Water Intelligence plc (AIM: WATR.L)

Interim Results: Strong Profit Growth

Water Intelligence plc (AIM: WATR.L) (the "Group" or "Water Intelligence"), a leading multinational provider of precision, minimally-invasive leak detection and remediation solutions for both potable and non-potable water is pleased to provide its unaudited Interim Results for the period ended 30 June 2024.  

Results are in-line with market expectations with strong profit growth as the Group accelerates its long-run growth plan with certain corporate transactions after the period end.

Financial Highlights

·    Revenue increased by 7% to $41.5 million (1H 2023: $38.7 million)

o  Franchise Royalty income decreased by 2% to $3.55 million (1H 2023: $3.63 million)

o  Franchise Related sales decreased 6% to $5.5 million (1H 2023: $5.9 million)

o  Corporate Store sales increased 11% to $32.4 million (1H 2023: $29.2 million)

§ US Corporate sales grew 12% to $28.3 million (1H 2023: $25.2 million)

§ International Corporate sales grew 5% to $4.1 million (1H 2024: $4.0 million)

·    Statutory Profit Before Tax increased by 11% to $4.7 million (1H 2023: $4.2 million)

·    Statutory EBITDA increased by 13% to $7.8 million (1H 2023: $7.0 million)

·    PBT Adjusted* increased by 10% to $6.0 million (1H 2023: $5.4 million)

·    EBITDA Adjusted** increased by 12% to $8.7 million (1H 2023: $7.7 million)

·    EPS Basic increased by 16% to 19.0 cents (1H 2023: 16.4 cents)

·    EPS Fully Diluted increased by 16% to 18.5 cents (1H 2023: 15.9 cents)

·    EPS Basic Adjusted* increased by 14% to 24.0 cents (1H 2023: 21.1 cents)

·    EPS Fully Diluted Adjusted* increased by 15% to 23.4 cents (1H 2023: 20.4 cents)

·    PBT Margin remained consistent at 11% (1H 2023: 11%)

·    EBITDA margin increased to 19% (1H 2023: 18%)

·    Cash and equivalents at 30 June of $11.1 million

o  Net Cash of ($2.82) million (cash minus bank borrowings)

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

o  Net Debt (including both Bank Debt and Deferred Acquisition Payments) to EBITDA ratio: 0.62x

o  Net Debt (including both Bank Debt and Deferred Acquisition Payments) to EBITDA Adjusted* ratio: 0.54x

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

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

Network Sales (implied gross sales of franchisees from which reported royalty is derived plus direct sales of corporate locations) grew 2% to $91 million (1H 2023: $89 million).

Corporate Development

During Period

·    Acquisition:  Franchise in Fresno, California

·    Technology: 

o  Commercialisation of New Technology Offerings

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

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

§ LS1 (Rapid municipal area surveys)

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

o  Salesforce.com implementation completed for B2B insurance channel

Subsequent to Period

·    Refinancing of $21 million of Bank Debt and deferred payments for acquisitions with M&T Bank; amortization - largely interest only - spread evenly through 2029 at 6.35% fixed rate

·    Acquisitions

o  Franchise acquisition of Lafayette, Louisiana

o  Acquisition of Feakle Gas and Plumbing in Ireland

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

"We achieved strong double-digit growth in profits and EBITDA during 1H while continuing to invest in our long-range growth plan. Our balance sheet remains strong and under-levered enabling us to have "dry powder" to complement our organic growth plans with accretive acquisitions. 

In June, we announced our capital allocation strategy to fund an accelerated plan for organic growth, accretive acquisitions and also options for liquidity for our shareholders through share repurchases given our ability to generate consistent profit growth.  During the summer, we got a jump start on implementing our strategy by refinancing our bank debt to further increase free cash flow and executing some acquisitions including one in Ireland that provides a roadmap for the growth of both the non-US and US businesses.  

We are excited about the future as we formally launch our Next 50 growth plan in October coincident with our American Leak Detection Convention celebrating the fiftieth anniversary of our core business."

Enquiries:

Water Intelligence plc

Laura Bass, Director, Strategic Finance                                                 Tel: +1 203 584-8240

Grant Thornton UK LLP - Nominated Adviser                                    Tel: +44 (0) 20 7383 5100

Philip Secrett

Harrison Clarke

Ciara Donnelly

RBC Capital Markets - Joint Broker                                                    Tel: +44 (0)20 7653 4000

Jill Li

Elizabeth Evans

Daniel Saveski

Dowgate Capital Ltd - Joint Broker                                                   Tel: +44 (0)20 3903 7715

Stephen Norcross

Chairman's Statement

As part of the Chairman's Statement in the 2023 Annual Report, we discussed capital allocation and our go-forward growth plan (Our Next 50), inspired by this October's Fiftieth Anniversary of American Leak Detection (ALD) - our core business.  We remain confident about the future and our ability to capture more market share in a growing market for water infrastructure solutions; hence we have actually launched the Next 50 plan early over the summer with our non-US businesses.

Since 30 June, we have taken steps to fuel (i) faster organic growth of current solutions, as well as, our new technology-driven solutions; (ii) new revenue and earnings growth through a synergistic non-US acquisition and (iii) options for increased shareholder liquidity, especially given our consistent earnings per share growth (EPS).  Each of these uses of capital builds on strong 1H financial results and operating investments. 

1H Financial Results.  We remained consistent during 1H.  Revenue, profits, EBITDA (earnings before interest taxes depreciation and amortization) were all up with profits and EBITDA showing double digit growth and EBITDA margins up 1%.  EPS, both basic and fully diluted, increased double digits.  In terms of market capture, network sales (direct sales plus gross sales from which franchise royalty is derived) grew 2% to $91 million. As discussed below, we expect to accelerate System-wide sales by expanding our B2B channels beyond insurance.

Group revenues grew 7% to $41.5 million (1H 2023: $38.7 million). US corporate locations grew 12% to $28.3 million (1H 2023: $25.2 million).  International corporate locations grew 5% to $4.1 million (1H 2023: $3.9 million).  Franchise royalties declined by 2% to $3.5 million (1H 2023: $3.6million) with such decline largely as a result of prior franchise acquisitions which reduced the pool of franchise royalties.  Franchise-related activities which includes franchise sales, parts and equipment sales and business to business activities declined 6% to $5.5 million (1H 2023: $5.9 million).  Such decline was largely due to changes in the insurance channel as certain US insurers restructured to address prior years' macroeconomic volatility.  It is expected that with the moderation of interest rates and inflation, such effect will be transitory.  As discussed below, now that Salesforce is implemented across the System for insurance, we are planning on extending our insurance B2B to other channels such as pools and property management, leading to further growth.

Profit before Tax grew 11% to $4.7 million (1H 2023: $4.2 million).  Profit before Tax Adjusted for amortization, share-based payments and non-core costs grew 10% to $6.0 million (1H 2023: $5.4 million).   EBITDA grew 13% to $7.8 million (1H 2023: 7.0 million).  EBITDA Adjusted for share-based payments and non-core costs increased 12% to $8.7 million (1H 2023: $7.7 million).   EBITDA margins increased to 19% (1H 2023: 18%).  As a result, earnings per share fully diluted grew 16% to 18.5 cents (1H 2023: 15.9 cents).

Our balance sheet remained strong and under-levered, providing cash for investments to accelerate 2H growth and beyond.  Cash at 30 June was $11.1 million.  The ratio of Net Debt (including both bank debt and deferred payments from prior acquisitions) to EBITDA remained conservative at 0.62 with Net Debt to EBITDA Adjusted at 0.54.  During 1H we continued to invest in the commercialization of new technologies - Pulse, LeakVue 2, LS1, VersaLiner, Video commerce and Salesforce - to add to organic growth and efficiencies.  We announced strong results after teaming with Ferguson on an implementation of VersaLiner.  In 2Q, we also completed a significant franchise reacquisition in Fresno, California reinforcing our regional hub operating structure and whose revenue and profits impact will show in 2H.

Early Start for the Next 50 Growth Plan

We have started 2H aggressively especially with respect to the Group's non-US businesses to build momentum for the official October launch in the US of the Next 50.  Given our scalable operating foundation across the US, especially in terms of regional hubs with both corporate and franchise locations and B2B channels, we believe that we can readily apply the model for our non-US businesses.

First, as a prelude, we refinanced $21 million of bank debt and deferred payments from acquisitions with M&T bank to increase free cash flow to enhance our ability to fund growth plans in the short and medium run. As noted above, such refinancing comes on top of an existing under-levered balance sheet at 30 June that has $11.1 million in cash and achieved 13% growth in statutory EBITDA to $7.85 million during 1H. With our refinancing, we have a smooth payment stream combining interest and amortization through 2029 at 6.35%.

Second, we applied capital to acquire a fast-growing Irish plumbing business for an attractive price.  This acquisition works synergistically with our organic growth plan for expanding our UK and EU business and implementing the same strategy in Australia.  It is also a model for the US part of the Next 50 Plan to be launched with our October Convention.  The formula starts with adding more trained technicians and then follows with the application of the Group's proprietary solutions for any diameter pipe for water infrastructure:  residential, commercial or municipal.

By acquiring a critical mass of skilled professionals in Ireland, we have now the capability to leverage the Group's operating assets to push market capture in three ways:  (i) leverage our UK municipal experience from Water Intelligence International to help execute publicly announced infrastructure spending in Ireland; (ii) transfer pinpoint leak detection solutions from ALD to our Irish team to increase residential and commercial market capture including for the Irish insurance market; and (iii) bid for EU water infrastructure projects from our Irish base of operations.  We are also reinforcing our technology-driven brand by introducing to Ireland our proprietary Pulse device (sewer blockages) which has had strong commercial success in the UK.  Given early indications post-acquisition, we are even more confident in this growth strategy.

We plan to advance this same growth strategy with our Australian locations where we currently have a critical mass of both municipal projects and ALD locations.  Over the summer, we expanded our existing Sydney Water contract and during Q2 and Q3 have invested in a significant number of staff that we are training to expand our Australian locations in 2025 after proper training.

US Business.  As we approach ALD's October Convention, we are planning to execute the same synergistic growth strategy that we have launched with our non-US businesses in Ireland and Australia.  To increase the critical mass of trained technicians for the US locations, during July we opened our state of the art training center in Bridgeport, Connecticut.  We have brought various national partners to the location during August to market our technologies.  We will be starting classes this fall to add more trained technicians to ALD corporate and franchise operations.  Further, we have now integrated Salesforce technology for both corporate and franchise locations as part of our B2B insurance channels.  We are using the data generated to improve operating efficiencies and to market enhanced Service Level Agreements (SLAs) for additional insurance partners. 

Moreover, with our national operating footprint across the United States and strong execution experience with national channels, we are also now working with other national partners in the pool business and property management to scale our growth model.  We anticipate heading into 2025 reinforcing organic growth with more national accounts and with technology offerings driven by Pulse (as noted above) and LeakVue for pool leaks.

Beyond organic growth, we will commit capital to selectively acquire franchises and 3^rd party companies - as we did in Ireland - that are synergistic to our overall plan.  We executed one tuck-in franchise acquisition in Lafayette, Louisiana over the summer that will also add to 2H growth.

It should be noted that in addition to acquiring franchises, we also plan to sell more franchises to create an on-going cycle of market development and acquisition. Because of the exit values that the Group has been able to provide for franchisees, there is renewed interest among the general public for buying franchise locations.  During 1H we sold a new franchise location in Albany, New York.

In terms of capital allocation, we have cleared the regulatory authorizations needed to engage in share repurchases to provide liquidity as part of the Group's overall strategy.  Our shareholders will be voting on such a proposal at our Shareholder meeting on 7 October.  

Strategic Direction.

Over the last two years, we have navigated a volatile market characterized by both inflation and high interest rates.  We have focused on profits and improved our margins but also invested in new technologies and operating systems for sustaining our future growth.  As the macroeconomic picture has begun to stabilize, we see significant opportunity ahead and we are prepared with cash resources, operating assets and a strong growth plan.  With great excitement, we have begun our Next 50 growth plan this summer ahead of its official launch at the ALD Convention in October.

Interim Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2024

Consolidated Statement of Financial Position as at 30 June 2024