Envirosuite Limited (EVS) Earnings Call Transcript & Summary

Welcome everybody, and welcome to our FY '24 Q2 Sales Update. Today I'm joined with our CFO, Justin.

Good morning.

Today, we're going to keep this slide up as we talk through our point. Look, we're really delighted with our Q2 results and how in uncertain terms how our H1 has shaped up. And so at the end of this session, we would like to open up to questions, and we'll answer those. [Operator Instructions] The questions are always helpful, though, to give color and insight into this data, so looking forward to that. Look, this was a good solid performance from the group and all products contributed, as well as all regions, and we want to get into how our strategy now is unfolding. Now that is providing strong growth for the company. But importantly, those strong financial results as well. And whilst today is around our Q2 sales update, we will touch on some of those key financial metrics, but we will be covering that off in detail in our H1 results in late February. So look, let's get into some of the detail there. So new sales of $3.1 million, of which there was $2 million in ARR. And so you'll see the graph on the bottom left, which has been a good consistent $2 million in each quarter, $1.1 million in project sales. And as you'd understand, project sales are good for us, certainly as a lead indicator to growth in the underlying business model as well as driving into profit in the current year. $0.6 million in aviation, $1.2 in industrial million and $0.1 million in water. The focus has been also on cash management through the year and it's prudent cost management that is driving our underlying financial results. And so we have certainly balanced FY '24 with that as well as growth moving forward. EVS Aviation, let's start with that and let some of the headlines there. Houston Airport in Texas and also a major airport in the UK and we will give a little bit more color to that later in the year. But at the moment, it will remain as a major airport in the UK, but it's a good win for us. And importantly, we now provide 18 of the 25 target opportunities in the UK. Strong growth from EVS Industrial, again, led strongly by the Americas and also within waste and mining, which is consistent and we're executing well to our strategy there. EVS Water had some really good success. So we're happy now with how our strategy is evolving. Certainly, lesser lines on the utility, albeit still important, but really driving our business to business engagement moving through there. So that momentum in water is really paying dividends. And we're quite delighted with some of the wins through that. And I will give somewhat a little bit more color to it. Our underlying churn, excluding our one-off with defense is consistent on 2.7%, which is a good healthy number for the business and a key part of our business model moving forward. And as a result of that, we certainly reaffirm our position to deliver a positive adjusted EBITDA less capitalized development on a run rate basis during FY '24, which is an important target that we set at the start of the year, and we'll continue to focus on that through the year. So, if we look at our land, expand and scale strategy, we're focusing on some of the key customers and expansion capability, we're certainly getting good results of that, both in retention of customers, upsell with customers, the renewals coming through as well as been adding into new sites. We're also focused around wanting to have an impact in certain segments in industrial segments. So take waste as an example. We know that we have got a strong value proposition and as you'll see in the last few quarters, quarter-on-quarter that we are getting solid waste traction, particularly in the Americas. Why is waste important for us? Waste is important because in the Americas, it is actually the third largest contributor to greenhouse gas emissions. And we're working with both segments of the market, which is the private, the big corporate owners of waste as well as the municipality, the council-owned waste facilities. In mining, in particular, our land, expand and scale is certainly improving strong dividends expansion there with Teck and also with Glencore. Aviation, we do have global market leadership position in that, and we continue to drive that. And that's through product excellence. It is through strong product differentiation and also the service to support those customers. And we really are the global choice there, the technology leader that our customers are wanting to work with. So it certainly sets us up for a good position in the ongoing years. And the pipeline certainly supports that. So Aviation, I might go a little bit of depth into the Aviation part. So total sales of $1.1 million, which has had $0.6 million in new ARR, which brings up our ARR to $36.5 million, which excluding our churn event, represents a 10.3% growth, which we're really confident is a good number for our Aviation business and one that we look to continue to push through that in the coming years. So let's spend a bit of time sitting on the Houston Airport. This is a major win in the US for us and one that the team have been working with the customer for a period of time, good competition in that line, but there was certainly a high bar, high threshold there from the customer to have a strong technology solution and also a partner that could work with them. And so that was a 3-year engagement that we've got. Certainly, the US team continues to have strong success in all parts of the US and Canada. And this, again, really cements us. So certainly, in Texas, we have a strong foothold. Certainly, in the Americas, we have a very strong foothold there. Major airport in the UK was signing up for five years there. But within our installed base, if you look at the underlying part, as you know, we have over now 190 airports globally, with most of the global leading airports that you would be familiar with. But it's important that we serve them, we serve them well and continue to innovate with them. And so we have had a good expansion there with Incheon International Airport in South Korea. And back in the UK, Heathrow and London, Gatwick expansion opportunities as well. And we'll continue to work with those customers to drive new solutions and serve them as well as growing our ARR. Here in Asia, we had our Hong Kong Civil Aviation Department, which upgraded a portion of its instrumentation, which was good for our nonrecurring revenue. So the UK in there, so I mentioned before, 18 of the 25 airports that are our target. We've got a long history of being successful in the UK and serving through those airports. And certainly, when we had our noise for them late last year, it was well represented by the UK airports. We had very good discussions with them. But this airport, their existing noise management system has been in place there for several years. And as with most airports around the world, the community evolves, the community noise problem starts to evolve as well and there's much greater scrutiny that comes in from the communities there. And so they certainly recognize that I had to change what they were doing. They went out to market with a rigorous RFP process, and we were successful in that. Again, we weren't the cheapest, I mean, that's not our aim. We certainly had the most encompassing solution for this particular customer. Plus also, our market leadership position in this one really gave us confidence that they are working with the world's best. And when you sign up to a 5-year deal, you want to be making sure that you're working with the global leaders, so supporting your needs today, but certainly well into the future. So we're excited to bring this new customer on and strengthen our broader UK capability within the aviation sector. Moving to Industrial. Total sales of $1.8 million there, new ARR of $1.2 million. The graph on the release there, you'll see it's a good solid growth for industrial part, $1.2 million. And that's made up of a host of different customers in different geographic regions, which is quite exciting for us. That's focusing on the Americas region, though, with Orange County in California, which is a new waste customer. As I said earlier, we have 2 value propositions here dealing with the accounting and then also dealing with the private operator. There are 2 very distinct value propositions, but the strength of the Omnis product, which sits in the industrial portfolio, is it a [ concator ] for both the underlying problem, I mean it is true, but the application is quite different. What's also exciting though is the additional site there with the waste management company in the US. They, for privacy reasons, and their own issues there, they're wanting to keep their name private. But what it shows is we're now adding sites into that customer base. So that's a true land, expand and scale opportunity that we've got there. Going to our existing customers, again, it's the backbone of the company, our strategy is to serve those customers. So Teck Resources in Canada, Cerrejón, Anglo American in South America has continued to expand. And that's driven in part by product, also in part by our customer success strategy where we're working with our customers to showcase what the technology can do and work with them to expanding both its capability and its exposure to those particular sites. Back here in Australia, we were able to expand with our wastewater customer in Queensland, which is Urban Utilities and also then back into the US with our City of Chicago and Department of Public Health, which is, again, really important for the business and understanding our strategy. We want to be landing customers and then we want to be expanding with them. Glencore is certainly a success story for us, and we continue now to drive growth within that account. So we have Glencore certainly in South America, adding new sites. We also have expansion. We also recently won in South Africa as well. So certainly Glencore will become more and more an important logo for us as we continue to work with them and drive value for them. In Southern Water, success story on 2 fronts there and a good cross-sell opportunity as well that we did at a fifth wastewater site for Southern Water in the UK. Churn had a slight increase in 7.3%, and that was actually in mining. But mining, you will get your churn event to go through. But as we've said, we've got significant expansion. And certainly, our second half pipeline is very strong in mining and even looking into FY '25, we're seeing significant expansion opportunities in there. Touching on Glencore. Look, Glencore is a household name in mining. We are lucky to have them as a customer. And that's really based on having such a strong relationship in Cerrejón, where we've been working with them now for many years and driving considerable value for that particular mine site. It is the largest coal mine in Latin America and strategically important to Glencore, but also to the community that it serves. And it's an important one to understand in mining. There always is a community, the service community that employees in the local region and it's trying to get the balance of getting the mining operations to operate within the environmental and community parameters. We're really delighted to be working with Glencore, and we'll continue to focus on growth, both within existing Glencore sites and also new sites. Water, we had a particularly strong quarter and if we go back to sharing our strategy previously where we have opened up now to business-to-business engagement, as well as our utility focus, it certainly is providing strong dividends through them. We've got new ARR of $0.2 million coming through, which has now got our ARR up to $1.7 million in there. So we're certainly delighted with the growth that we're seeing. But we're actually more delighted with the logos and the quality of customers that are now starting to use our technology. So the first point there, we'll kick off with is ACE Water. ACE Water is a leading water treatment company in Singapore, and they've got a strong strategic footprint in there. We showcased our technologies to them recently, and they were blown away by its capability and how they can see that it can serve certainly the Singaporean market and potentially other markets in Asia. And so this agreement, we'll see that the EVS Water technology used initially in a small number of water reclamation plants and industrial wastewater plants, but then also grow out. So we want to be partnering with ACE Water, and this is very similar to what we did with Ion Exchange in India. So certainly, our growth and our focus has been successful. Sada has been very busy in driving this B2B exposure. So we're very happy with his progress as he has made in a relatively short space of time. Here in Australia, we signed up Origin Energy, with Plant Designer. Now you may remember, Plant Designer is at the lower end of the price point for us. This is effectively a desktop application, cloud desktop application that users to design water facilities. And so Origin Energy are using this to model out complex chemistry, which operates in the coal seam gas and wastewater treatment storage. And so they're going to use that to optimize and improve their operations. So, certainly delighted to have Origin Energy as a customer. We also signed here now in Germany, a very important opportunity for us, which is with Plant Designer, but with BASF and BASF, as you can appreciate, is a industrial -- global industrial brand that has significant impact on this. So it's one of the most well-known industrial organizations globally. And so they're going to be modeling out water and wastewater treatment applications, particular to the manufacturing facilities, it certainly has got potential now to scale globally. So our teams will be working with BASF to ensure success and maximize our growth potential. As I mentioned earlier, around Southern Water, we have had another cross-sell opportunity. And what we're seeing with SeweX is almost always where we sell SeweX into a wastewater facility, we have an enormous opportunity, either one pulls through the other or the other pulls through. So SeweX in here, we already had a good strong Omnis engagement within Southern Water, then now got SeweX coming in. So this is our first SeweX application in the UK. Happy to be working with Southern Water on to this one as well. And interesting, again, slightly different application for SeweX there, same underlying technology, which is great, but it's just a slightly different use case. And as we expand our installed base, we're starting to learn more and more about the different applications and needs in the different markets there. So certainly, that's really good. I'll touch on ACE Water, so I won't go much into that. But certainly, with ACE Water and Ion Exchange, we do have some really solid B2B engagements there.

I just want to jump in. Just to confirm to those who were late to joining the call, just to confirm there's not a presentation that we're running through today. It's just the title slide that you see is all we're presenting, and we're just doing a walk through the release that's gone out to the ASX. So just confirming for those -- Jason mentioned it at the start up and I'm sure that some people got held up in joining the call. Sorry, Jason.

Thanks, Justin. Good that you jumped in. So moving to Page 6 on the slide, we have included at a constant currency basis there as we've grown out. Justin, is there anything you want to touch there on to from ARR and the outlook?

Thanks, Jason. The reason for showing constant currency is just to give the underlying move and change in the business and growth in ARR over the period. Clearly, when you're looking at it on a reported basis, and you see that it has dropped, that has been largely impacted by an adverse movement in the US currency in certainly in the half year period. Showing constant currency gives us that confidence around where the underlying growth in the business is -- or that the underlying business is growing as we know and the fact that we are impacted at this level by currency movements. When you're looking at a metric like this that drives revenue at the top line, what it's also associated with the -- on a results basis, we get the corresponding either benefit or downside when it comes to our cost. So it can't be taken in isolation. We look at it in a full sense of the business. Going forward, we'll continue to report on this basis, so we can track. But we track back to the base being the last reporting date at 30 June. In terms of outlook, happy to -- rather than wait for the question to be fielded, but on the front foot. We are in the process of completing our half year audit review for the 31 December, '23 numbers. And that's progressing as expected with the anticipation of a release in the late part of February. The results to date continue to demonstrate the growth that we're seeing in the business and the performance at the profitability metric that we described as our goal and target. And we remain on target to achieve our run rate profitability in adjusted EBITDA less capitalized development cost in the forecast period being Q4 for FY '24.

Yes. Thanks. And I guess if we now look to the future, certainly, the wins that we have announced in this quarter, still the execution of the strategy in all 3 products, so aviation, industrial and water, particularly delighted with the traction that we have had in water in Q2. As always, we do deep analysis of the future pipeline. And what we can say there is that there is strong growth opportunities over the next H2, but into FY '25, so a rolling 18-month forecast, certainly with aviation, there's good opportunities. And I think the forums that we held back at the end of last year, certainly opened up numerous opportunities within our customer base as well. In mining, we're seeing really strong adoption of our technology in there. So the pipeline for mining is very strong in all regions, actually, which is great. We're starting to open up new customer logos, which then opens up new geographic areas. The beauty of our business model and our existing global footprint means that we are in the industrial part, able to add customers effectively in any part of the world without really incurring any increase in head count. And so the industrial platform is an incredibly scalable platform that we have got there. So our focus will be to work with logos, to work with key customers and to drive product implementation and adoption in all of the different geographic areas to support our customers around the world. And what you will see moving forward is certainly the gross margin improvements in the industrial part really start to leverage. What we have got is a very scalable platform in there. We also have an incredibly advanced platform that we are confident in -- we have a very high hit rate on our sales pipeline as well as strong product and customer usage adoption as well. So certainly, the pipeline there is very healthy for the industrial part. ESG does help. Of course, ESG is a key driver for customers. But our focus has always been to drive ESG and operational improvement. And what you are seeing is a greater focus from our customers to drive their operational improvement to driving that benefit, and that's certainly where we hope. Water certainly has made that cut through now in B2B, and you do not sign a BASF in the industrial sector without close scrutiny and understanding. So the work that the European team did to get that customer across the line on boarded and using the product has been absolutely first class. So water represents a great opportunity for Envirosuite. So at that point, what we might do is throw to Q&A and see where the questions come from.

Great. Thanks, Jason and Justin for delivering that update. [Operator Instructions] So first question is -- a few questions actually, which are of a similar nature. So thank you, Lachlan Scott, Chris Savage and Robert Bruce, I'm going to combine these questions into one. So guys, could you talk a little bit around why the airport total ARR declined quarter-on-quarter from Q1 to Q2? And then one of the questions was also asking more specifically about the churn event that we reported back in Q3 FY '23 and why we're still seeing that impact.

Yes. Look, thanks, Jeremy. Let me jump in on the first question in churn -- sorry, in terms of growth on ARR. On a quarter-to-quarter basis, we have seen the total going from 37.2% on a reported basis, down to 36.5%. We mentioned there's the impact of currency. And when you're a global business like Envirosuite, we, being an Australian tech company, if you like, exporting our capability to global markets, we are exposed to currency. What we then do is when we're analyzing that to really demonstrate where the growth of the business is coming from and what the underlying growth is we then revert back to a constant currency basis where we use the rate that exists as at 30 June. In this case, it's going to be 30 June, 2023. And on Page 6 of our release, you can see the constant currency where we've been able to shift our aviation business from 36.4% at June to 37.1% at the end of December. So we've got that in our numbers and demonstrates the growth that we're seeing that accords with what Justin has just been through. Why we keep referring back to our churn number, and the churn event in Q3, our churn numbers are based on a last 12 months calculation. So it takes into account what the ARR was 12 months ago. We then look at the churn that's occurred and we base it on that number. So as to give a true annual number rather than a quarterly annualized because we see that the longer-term trend is more reflective of the underlying performance in the business. And when we get to the point that, that churn in Q3 has now come out, we'll stop reporting on that because it will be reflective of a 12-month post that churn event. So hopefully, that assists in understanding that calculation.

Thanks, Justin. Another question, similar but at the company total ARR level. Can we talk to the quarter-on-quarter decline despite adding $2 million in new ARR? And a secondary comment to the question, the new ARR appears to be at odds with total ARR around the FX churn events and so on. So, if you can give a bit more color to that too, that would be great, please.

Look, thanks, Jeremy. And so one of the pieces that we talk about when it comes to churn and we've outlined in our definition is we look at our churn events as being those where the result with the customer or the outcome with the customer is that we've churned and no longer have an ongoing relationship with them despite the opportunity to have that. Now, I'll give the corresponding component to that, which is we have downsales from existing customers that we don't accurately record -- we record, but we don't determine that they are part of a churn event. They're a downsell and are otherwise excluded from the transaction. Typically, in the past, for example, we've noted that we've got relationship with Lendlease, and Lendlease undertakes ongoing monitoring of various construction sites. And rather than showing the construction site that we know that's coming to an end as a churn event, we record that as a downsell. So there are circumstances where with a company or a construction company like Lendlease, where there are vulnerable environmental monitoring services provided to that customer and to various sites. We show the upsell as new ARR, but we aren't showing that downsell as a churn, because it's not necessarily or it isn't a churn event. We also have other arrangements that are end of contract. And we mentioned this at the end of Q1, where we had a number of low-margin end-of-life monitoring arrangements that we had that hit our Q1 ARR, but we don't recall them as a churn event in the basis of their end-of-life contract with a determined end date in it. What we're trying to reflect in our churn is, what is the impact on our underlying business and the customer uptake on the product and assessing it to the extent that there's a product market fit issue or matters of that nature, that we would then reflect back into our product road map that we may be able to deliver that service or that product capability down the track. So there's always that underlying perspective of what is going on from a customer, why they churned and getting a deep dive into that and understanding is a product, is it service or is it price? As Jason mentioned before, customer success remains a very strong focus of the business to ensure that our customers are utilizing and getting the benefit of that platform on their day-to-day operations.

Yes. The only other thing I'd add to that is, we are focused on improving the underlying results in the company. So gross margin is one of the key factors for this and also the scalability of the business. So it's important to understand that, going back to those NPI contracts, we are focused here on one of the things that has got a healthy, healthy gross margin that is beneficial for the business. And so from time to time, we're doing need to make decisions with customers with [ our ] technology there to make sure that we can achieve our end goal of getting this above a 60% gross margin business.

Thanks, guys. A couple of more questions around some of the churn numbers here. So Jason, you mentioned in the industrial part of the update, which we spoke about a mining site that churned. Chris Savage just asked if you could give a little more context around what happened in that particular mine. And then a question from Gary Merkel, which is really also going into them being around can we talk to what we're learning or things we're putting in place to reduce future churn as well.

Yes. I might start with Gary's question first, because I think that's sort of the leading part. Look, we've now got almost 500 customer sites around the world with different forms of engagement. So you're always going to have some variability to come into that. We have got incredibly low churn within the business. If you could compare this to any other industrial type part, it's very strong. And what we're looking for is customers that do have long-term ARR contracts that we can grow with. From time to time, you are going to get a mine site, and it might be an individual that comes through and says, "Look, I want to try something different." So the mine site there, it was literally that somebody said, "Hey, listen, we want to try something different." Three months after they've tried something different. They've already spoken to us to say, "Hang on, we don't like the decision we made," and we've got strong engagement back not only running with that customer on a particular site, but actually more globally with that particular customer. So learning is an incredibly important part. What was the missing piece in that for someone to try something different? We have got customer success now in each of the regions. And so the regions take on a strong understanding of what actually is required and how we need to go about the engagement with the customer, the use of the product adoptions, we have lead and lag indicators embedded into the product about how people are using it, what the adoption is. We understand the importance of having multiple touch points within the customer group. And so that is a continual focus for us. And we'll be moving forward. And as we go from 500 sites to 1,000 sites, inevitably, you will get the site here or there. But the numbers certainly with industrial and aviation is incredibly low moving through. It is a constant learning part, and that is the key element there that we're learning, we're adopting. What we're not seeing is we're not getting beaten on technology capability. We're not getting beaten on customer service. We're not getting beaten on the future expansion capabilities. We do have a price premium in the market, and we want to protect the price premium. What we deliver is certainly seen in the market as industry-leading. And so we always need to protect at that point. So hopefully that answers both questions.

Thanks, Jason. Thanks, everyone. [Operator Instructions] We had a question come through from Tristan Whitehorne. So Tristan's recalling that in one of our briefing sessions, we spoke about how more and more we're seeing the kind of business we're building is requiring us to take responsibility for the instrumentation and property plant and equipment more broadly. Are you able to comment on what proportion of our new revenue is being driven by PPE, which is presumably dilutive of margin compared to the software component?