Envirosuite Limited (EVS) Earnings Call Transcript & Summary

Welcome to Envirosuite FY '24 Q1 sales update. Today I'm joined with the Justin Owen. We're excited to present our results today as we have done previously and we'll be using the same format as the last few quarterly updates. So for those of you who want to ask questions, there will be a period of time at the end, where you can raise your hand and ask questions as well as if you want to then write them down, Jeremy will take those, read them and put them forward. So we certainly encourage questions. I think there's some good content today that we wanted to go through and the Q&A generally brings out some good insight. So I encourage you to do that. I might just spend a few moments talking about who Envirosuite for the new investors who have come in. And just to reinforce, I guess what we are doing and how strongly we believe in what we're doing as a company for the existing shareholders and the impact that we are having around the world. So first of all, we are a technology company, we are an Australian based technology company, and we're very proud of the technology we build out. But we're also driven by purpose. And so we are the leaders in environmental intelligence. And we believe that this is absolutely key to improving the well-being of people and the planet and driving prosperity across all regions in the world, this is truly a global opportunity for us. But I said we're technology company, right, so this is underpinned with strong scientific differentiation. And what we will demonstrate in this quarterly and other releases is just a strong competitive advantage that we do have with our customers. We're focused on 6 key customer sectors, aviation, mining, industrial, waste, wastewater and water treatment. And what we want to do is being #1 in all of those. In aviation, we already are global leaders in this by a significant margin. And what we do is, we are helping some of the world's leading customers from NASA to BHP. We've become an intrinsic part of efficient modern day operations enabling data through information into knowledge any decisions and as we will continue to focus our efforts. So let's now turn to some of the key results from Q1. So the key headline for me is $60 million of IRR. It's a great result and a big breakthrough for the company. We've been working towards this for some time and it's great to see the results coming through. I think, an Australian company of $60 million of recurring revenue, we think is going to be a strong lead for us and positions us for the good growth and to get to that profitability target as well. The quarter resulted in $3.7 million of sales, which is up 9% on PCP. You'll see on the chart there, on the left, we had a 2 million IRR quarter for Q1. As we know, as a global business, we are exposed to the northern hemisphere holidays. And once again, that's come through, but this is in line with our expectations, and certainly our forecast. So right in the middle of what we wanted to have there. What was good as well in this result was the contribution from all of the products and all of the regions, which is great. So let's focus on aviation for a second there, new IRR of $0.6 million, which is good. I know that we had an incredibly strong Q4 last year within aviation, so to again, continue that momentum through is good. Industrial had $1.1 million of new IRR. And we'll get into a bit of depth when we get onto the industrial page. But again, just shows the confidence from our customers. And again, America has had a strong contribution into the industrial sector. Water also had a good quarter. So we're new IRR of $0.3 million. And that's up 45% on PCP. So good results, we're starting to see some solid momentum in water. But I'll give a bit more color to that later on. And again, I want to reaffirm this and Justin will spend time later on, but, we do want to reaffirm our outlook to deliver positive adjusted EBITDA, this capitalized development on a run rate basis during FY '24. So that's our focus. Our strategic goals are very much aligned into that. So that's how our focus. Turnover last 12 months of 8.1%. But you will remember we had a one-off with one customer. If you normalize that through, it's 2.1%, which is I think a very good in the sector that we're in, I'd say that's world class, in fact. So our long term average is in line. So I think the path for me, right, is that coming back to each geographic region, even though we were exposed on the northern hemisphere holidays through there, we did have a good solid contribution from EMEA and from North America into that part, we weren't just then relying onto APAC, which is good. I think the other part is adding in new customers and I'll spend time in giving a bit of color to those. And our business model is predicated on 2 key parts, one, look after our current customers and make sure we're providing good strong technology solutions for them and enabling them to meet their requirements and grow with them with new product introductions coming through. We've got some example there from existing customers where we've uplifted them. But the other part is adding in new customers, our land expanded scale strategy is paying dividends. And we'll see that we are focused on customers that can scale, but also that have got significant problems to solve. So I think those were the two key points for me. The growth, 55% of new IRR coming through the Americas region, we're consistently seeing that now come through. So we as a management team are certainly aligned to support growth and the tailwinds, consistent tailwinds that we are seeing in the Americas region. So we move to aviation, you see the point 6 that I mentioned before and you'll see that from Q3, Q4, Q1, you started to see a solid growth curve there, once we took into the effect of the churn of defense. So we're seeing that aviation has got a good pipeline moving forward. That's not just for the next few quarters, but actually for many years. One of the things I wanted to touch on here was our Forum '23, which we held one in Europe, and one in North America. I attended both and had the privilege of meeting with many of our customers and understanding firsthand the significance of the problems they're dealing with. And what was clear to me on many [indiscernible] that noise continues to be an incredibly pressing issue for airports to invest into as well as the emergence of net zero targets. And this is where our carbon emissions are now ANSP solutions, will really start to pay dividends was absolutely validated in both key markets there that we have got strong customer traction, that we are solving a significant problem. And they see us as the global leader. So that was good. We did promote through different means about customers getting up and talking about their own journey and how they use carbon emissions or how they use entitlement. So that's certainly led to not only a strong pipeline for the rest of this year, but also for future product development as well. So I think that was very good. It was attended by 87 users and to get to have that experience on the back of that. So the new normal post-COVID and we probably won't mention that word anymore, but it is in front of customers and that clearly is going to generate some activity with the customer. So that was really good. Glad that we're able to do that. So total sales of $1.7 million, I said $0.6 million in IRR. So we did also have a -- we called this out on our key aviation customer in the U.K., they don't want to be named at this point in time for different reasons. And it's always going to be one of the parts here that we would love to talk through who the customer is. But in some situations, we do need to respect what they're trying to do and their privacy around that. But in this one, they recently published this comprehensive noise action plan. And so what they have got there is a fairly clear view of what they want to do in the next 5 years. A key piece of this plan will be facilitating a 2-way dialogue with communities. And this is around the changes to the U.K. civil aviation authorities airspace change process. And how the community is getting impacted to this? If you go back to our core strategy, right, we do have a clear thing that we want to engage with the customer being industrial governed in the cross section of environment and community. And so insightful product really is key to this solution. We did showcase insightful at our 2 forum events, and it was very well received by all customers. But just to give you a bit of a color to Insightful, this is a cloud-based solution. There's no instrumentation to go in, it sits on top of the airport infrastructure. And so for us it's a good addition, creates increased share of wallet, and more meaningful integration with our customers. What it does is, it extends the functionality of existing [ ANOMs ] and web track services at the airports and it presents comprehensive noise and flight track data. So that if you're a community member in here, you can actually start to understand what the impact is here. So this is certainly on the back of the new normal people working from home, we're seeing solid growth into Insightful and strong demand. So we're really pleased with the aviation result for Q1. Now moving into the industrial part, so I want to sort of come back a little bit to our strategy here. And just to remind people, so industrial is our cloud-based environmental intelligence platform, which takes in noise, vibration, air quality, water quality, dust, odor, and a host of other environmental inputs that we want to bring in. And that's providing real time understanding of what's going on within the site. And how that site is interacting again, with community with the environment and with stakeholders. What we have been focused on for the last few years is improving the gross margin in this particular product segment. And so we've been doing that selectively through improving our infrastructure our go-to-market strategy, et cetera as well as in focusing on long-term projects with customers. So mining is very good, right, because mines are going to be operating for 20 30, 40, potentially 60 years. Waste facilities are in that backup as well, wastewater facilities in the industrial. So we're really focused on to those 4 key sectors. And that is clear to us that we are consciously going down that path. So for us now to have in this quarter, $1.1 million of ARR is a good solid start to it. Now we did mention that staff have been sent on PCP, but as you'll see from the chart on the left, you'll see an up and a down. We could be adding a significant mine site in one quarter and not the next and now we'll have a material impact on to how that number comes through. What we want to be seeing is new sites coming on with new customers and new sites with existing customers. And that's exactly what we did this quarter. So new customers, VKG Oil, which is a major industrial enterprise in Europe, that was really good to see them come on. Another one they're continuing on in the mining part was Capstone Copper, which is a copper producer with operations throughout the Americas. So again, [indiscernible] expanded scale opportunity here is prove this out with the first customer. And we'll first start with this customer and then scale up through their organizations. The other part there is we did actually continue on with Braskem as well. So we're starting to see this existing customers grow through. In the Americas, we are focused heavily on waste, it is a significant market in the Americas for us. And you may have seen through the last couple of quarters, we're continuing to add science. So this is a great testament to the focus that we've got in the Americas to market traction in the value proposition that we've got there. There's no doubt the Environmental Justice Program is also helping us to create a greater awareness. But adding in Ada County landfill, Atlantic County Utilities and the City of Des Moines. So that's, again, some really good wind through, should remain steady at 4.8% as well. Spending a little bit of time here on the VKG Oil as a case study, it's an interesting one and encourage you to go and look, but they're the largest shale oil producer globally. And we have good engagement went through with them and we're able to work through a strong connection with them. And it's a path that I would encourage you to understand the big scale that we have got within that shale producer. So fugitive odor emissions that are common to in shale oil production process and that's kind of up to communities and also their environmental regulation as well. Moving to water. Water is starting to see some good momentum coming through. So if you look at that the ARR of $0.3 million last quarter, we had a $0.2 million, this is predicated now on an enterprise agreement with Ion Exchange, which is a leading water treatment solution company in India. So the first part of this agreement is to get through sites in, but we have and coming back to strategy, in the past we have looked at dealing with governments and municipalities around the world. And in that, we have got the engagement with them. However, it is taking a long time to go through the procurement hurdles. So 4 or 5 months ago, we did pivot and we are now focusing in on more of a B2B arrangement. So Ion Exchange, they operate facilities on behalf of customers or themselves. And so they've got a material net benefit if they're able to improve the operational efficiency of those water facilities. Within that, what they've done is they've recognized that we've actually got some very good software that can actually help them scale and bring efficiency. So on the back of this, we see considerable growth opportunity in India. They have worked very closely with us. And what we're doing is we're using our designer platform. So this is actually attacking a different market segment than we have in the past. So going back to the high level, we have our SeweX, which is going into the sewer networks. We have our optimizer that's gone into [indiscernible] into Hong Kong, into PUB, Singapore and designer is in the smaller type facilities. Now the benefit here is there's literally tens of thousands of these sites around the world. So we're excited to work with Ion Exchange. And what you will see is some continued news press on that. I've had a couple of inbound requests this week on the back of our posts on LinkedIn, where we are promoting now this early engagement with that. So certainly encourage you to follow the story on LinkedIn and what we do. And we'll also keep you abreast of the information as we continue to scale. We were pleased with the water result into the quarter. Turning to project sales here and giving a bit of color, it looks like a good mountain to climb and come back down. I want to reiterate the importance of project sales to Envirosuite. Our customers are going to engage with us on a couple of different parts, certainly in the aviation sector, there will be lumpy projects. And we may be going through and putting in quite a number of our instrumentation, IoT devices, or eGauge, to do a bit of a project work at the front end. Now we're never going to have a linear curve on this, this is always going to be lumpy. It will go up and down. But what we are seeing, which is an important trend line, is the growing need to do this project sales. And so we will continue to do that. What's good there is it does flow into revenue in a relatively short space of time as well as into profit for us. We are focused though our core metric here is our recurring revenue. So the one thing that we want to be measured by and that you should follow us through is the growth in that recurring revenue moving core. The project sales becomes an important element on top, especially as we transition into that profitability target in FY '24. So we're pleased with the $1.7 million on there. And again, from a pipeline and outlook perspective, we see big product sales moving through. Moving to outlook and then I'm going to pass it to Justin. So we are seeing growth in all products which are, aviation, industrial and water, which is great as well as all regions. And so that's good. There's strong demand from Americas. As I said earlier, we'll continue to invest on that path. But the capabilities that we have made the investment in the last 12-18 months, has also been around deployability and scalability. So what we are starting to see now is a gross margin improvement as well. Today is not about updating on to the gross margin or the revenue that we're turning on. But we are starting to see some good solid underlying improvements into that as well. The pipeline is continuing to build. We normally get a question on how's our pipeline looking? We're going to take that one proactively today. The award of business-to-business has grown. We have got a dual strategy now to continue to work with the key municipalities around the world that we feel good relationship with. But we are focused really on where is the short-term revenue, where is the short-term ARR as well. And so that's going to be focused heavily around that business-to-business arrangement. In the industrial sector, mining and waste are probably the 2 key stroke brackets for us. Mining continues to be a strong growth curve for us. We are proving this out with our customers. Customers are also coming to us now more proactively with things that they need to see in the platform, which is unfortunately aligned to our road map. And so we're supporting our customers on a trajectory of that. And then lastly on the aviation part, having the 2 forums in Europe and in the U.S., they certainly got a stronger engagement with our customers. So we validated our current software solutions that we have got and we can build on our 188 sites. And as we continue to move through the year, that number will increase through as well. So we see a good finish to the financial year '24. But more importantly this is a stronger, stronger pipeline for '25 and '26. So we see a strong growth. Justin, I'll pass to you.

Thanks, Jason. As Jason mentioned, today is a sales update. And we will of course provide at the half year more detail and insight into the financial performance of the company and provide some further outlook at that time. However, in the outlook statement, we have reaffirmed that the company will deliver adjusted EBITDA, less capitalized development costs on a run rate basis during FY '24. The key point to note there are in making that statement, just want to call back the FY '23 results, where we recorded cash inflow from operations of a positive amount of $750,000, representing an improvement of $3.9 million over FY '22. And in FY '23, our cash outflow on capitalized development costs was around that $5.8 million. So this improvement outlines the underlying financial trend of the company and supports our basis and our results to date on where we see FY '24 tracking.

So what we might do now is turn to Q&A. I can see there's a couple on there. But Jeremy, why don't I pass to you?

Sure. Thanks, Jason. And thank you, Justin, for delivering that update. I'd start just by reminding everyone to ask questions, you can either raise your hand and I'll come to you and take you off mute so you can post your question. Alternatively, you can use the Q&A function that Zoom has at the bottom of your screens and submit a written question that way. We did actually have one question that came through via e-mail ahead of the session, which is the one I'm going to start with today. So the question is to please address the issue of why the marketing strategy and the communications with the investor market isn't coming through and not being represented in the share price? Do we have plans and one of the plans to evolve and develop our communication strategy with the market and with potential investors?

Thanks, Jeremy, I'll take that as a starting point. I'm sure Jason will have some commentary as well. We've delivered some solid, solid results and performance over the last in [indiscernible], certainly 12, 18 months since we've all been on board. And we looked at the results and improvement over the year in terms of what we've said, we've achieved the growth in ARR and the underlying performance of the company. I think it's fair to say if you look at the global trends in terms of share price, there's a number of commentators who talked to it and respond to it and we are somewhat, if you like surprised in terms of where the price is given where the results of the company have been. And also, I guess it reflects in to a certain extent, global macro trends. That said, we are always looking to improve and focus and increase our market communication in terms of industrial relations -- investor relations, sorry, to ensure that we get the right messaging out at the right time to the right audience. So suffice to say it is a regular topic both at the executive level and we also take support from the Board in terms of making sure that we are aligned and effective given any constraints that we may have in getting effective communication out to our investor base. Of course, we're happy to take suggestions, but we do work quite diligently on that one in forums like today to ensure that we get good coverage.

Yes, the only other thing I'd add onto that one, we know that the -- when I travel around the world and I talk to customers, the impact that we are having with these customers and we emphasize NASA to BHP. We had NASA actually talking at the forum. We are having a significant impact with our customers. This is long duration, there's multiyear contracts moving forward. So the business is well positioned for long-term growth, but we are hell bent on getting that message out to as many people as we can.

The next question is a written question that's come in from [ Steve Nelson ]. Can you give us an insight into new customer growth as to above and beyond what was been mentioned already during the update over the water, please?

So the new customer growth as far as number of sites, or I'm still starting to get a bit of cast of that. So I guess the part there is certain from industrial, there's at least six sites that have been added in, which is quite good. Water, we've had 3 sites here with Ion Exchange coming through. So that's the key parts onto that one. What you will start to see is a rapid acceleration on the Ion Exchange with sites coming through. And we'll work out what the right metrics are to report on that moving forward under that enterprise agreement. Also understanding it is commercially sensitive, we want to respect that with Ion Exchange. But the industrial growth is good. What's the other pleasing part I'd suggest is the increase on the ARR of some of those existing industrial customers. So it's not just with the new sites.

Great. Thank you. Next question to come through is around industrial. While there was solid new ARR, the total ARR has not moved according to the charts that we've run through. So can you give a little more color around the customers that have churned off and the reason for that occurring and are there more contracts like this ahead?

Thanks, Jeremy. So in terms of churn overall, we've seen an 8.1% churn on a last 12 month basis, including the churn event that we noted in Q3 last year. Excluding that event, churn as measured over the last 12 months was 2.1%. And we continue to work on reducing this. We see the churn event as a good trend. Couple of things to note here is in terms of the churn we recorded, there was no loss to a competitor, we have had some experience in delaying of renewal process, we are quite diligent on how we record that within our churn metric. Last to relate to a change in management and their needs is a reason and the last one being specific was a solution fit. Now in terms of industrial, we had some end-of-life contracts impacting industrial in the quarter. And under our definition of churn, we exclude end-of-life contracts from this metric, principally as there's no mechanism to renew and if included, would otherwise be -- would distort the churn metric. These end-of-life contracts represent historical arrangements have been put into place, initially relating to construction contracts that were spoken to before that came to an end, where we continue to have strong relationships with the builders in those contracts, they're global customer, where they value the EVS solution and we continue and they continue to use the solution and we continue to engage with them and also to move away from a contracting model that is contract-specific, but more customer-focused. So looking at options available. Secondly, there was a third party monitoring arrangement that came to an end in the quarter. Again, this arrangement was a historical arrangement that was in place within the company. More importantly, the arrangement did not utilize the Envirosuite platform -- industrial platform and from a financial perspective due to the contractual arrangement in place resulted in lower gross margin to the company. So we certainly recognize those 2 particular items as reductions in ARR, but as an end-of-life contract, we don't include that in our churn metric.

Thanks, Justin. Next question coming in, they're all coming in written today, which is great. Again, feel free to raise your hand, if you'd like to pose a question live. A question from [ Lachlan Scott ]. Where are you now seeing the best opportunities in water in the year ahead? Designer, optimizer or SeweX?

Good question. It's a mix of -- certainly from the business-to-business arrangement, what we have seen is that optimizer and designer have got a compelling value proposition moving forward. And I think the way that we're now looking at designer being able to go into these smaller facilities where they are getting incremental ROI I think is a good growth curve for us. And what we will do is continue to look for partners like the likes of Ion Exchange. And geographic-based. Optimizer, though we have got a solid pipeline of B2B engagements moving through, so that's good. SeweX continues to be a strong value proposition. However, what we have seen and I think it's important one of how we start to shape up the company moving forward is there's a strong tie between the Omnis product and also SeweX. And so we're seeing more and more of this stronger cross-sell opportunity into that area. And I think that's a part that we really are looking at now on our go-to-market strategy and really aligning the 2 together. So yes, we see SeweX somewhat tied into that wastewater segment with Omnis, optimizer designer going through that B2B arrangement.

Thanks, Jason. A second question around water and WA Water Corporation more specifically. How's that relationship and that engagement going? There's reference here to, Water Corporation and us talking about it being over 100 sites that the customer manages. How's the relationship going? And can you give any sort of update or color to that one?

Yes, look, so the customer relationship is going well. We continue to work with a team in Perth. They're building out their capability and their strategy on to what they want to do with a broader network. So it's very good. They're incredibly strong proponents of the technology. And they're proactively promoting us into water network and then what associations here in Australia and beyond, so very happy with the relationship? No further update, though, on the expansion of that one. But that will continue to evolve over time.