H2O INNOVATION INC.
TSX VENTURE : HEO

H2O INNOVATION INC.

February 10, 2010 08:00 ET

H2O Innovation Reports 2010 Second Quarter Results - Sales of $7.1 Million, Results Impacted by Recession, Company Stays Focused on Growth Strategy

 QUEBEC CITY, QUEBEC--(Marketwire - Feb. 10, 2010) - (TSX VENTURE:HEO) (ALTERNEXT:MNEMO:ALHEO)

  • Sales of $7.1 million, down from $9.5 million for the same period in fiscal 2009.
  • Gross margin at 22.1%, compared to 25.6% for the same period in fiscal 2009.
  • Operating loss of ($1,121,597), compared to operating earnings of $303,283 for the same period in fiscal 2009.
  • EBITDA at ($982,738) compared to $1,206,766 for the same period in fiscal 2009 (including the effects of a mostly unrealized foreign exchange loss).
  • Net loss of ($1,576,222), compared to net income of $727,148 for the same period in fiscal 2009 (including the effects of a mostly unrealized foreign exchange loss).
  • Operating activities used ($1,013,823) in cash, compared to $1,209,946 in cash generated for the same period in fiscal 2009.

All amounts in Canadian dollars unless otherwise stated.

H2O Innovation Inc. ("H2O Innovation" or the "Company"), a complete water treatment solutions company providing custom designed water treatment systems along with operating and maintenance solutions, announces today its results for the second quarter of fiscal year 2010. During the quarter, H2O Innovation's results felt the impact of the enduring recession, with sales and EBITDA decreasing compared to the corresponding quarter of the previous fiscal year. The results of the quarter ended December 31, 2009 also show an increase in the level of revenues derived from the sale of services and consumable products, and show the proportion of revenues coming from sales recorded outside North America to be comparable to the level of previous quarter of fiscal 2010. Over the course of the quarter and shortly after, the Company took significant and constructive actions to increase the level of its revenues derived from industrial sales as well as its international revenues by entering into a sales representation agreement in the United States with 3M Purification Inc. and by creating H2O Innovation India Ltd., a joint venture with Chembond Chemicals Limited of Mumbai, India to serve the industrial, commercial, and institutional water treatment markets in India.

CONSOLIDATED RESULTS
(Unaudited)
Three-month period ended December 31 Six-month period
ended December 31
2009 2008 2009 2008
  $CAD $CAD $CAD $CAD
Sales 7,087,242 9,546,009 15,493,852 15,095,466
Gross margin 22.1% 25.6% 26.3% 25.1%
Operating earnings (loss) (1,121,597) 303,283 (1,073,277) (86,722)
EBITDA (982,738) 1,206,766 (1,055,598) 1,236,693
EBITDA excluding unrealized foreign exchange gain (loss) (778,108) 674,847 (297,995) 659,116
Net earnings (loss) for the period and comprehensive results (1,576,222) 727,148 (2,218,910) 317,877
Basic and diluted net earnings (loss) per share (0.029) 0.015 (0.040) 0.007
Cash generated (used) from (by) operating activities (1,013,823) 1,209,946 (1,258,611) 1,259,189

For the three-month period ended December 31, 2009, sales amounted to $7,087,242 compared to $9,546,009 for the same three-month period ended December 31, 2008. The decrease in sales caused a decrease of the Company's gross margin from $2,441,668 to $1,568,895 for the three months ending December 31, 2008 and 2009. This decrease in gross margin for the quarter compared to the same quarter last year resulted from multiple factors, but primarily by the unusually high proportion of income derived from municipal projects compared to income from industrial projects. However, sales of consumables contributed to somewhat mitigating this effect. In percentage, gross margin for the quarter amounted to 22.1%, compared to 25.6% for the corresponding quarter of the previous fiscal year. Operating loss for the quarter was ($1,121,597), compared to operating earnings of $303,283 for the same period of the previous fiscal year. EBITDA for the quarter was ($982,738), compared to $1,206,766 for the same period ended December 31, 2008. Excluding unrealized foreign exchange loss, EBITDA for the quarter was ($778,108). During the quarter, H2O Innovation recorded a net loss of ($1,576,222) ($0.029 per share), compared to net earnings of $727,148 ($0.015 per share) for the corresponding quarter of the previous fiscal year. This nominal decrease of $2,303,370 is explained by various factors, including the exchange loss on financial assets and liabilities in U.S. dollars, the nominal decrease in sales and a non-recurring loss of ($138,634) on the disposal of assets.

The Company's sales backlog stood at $19.2 M as at December 31, 2009 and at $10.8 M as at February 8, 2010. The nominal reduction of the Company's backlog between December 31, 2009 and February 8, 2010 can in large part be attributed to the definitive cancellation of a contract, as announced by press release on February 8, 2010. The Company's sales backlog is comprised entirely of systems and equipment sales and does not include sales of services or consumable products.

Before the change in operating working capital, operating activities used $1,013,823 in cash for the period ended December 31, 2009 compared to $1,209,946 in cash generated for the comparable period ended December 31, 2008.

"During this quarter, we felt the full impact of the recession that began almost a year and a half ago. U.S. and Canadian industrial companies remained cautious and, for most of them, continued to delay investments in capital equipment such as water treatment systems. This is why during the quarter and shortly after, constructive actions were taken in a timely manner to increase our growth opportunities, with a particular focus on increasing our industrial and international sales. Although the results of the quarter do not satisfy us, we are confident that the actions undertaken during the quarter and the developments announced shortly thereafter will place H2O Innovation in a better position to continue its growth as a leading provider of high performance water treatment solutions not only in North America, but also increasingly on an international level", stated Frédéric Dugré, President and CEO of H2O Innovation Inc.

RECENT HIGHLIGHTS
Long sales cycle for system sales coupled with length of recession translate into lower system sales
The lower sales figure for the quarter compared to the corresponding quarter of the previous fiscal year can mainly be explained by a decrease of our system sales, particularly in the segment of industrial sales. This can in large part be linked to the twelve to eighteen month long sales cycle of water treatment systems and as such, the Company has only now felt the fullest impact of the recession that began late in 2008. The underrepresentation of industrial sales in total sales during the quarter had a direct impact on the decrease of our gross margin, as industrial sales generally provide higher gross margins than municipal projects.

Performance of PWT business unit remains solid, grows Company's international revenues The performance of the Company's Professional Water Technology ("PWT") business unit remained solid this quarter, as it had been in the previous one. Sales generated by PWT and other sales of services and consumable products amounted to $2.4 M, representing more than 30% of the Company's total sales. As a majority of PWT's sales are recorded outside North America, this contributed to increasing the level of H2O Innovation's total international sales. For a second consecutive quarter, the Company recorded close to 10% of its total sales outside North America, slowly but progressively reducing the Company's dependency to the North American economy.

New contracts signed for systems and equipments in challenging economic environment In spite of the economic environment, H2O Innovation signed new contracts totalling $4.2 M during the second quarter of fiscal 2010, primarily in the municipal wastewater treatment and water reuse markets in the United States, but also for the manufacturing of reverse osmosis systems for drinking water production. The Company continues to develop its network of sales representatives in the U.S. and can now count on more than 20 representatives seeking sales for its wastewater and water reuse systems. This network of external representatives works alongside H2O Innovation's internal sales team, primarily dedicated to the sale of drinking and process water systems.

SUBSEQUENT EVENTS
Sales representation agreement with 3M Purification for two U.S. industrial water treatment markets
Shortly after the end of the quarter, H2O Innovation announced the execution of a sales representation agreement with 3M Purification, formerly known as CUNO Incorporated, a division of 3M Inc., a Fortune 100 company. 3M Purification is a world leader in the separation, clarification, and purification of fluids and gases with global operations. Under the agreement, 3M Purification will represent H2O Innovation's complete line of customized water treatment solutions in the U.S. oil & gas and automotive assembly markets, which are segments of significant size in the industrial water treatment industry. This agreement will provide the Company with a powerful new tool to grow its sales and to better balance the revenue mix of industrial and municipal system sales. The agreement with 3M Purification gives H2O Innovation access to additional sales opportunities through 3M Purification's long standing client relationships with top-tier U.S. companies. Key resources from both companies have already started working together identifying and developing sales opportunities.

Creation of H2O Innovation India to serve Indian industrial, commercial, and institutional markets, to increase competitiveness, and to leverage supply chain On February 1, 2010, H2O Innovation announced the creation of H2O Innovation India Limited, a joint venture with Chembond Chemicals Limited of Mumbai, India dedicated to providing water treatment systems and maintenance services to the Indian industrial, commercial, and institutional markets. H2O Innovation India already counts on a team of 12 employees, including a complete management, engineering and sales team with extensive experience in the Indian water treatment industry. By establishing the Company's first international operational base, furthermore in a high growth region, H2O Innovation has three objectives. First, to grow its level of international sales by serving the local Indian market. Second, to increase its competitiveness on international projects by calling upon H2O Innovation India to manufacture in India the systems which are to be delivered to end-users located outside North America. And finally, to leverage the Company's supply chain by using H2O Innovation India to identify and validate new suppliers in the South-East Asian region to purchase at favourable costs key system components and parts.

"During the quarters ahead, we will continue to stay focused on improving our costs of goods sold and will put renewed and sustained efforts in growing our sales in all applications, markets, and regions where we are active, building on our list of reference projects now topping 450 systems installed, on our two-pronged business model combining capital equipment and services & consumables, and on the new opportunities brought by our sales representation agreement with 3M Purification and our joint venture in India, H2O Innovation India", concluded Frédéric Dugré.

The second quarter financial report is available on the Company's Website (www.h2oinnovation.com) and on NYSE Euronext Alternext's site (www.alternext.fr). Additional information on the Company is also available on SEDAR (www.sedar.com).

Conference call and webcast H2O Innovation will hold a conference call today Wednesday February 10, 2010 at 10:30 a.m. (Eastern time) to review the results for the second quarter. The call will begin with a presentation by Frédéric Dugré, President and Chief Executive Officer of H2O Innovation, and Annie Lemieux, Chief Financial Officer of H2O Innovation. A question-and-answer period will follow. A slide presentation intended for simultaneous viewing during the call will be available this morning on the Financial Reports and Webcasts page of the Investors section of the Company's website.

Shareholders, analysts and institutional investors are invited to participate. The numbers to dial for access are 514-392-9193 (Montreal area) or the North American toll-free number 1-866-696-591. International participants are invited to dial +1 514-392-9193.

Media representatives and other interested parties may participate in listen only mode or may listen to the live webcast of the conference call (audio and slides) accessible through H2O Innovation's website at www.h2oinnovation.com. The webcast will remain available for replay on the Company's website for 90 days in the Investors section.

Prospective disclosures Certain statements set forth in this press release regarding the operations and the activities of H2O Innovation as well as other communications by the Company to the public that describe more generally management objectives, projections, estimates, expectations or forecasts may constitute forward-looking statements within the meaning of securities legislation. Forward-looking statements concern analysis and other information based on forecast future results and the estimate of amounts that cannot yet be yet determined. Forward-looking statements include the use of the words "expect", "believe", "estimate" and other similar terms as well as those usually used in the future and the conditional, notably regarding certain assumptions as to the success of a venture. Those forward-looking statements involve a number of risks and uncertainties which may result in actual and future results of the Company to be materially different than those indicated. Information about the risk factors to which the Company is exposed is provided in the Annual Information Form dated September 28, 2009 available on SEDAR (www.sedar.com). Unless required to do so pursuant to applicable securities legislation, H2O Innovation assumes no obligation to update or revise forward-looking statements contained in this press release or in other communications as a result of new information, future events and other changes.

About H2O Innovation 
With 10 years of experience developing water treatment solutions, H2O Innovation is establishing itself as a key player in sustainable development and clean technologies in North America and abroad. H2O Innovation designs, develops, produces, and integrates state-of-the-art custom-built water treatment systems for the production of drinking water, the reclamation of water, the treatment of wastewater and industrial process water in the municipal, commercial, industrial, oil & gas, mining, and energy markets. Additionally, the Company offers complete operating and maintenance solutions for membrane filtration and reverse osmosis systems. H2O Innovation has approximately 100 employees and eight offices including three manufacturing plants in Canada and the United States and is a founding partner of H2O Innovation India, a joint venture with Chembond Chemicals of Mumbai, India. Shares of H2O Innovation are listed on the TSX Venture Exchange (HEO) as well as on the NYSE Euronext Alternext Exchange (MNEMO: ALHEO). For more information about H2O Innovation, visit the Company's website at www.h2oinnovation.com.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) nor the Alternext Exchange accepts responsibility for the adequacy or accuracy of this release.

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