Good afternoon. My name is Kelsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kontrol Technologies Q3 2021 Financial Results Report Conference Call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, we will answer questions that were forwarded to us beforehand by analysts. The CEO of Kontrol Technologies, Paul Ghezzi, and the CFO, Claudio Del Vasto, are your hosts for today's conference call and will provide management comments. Before we begin, please be reminded that certain statements and information included in the management's discussion and analysis and financial statements and presentations, including information related to future financial or operating performance and other statements that express the expectations of management or estimates of future performance constitute forward-looking statements.
For more information on the company's forward-looking statements and risk factors, please reference the management discussion and analysis and our financial statements for Q3 2021. For all public information filings, please visit sedar.com. Thank you. I would now like to turn the conference over to Mr. Paul Ghezzi, CEO of Kontrol Technologies. Mr. Ghezzi, you may begin the conference.
Hey, everyone, and welcome to the Kontrol Technologies Q3 2021 financial statement call. I'm joined on the call by our CFO, Claudio Del Vasto, who'll summarize our financial results for Q3. I'm excited to share our milestone quarter in which we delivered record revenues, EBITDA, and net income. We have clearly demonstrated the ability to add significant growth with profitability. We continue to drive strong organic growth supported by heightened demand from our expanding blue-chip customer base. Kontrol is uniquely positioned to capitalize on the ongoing building modernization super cycle, and I look forward to continued momentum as we execute on our operating strategy to the remainder of 2021 and into this next phase of growth ahead as we work to deliver sustainable value for our shareholders.
In addition to revenue and earnings growth, we continue to operate with financial discipline and exited Q3 with a strong balance sheet and working capital position. I'll have a general corporate update following the presentation of the key financial metrics for Q3. I'll now pass it over to Claudio Del Vasto to present our financial results in more detail.
Thanks, Paul. Hello, everyone. This is Claudio Del Vasto, CFO of Kontrol Technologies Corp. As Paul noted, we delivered record third quarter results. Revenue, earnings, and cash flow from operating activities were all significantly higher than prior periods. We're very pleased with third quarter and year-to-date performance. I'll provide a very short briefing on Q3 financial results. Revenues for the third quarter were CAD 21.5 million, an increase of 614% from the same quarter in the prior year. Revenues for the nine months ended September 30 were CAD 29 million, up 260% over the same period in the prior year. We generated positive net income for the second consecutive quarter. Net income for the third quarter was CAD 2.8 million.
Adjusted EBITDA for the third quarter was CAD 2.8 million, an increase of 224% over the same quarter in the prior year. Adjusted EBITDA for the nine months ended September 30 was CAD 5 million, an increase of 234% from the same period in the prior year. Cash flows from operating activities for the nine months ended September 30 were CAD 4.8 million. We improved our financial position through debt reduction that totaled CAD 4 million for the nine months ended September 30, 2021. In summary, Kontrol delivered strong revenue and earnings performance driven by growth across our platforms as we continue to strengthen our balance sheet. I'll turn it back over to Paul.
Thank you, Claudio. Overall, we remain on track for our best financial year in our history, driven by expanding technology solutions, organic growth, and the recent acquisition of Global HVAC & Automation. We are experiencing tailwinds in the business, driven by the convergence of government policy, stakeholder activism, and corporate social responsibility. Buildings across North America are responsible for approximately 40% of GHG emissions. In the next decade, buildings globally will consume approximately half the world's energy supply. Certainly, this underscores the importance and necessity for enhanced intelligence to operate better, safer, and more sustainable buildings. The Global acquisition. We've been able to integrate Global into our operating platform while delivering record net income. This reflects our ability to acquire a good value and manage the P&L with discipline.
We believe that through the introduction of our recurring revenues in software and service, we'll be able to drive those revenues into Global with a higher margin. By adding recurring revenues to the business, we can deliver a higher return on investment and return on invested capital. BioCloud. We continue to experience strong demand for BioCloud. From our customers in Europe and outside of North America, we are being advised of a fifth wave, that may be potentially impacting the global economy. We are pleased to announce and share today multiple positive BioCloud detections of the SARS-CoV-2 virus. This is a major accomplishment for BioCloud, as we have collected significant data over an extended period of time that can now be shared with our respective partners, customers, and applicable government agencies.
BioCloud is accretive to revenues and earnings and represents good organic growth and internal innovation. We continue to make great progress, and we believe we are in the beginning stages where every building in the world will have an early viral and pathogen detection system. BioCloud is not a medical device and does not require Health Canada or FDA approval. We continue to wait for Health Canada update, and as previously stated, we neither control the timing nor the process. When we have a confirmation, we'll update the market. We believe that BioCloud is in an enviable position of technology validation through all the testing performed to date. As we evolve the BioCloud technology, we'll continue to update the market. Without a doubt, BioCloud has moved us into the global stage and has been the catalyst to numerous global partnerships with many more to come.
We are pleased to announce that we are starting our first carbon credit program in Q4, our project in Q4, with many more to follow. Adding carbon credit monetization to our platform has delivered numerous new opportunities for our building technology value proposition. Supply chain. The supply chain across our business remains an ongoing challenge, as it does for the majority of businesses. Lead times on components have improved slightly, but it is difficult to predict with any certainty when those will be back to normal. We work closely with our customers and suppliers on a daily basis to best manage our supply chain. Corporate outlook. Kontrol updated its guidance for 2021 fiscal year following the strong performance in Q3.
Revenue is estimated to be in the range of CAD 43 million-CAD 46 million for the year, up from its previous CAD 38 million estimate and compared to CAD 13 million in 2020. Adjusted EBITDA is estimated to be in the range of CAD 6 million-CAD 7 million, up from the previous CAD 3.7 million estimate and compared to CAD 2 million in 2020. The company anticipates seasonality in the month of December around project cut off and revenue recognition and provides its updated outlook as a range to take into account the potential impacts of this seasonality. In conclusion, we want to take some time to thank all of our staff, our customers, and our partners. We are delivering record financial performance while executing on our vision for a more sustainable future for all.
We are excited about our business, our current innovation, and the innovation we'll be adding in the coming months and years. We look forward to the continued execution of our strategic plan. Thank you, operator.
Thank you. Ladies and gentlemen, we will now begin the question-answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will then hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order that they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question does come from Jeffrey Campbell from Alliance Global Partners. Please go ahead.
Good afternoon, Paul and Claudio.
Hey, Jeff.
I've actually got four questions, if that's all right.
Sure. Fire away.
Kontrol's offering has broadened quite considerably over the past couple of quarters. You're now involved in equipment installation, all manner of software monitoring, equipment maintenance, not to mention BioCloud and emissions trading and so forth. I was wondering, with Global now in the mix, are you prioritizing Global's backlog and the potential for smart building cross-selling, or are you still actively seeking opportunities to start smaller with analytics and grow applications in a building over time?
Thanks for the question. That's a good question. We look at our avenues into a building as multiple avenues. We can enter a building on a software platform and scale into a project, or we can enter a building on a project and add our software. The same is true for BioCloud and HVAC systems. The approach that we take is cross-sell to customers, look for new customers and entry points, and not specifically focus on any one entry point in particular. You know, whatever is available from the customer. That's, I think, unique to Kontrol in terms of our size and scale. If we think about a much larger competitor to Kontrol, they may have to compete on an entire portfolio for that scale to make sense for them.
We can enter two or three buildings, be profitable on that entry point, but scale into the rest of the portfolio. I think that's been a big advantage for us, in the market.
I appreciate that. I'm wondering if you could talk a little bit about the new VRV, VRF offering, which Kontrol recently completed an installation. Just high level, can you expand on what the technology displaces and?
Sure.
What is its cost benefit? Is this more of a customer-driven or a customer education effort moving forward?
Yeah. What I can say is it's really the first time in the last, I would say, decade that I've seen, customers facing real pressure on emissions. That pressure is coming. It used to be the industrial sector was highly regulated. Regulation is coming into buildings. For example, New York right now is forcing more GHG emission reporting and also penalties. We see that regime sweeping across Canada, where if you're a building owner and you're emitting more than your allotment, you're gonna be taxed. That tax discussion is really driving sustainability from the perspective of what goes inside the building, a traditional HVAC system. A VRV, VRF system can be up to 30% more efficient than the most efficient traditional HVAC system.
We're seeing customer interest from the perspective of, I need to get more sustainable, I need to reduce my GHG burden. I need to avoid penalties. Really, that's what's driving the market. Our approach is to go to our customers with a turnkey design build solution where we're not only installing, but we're part of the design, and then we're part of the maintenance and part of the reporting with the software. I think if I look at the next 10 years, you know, the last 10 years have been about efficient HVAC systems. The next 10 years are going to be what we can do beyond that. We're very excited about that opportunity. We completed our first installation, and what we basically found is we could leverage that installation with lower manpower and lower hours, which of course means higher margins.
I think you'll be hearing more from us on VRV and VRF in high-rise.
Great. Thank you. Appreciate that. As Kontrol has moved up market in Canada with Global and later Skyline Group as an example, and with the growing regulatory support you just mentioned, is there any less urgency or ambition to move into the U.S. market?
We're very excited about the U.S. market. Right now we're generating roughly 10% of our revenues from the U.S. market. The approach that we're taking is a two-pronged approach. One, looking for strategic acquisition, and we have a number on the go. These would be smaller software acquisitions that have large building footprints. We think that's a great way to scale into the market. That was somewhat slowed down because of COVID and the inability to travel and do a small software deal. We're working on that now. The other approach is to take our existing customer stock in Canada and look for those asset managers, portfolio managers and owners that have buildings in the U.S.
That would take our Smart Suite and technology platform across the border. We are working on that as well. You know, we see the U.S. as our natural market in terms of building scale. There's no comparison to Canada, but we've also been very careful, and this is a philosophy of Kontrol is, you know, don't go open an office in the U.S. and take CAD 2 million out of your P&L if you don't have a good customer base that you're ready to scale into. That's the give and take in our P&L. We've been very happy with that approach. It's kept us profitable, and I think we can still grow into the U.S., using that approach.
Okay. My final question is regarding your statement today that the carbon capture program is adding to your opportunities in building technology. I was wondering if you could expand on that a little bit.
What we've been able to do now is say to our customers, not only can we give you a technology solution that reduces your energy and your emission footprint, but we can monetize those together. That has never been done in our market. Traditionally in the what we would call the Energy Efficiency Market, the utilities have controlled the monetization of carbon credits. Our program is in direct competition with the utility, where we're carving those out, taking them to an open market and sharing with our customer. It's the first time that our customers have been able to move away from a utility-type solution to a much more private market solution. That has them excited. The two speak to each other. If we can drive more technology solutions, we can generate more carbon credits and vice versa.
Got it. Thanks very much for your answers.
Thank you, Jeff.
Thank you. Your next question is from Sid Rajeev from Fundamental Research Corp. Please go ahead.
Gentlemen, congratulations on the strong performance. I should say that the revenue blew past our estimates, to be more precise, 30% higher than our estimates. It seems like revenue was also higher than your estimates. Is it primarily because of new clients or you were able to get more revenue out of existing clients?
Thank you, Sid. It's really a couple things, is one, we try and be conservative in our outlook, and then we try and execute into that. Two, we are seeing certainly a lot of tailwinds in terms of the industry, in terms of government policy, stakeholder activism, corporate sustainability. Energy costs, as you know, have just spiked incredibly. So buildings are seeing right now a 40% energy increase over the next 12 months. Couple that with the potential of a carbon tax on buildings has the wind at our back. We're very fortunate in that policy has aligned with our technology, and we think this is just the beginning of this massive trend, which Morgan Stanley refers to as the building modernization super cycle. I think it's a combination of those two things.
Yeah. I see that the gross margins have been fluctuating quarter-over-quarter. How should we forecast this line item, maybe going into 2022? What would be a normalized gross margin?
Yeah, great question. I think the addition of Global HVAC & Automation skews that a little in this quarter. The way we look at our business is a 30%-35% gross margin business, which is a combination of projects, software and service. That's a very healthy margin in our industry. It allows you to take on large projects with customers in the CAD 10 million range. It also allows you to take on smaller software projects. That merged gross margin is really representative of the leaders in the industry, which we're emulating. We're very optimistic about hitting those targets on a normalized basis.
Got it. In terms of revenue projections, what percent of the existing revenue is recurring?
That's a great question. Because of the addition of Global, there's a large skew there. We're at approximately 20%, whereas before we were at 40%. On the other side of that, Global gives us a very large platform to scale into on a recurring revenue basis, and I think we can get that number up.
Got it. One more question on the CapEx, CAD 1.6 million in product development, nine months. Any guidance on that? I believe you keep looking at acquisitions, but can we expect near-term acquisitions?
We like to take a strategic approach to acquisitions. You know, one thing we're known for is not overpaying. We like to find good value. We've been able to close approximately 4x to 5x EBITDA on all of our acquisitions, and I think the value of not overpaying is reflected in our balance sheet and our P&L, so we're very proud of that. We do have a number that we're looking at kicking the tires, and I think strategically, the U.S. is our next target. In terms of the other question, remind me of what that was again.
Sorry. That's the product development.
Yes. Okay. Yes, got it. There's a number of products that we have. We have the SmartSite, Smart Suite, and BioCloud. The product development costs really cross those three platforms. Our anticipation on those is those will come down as the products are maturing. If we look at next year, we're looking at about approximately CAD 1 million of product development in 2022.
Okay. Thank you so much, Paul.
Thanks for your time. Thank you.
There are no further questions at this time. Mr. Ghezzi, you may proceed.
All right. Operator, thank you very much. Thank you, everyone, for joining the call. We appreciate you spending time with us, and we look forward to continue to deliver fantastic growth on revenue, earnings, and net income. If you'd like to connect with us, info@kontrolcorp.com is the email. That wraps up the call for today. Thank you very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.