H2O Innovation Reports 2010 Third Quarter Results: Sales of $6.3 Million-Company Implements Growth-Fostering Initiatives and $1.25 M Cost Reduction Program

All amounts in Canadian dollars unless otherwise stated.

QUEBEC CITY, May 11, 2010 /CNW Telbec/ - H2O Innovation Inc. (TSX VENTURE:HEO)(ALTERNEXT:MNEMO:ALHEO)

  • Sales of $6.3 million, down from $8.8 million for the same period in fiscal 2009.
  • Gross margin at 25.4%, compared to 26.4% for the same period in fiscal 2009.
  • Operating loss of ($1,269,539), compared to operating earnings of $268,446 for the same period in fiscal 2009.
  • EBITDA at ($980,271), compared to $1,180,650 for the same period in fiscal 2009 (including the effects of a mostly unrealized foreign exchange loss).
  • Net loss of ($1,558,567), compared to net income of $684,423 for the same period in fiscal 2009 (including the effects of a mostly unrealized foreign exchange loss).
  • Operating activities used ($1,146,876) in cash, compared to $1,173,520 in cash generated for the same period in fiscal 2009.
  • Company implements cost reduction and spending control program expected to trim approximately $1.25 M in total annual expenses.

H2O Innovation Inc. ("H2O Innovation" or the "Company") announces today its results for the third quarter of fiscal year 2010. During the quarter, H2O Innovation's results continued to feel the enduring impact of the recession as the Company's sales, gross margin, EBITDA and net loss are down compared to the same period in fiscal 2009. The low level of capital investments made by the Company's customers - both in the municipal and industrial sectors - translated into unusually low revenues from system sales, which a nominal increase in revenues from sales of services and consumables was not enough to compensate. 

Acting quickly upon this prolonged slowdown in systems sales, H2O Innovation put in place several growth-fostering initiatives seeking to increase its sales of water treatment systems, while implementing a cost reduction and spending control program. Sales growth initiatives notably include entering into a sales representation agreement with 3M Purification and creating the joint venture H2O Innovation India Ltd. to serve the fast growing Indian industrial, commercial, and institutional markets. Management expects sales growth from these initiatives to start being noted in the following quarters. Conceived and having started to be implemented after the end of the quarter, the Company's cost reduction and spending control program is expected to trim approximately $1.25 M in total annual expenses. The program has been developed with the objective of preserving the Company's sales and engineering resources, essential to fuel the Company's sales growth.

         
CONSOLIDATED RESULTS (Unaudited) Three-month period
ended March 31
Nine-month period
ended March 31  
2010  2009  2010 2009 
  $CAD $CAD $CAD $CAD  
Sales 6,312,349 8,797,872 21,806,201 23,893,338  
Gross margin 25.4% 26.4% 26.1% 25.6%
Operating earnings (loss) (1,269,539) 268,446 (2,342,816) 181,724  
EBITDA (980,271) 1,180,650 (2,035,869) 2,417,343  
EBITDA excluding unrealized foreign exchange gain (loss) (824,132) 649,074 (1,122,127) 1,308,190  
Net earnings (loss) for the period and comprehensive results (1,558,567) 684,423 (3,777,477) 1,002,300  
Basic and diluted net earnings (loss) per share (0.028) 0.014 (0.068) 0.021  
Cash generated (used) from (by) operating activities (1,146,876) 1,173,520 (2,405,487) 2,432,709  

The Company's gross margin for the quarter was 25.4%, slightly down compared to 26.4% for the corresponding quarter of the previous fiscal year but significantly higher than during the previous quarter of the current fiscal year (Q2 2010), when it was recorded at 22.1%. The nominal decrease of $2,242,990 is explained by various factors, but most significantly by the nominal decrease in revenues from systems sales, in turn caused by an insufficient level of contracts for water treatment systems secured during the first months of the recession. The nominal reduction in system sales negated the increase in sales of services and consumables, which, contrary to system sales, performed well during the quarter and have shown a constant growth quarter after quarter.

The sales backlog stood at $14.5 M as at March 31, 2010. The sales backlog is entirely composed of systems and equipment sales and does not include sales of services or consumables, which represented 43% of the Company's total sales for the quarter, an unusually high proportion of total sales due to lower system sales recorded during the quarter. In the two previous quarters of fiscal 2010, sales of services and consumables represented 27% and 33% of total sales.

COST REDUCTION AND SPENDING CONTROL PROGRAM

Acting on the decline in systems sales and in order to maintain high margins and return to positive EBITDA, the Company has prepared a cost reduction and spending control program with the objective to trim approximately $1.25 M in total annual expenses. This program started to be implemented shortly following the end of the third quarter. Management expects the effects of the program to be divided in a 40/60 proportion between productivity gains and reductions in selling, general and administrative fees. The effects of the program are expected to start showing in the fourth quarter of fiscal 2010 and to reach their full effect in fiscal 2011. The program includes hiring freeze, workweek reduction for manufacturing staff, selected layoffs, along with a reduction in trade show and travel expenses. All manufacturing processes are also being analyzed to identify additional operational efficiencies, especially in the lower value-added tasks of the Company's manufacturing processes. Selling, general and administrative functions will also thoroughly be reviewed to improve the Company's business processes.

"Although we cannot be pleased by the low total sales figure of our third quarter results, we are encouraged by the increase in our gross margin compared to the previous quarter. Our growing sales pipeline, the constructive growth initiatives we announced during the quarter and now the cost reduction program we are implementing will all be key factors moving the Company towards positive results, our top priority", stated Frédéric Dugré, President and CEO of H2O Innovation Inc.

RECENT HIGHLIGHTS

Over $5.8 M in new contracts for water treatment systems during the quarter

During the quarter, H2O Innovation successfully secured over $5.8 M in new contracts for water treatment systems and equipments, 38% more than during the previous quarter of fiscal 2010 and 115% more than during the first quarter of fiscal 2010. These contracts will translate into revenues during the next quarters. As soon as the Company's industrial system sales significantly slowed down at the beginning of the recession, Management reallocated part of its industrial sales and engineering teams to serve the municipal sector, enabling H2O Innovation to cover U.S. states and regions previously not covered for municipal equipment sales. This reallocation has been a key factor for the Company to successfully secure contracts providing two integrated ultrafiltration and reverse osmosis systems for municipal water treatment plants in North Dakota, H2O Innovation's first sizeable municipal sales in the U.S. Midwest. Management sees their signing - and the positive trend in new bookings recorded quarter-over-quarter - as a sign of momentum picking up in the municipal sector.

"We remain highly focused on building momentum with our system sales in North America and in India, thanks to the initiatives put in place during the quarter and to the hard work and dedication of our team. The weeks and months ahead will require that everyone within our Company step up their efforts as we implement our cost reduction and spending control program. Our common objective is to quickly put H2O Innovation back on track for profitable growth", concluded Frédéric Dugré.

Sales representation agreement with 3M Purification extended to cover Canada

On January 20, 2010, H2O Innovation signed a sales representation agreement with 3M Purification which sees it represent the Company's complete line of customized water treatment solutions (systems and consumable products) in the U.S. oil & gas and automotive assembly markets. Two months later, on March 25, 2010, the initial agreement with 3M Purification was extended to cover the same markets in Canada. 3M Purification and H2O Innovation resources from both sides of the border have been working together from day one developing a sales pipeline from 3M Purification's client base. This agreement brings the Company a very reputable sales force, increased visibility, and added credibility in two important segments of the North American industrial water treatment industry.

Creation of H2O Innovation India to serve Indian industrial, commercial, and institutional markets

On February 1, 2010, H2O Innovation created H2O Innovation India, a joint venture to provide water treatment systems and maintenance services to the fast growing Indian industrial, commercial, and institutional markets. Its twelve-employee sales and engineering team is actively pursuing sales opportunities in the local Indian market with the support and knowledge of H2O Innovation's engineers. H2O Innovation India's sales objectives are to generate between CAN$5 million and CAN$8 million within its first three years of operation.

In addition, H2O Innovation India will serve to increase the Company's competitiveness on international projects by having part or all of them manufactured in India. The Company also seeks to leverage its global supply chain by using H2O Innovation India to source at favorable costs key system components and parts for North American and international projects.

SUBSEQUENT EVENT

H2O Innovation has continued to put in place growth-fostering initiatives subsequently to the end of the quarter. The Company's Professional Water Technologies business unit has developed three new membrane cleaners targeting the ultrafiltration and microfiltration membrane markets, extending its product offering beyond solutions for reverse osmosis systems.

The third 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 Tuesday May 11, 2010 at 10:30 a.m. (Eastern time) to review the results for the third 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 1-866-226-1793. 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. 

SOURCE H2O INNOVATION INC.

For further information:


H2O Innovation Inc.
Guillaume Ducharme
418-688-0170 ext. 329
guillaume.ducharme@h2oinnovation.com
www.h2oinnovation.com

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H2O INNOVATION INC.

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