a strong start financially to the second half. So certainly, January and February, we had -- we were adjusted EBITDA positive in those months. So again, a very, very positive start to the year. And in terms of the transition into cash flow accretive, clearly, it's the time to absorb the capitalization of our R&D development. And we -- and I've said in the past, we see that as being around 5 to 7 months post that transition. So that's why we're looking at around Q3 is when that inflection point occurs.

A question, an anonymous question, but I think we can answer it anyway. In terms of large accounts, are there other large accounts that the company has looked at, I guess, such as concentration risk around very large customers?

Yes. So look, we're in a fortunate position with our large customers where they're all in multiyear contract agreements. So those are highly secure, and we are very confident on the major customers, both in mining and in aviation.

Ross, if you're unmuted, you can pose your question.

My question was around the concentration side as well, which has been addressed. But I guess the second one was around can you kind of make any general observations, I guess, around current macroeconomic conditions. I mean I know your clients are likely less buffered by short-term movements, but maybe some comments just around how you're seeing the market and any change in sentiment.

Yes. Look, I think if you look at the Americas on this one, so Americas has continued to be strong, both North and South. I think the underlying environment of justice will continue to be here. That is strong legislation that can address. I think mining has been robust, and the outlook there is strong. We're actually starting to see some companies come to us because they need the investment. So they need to address ESG principles to attract investment. So I think from that, it's strong. Europe has been a little bit hit miss. We're starting to see we come out of that and a bit more confidence to come through. Aviation, though, is certainly very strong. So for us, we are market leaders in this space. We've got a strong pipeline. And the demand in the aviation area is stronger than what we planned for at the start of the year, which is good. And we've been in a really good position to benefit from that. And certainly, the focus now in Aviation around net zero, and we know we've got unique product set in this. And so that's a big market for us that we know that we can grow through. And what we did within our ASP example, we know that that's repeatable through Europe, through Asia and through Americas. So we have highly confident in that space.

Yes. And obviously, making the observation around the churn event, but if we put that to one side, it feels like the fundamental business delivered almost identically or exactly how you were hoping it would maybe a little bit of traction in water. But I mean outside of the churn event, is there anything else you are disappointed about? It seems like it was quite a robust result ex that one event.

No. Look, certainly, if you look at Omnis in Q2, that was a bit of a downbeat. It was good to see that come up to $2.5 million in new sales. So I think Omnis is back on line. I think again, indication there's strong support for that. So certainly Omnis was, probably for me, the highlight in that one. You can't -- it's -- when you bring a product like Water to market, the validation that we're getting in Paris to Kalamazoo to the vocal partner, this is so strong. So to get that validation, I think, is incredibly proud. And obviously, the product, the big one, Aena, that's a big contract, 3, plus 1, plus 1, builds on a long-standing relationship. And we know we're helping them strive forward. So certainly a really focused customer process. Look, we're happy with the quarter. And to be honest with you, we're happy with the outlook for Q4 that we're going to finish in a strong position.

We've had a couple of questions just on DoD and the nature of the services that were being provided to them, perhaps some commentary around aviation and the direction and the type of services we want to be providing to customers. Jason?

Yes. So the question there is would we go look for growth, sustainable growth, repeatable growth and where there's a large customer base to go through, right? So Defense is not an area that we really want to focus our product set around. The commercial aviation is a large growing part, and I want to come back to this net zero. Airports and the aviation industry in general faces a huge challenge, right, to address the greenhouse gas emissions that we're in. And what we're doing to be able to take the community, the noise, the carbon emissions and in flight, the efficiency of coming in and taking off, will be a strong driver in that commercial aviation space moving forward. So that is a very large market for us, and it's one where we've got clear competitive differentiation, And we will continue to work with the customers like Aena. But even Philadelphia, that we've won last quarter, getting those up and working, those are strong ones as well.

A question from [ Anup ] regarding the waste facilities in the U.S. Could you provide some comments around if they are part of large groups? And what are the sort of expansion opportunities with customers in the U.S. in the waste and wastewater sector?

Yes. So waste is a -- it's an interesting segment because if you look at the scale of the problem within waste, it is quite significant, especially in the U.S. We are now dealing with the majority of the waste management companies, and we're going in to work through what is the right approach for each one. Now as you can appreciate, and the reason we don't name the waste management companies is because they actually inherently are in the business of making product. And so what we're doing is we're working with them to understand odor mitigation strategies to be proactive in that part. They know they've got a significant problem. The U.S., in particular, has got significant scale to it, but we have got good engagement with those enterprise-style customers, and we're building the relationship and the value proposition to address that market segment.

Perhaps time for one more question. It's from [ Jake. ] You just noted strong results, barring the churn event, but his question is related to water. What is the sort of, I guess, general plan in terms of growing the water Business? I think you made comments about being alive and our product in each of the regions, Jason?

Yes. So the strategy has always been the same one, find a customer who is an early adopter for exciting, disruptive technology, which we have. And we'll talk through SeweX and Optimiser because they're slightly different. So find that customer with Water Corp, work with them to make sure that we build value, work with them so we understand the business model that drives their strategic objectives. Work with them and then enable them to be the advocate in the local market. And Water Corp been a wonderful customer for us over the last 12 months. We've taken that model to North America. Now North America has a different utility infrastructure and customer base, but understanding what the nuances are. That's why we went down the path with Evocra in the U.S. to actually work with a different channel to market that have got significant scale. And just to remind you, again, Evocra was in a very sweet spot. They were bought recently for USD 7.5 billion, and they play within that water industry. So they're a meaningful important customer. And then going into Europe, having something like Paris and the sewer network, as you can appreciate, has a very different age life than what we have here in Australia, and has different problem because of different climatic conditions as well. So understanding that. So now we've got that, we can actually start to roll that through. Optimiser, strong ROI, and that is all around return on investment for the customer, driving energy reduction and a chemical dosage. We've got those reference sites we're working through and we're working with our world-leading desalination plants who are wanting to reduce our energy and be proactive in their impact to the environment. So that's the approach. We are also working with partners. Sada recently joined us, and Sada has been very busy for the start of this calendar year, and he's working with his industry contacts, industry players, leaders in that. And so we're getting exciting traction. And we hope we can update more to come in the coming quarters on that.

Thanks, Jason. That's all the questions we've had submitted. I'd invite any other investors, who have further questions to send us an email at [email protected], and we'll happily respond to those as well. Perhaps some concluding comments, Jason?

Well, just to wrap up, I think Q3 was a great quarter, barring the churn event. I don't want to be dismissive of it. It's an important customer, but also Defense is not equal focus. And we're building a business for growth. We're bringing business for scale and it has a strong gross margin contribution. And so that's where we are putting our effort behind. Water, a very interesting space, and excited to share some developments over the coming couple of quarters. Finish off on this, it's a great growth engine at the company. It's holding a significant problem -- a horizontal platform that's got huge scale potential. So it's our opportunity to get in front of customers, which is what we're working hard to do. So with that, it's been good. I want to thank all Envirosuite staff around the world for their contribution and also the Envirosuite customers who stick with us and who are working in that trusted partnership arrangement.