Thermal Energy International Inc

XTSX:TMG

Earnings Call Transcript 2025-Q1

[William Croslland, executive]

Great. Fantastic. Good morning, everyone. I'm William Crossland, CEO of Thermal Energy International. Thank you for joining our call this morning. Earlier today we reported our financial results for the first quarter ended August 31. Our news release, financial statements and MD&A will be posted on our website and have been filed on SEDAR.

After my prepared remarks, we'll have a question-and-answer session, at which time qualified equity research analysts joining us on MS Teams will be able to ask questions. If you're joining us online, you should be able to see our slide presentation on your screen now.

Before we go any further, I need to point out that today's earnings call may contain forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information, please refer to our year-end financial statement and our management's discussion and analysis for the quarter and our other filings with the Canadian securities regulatory.

As a quick overview, we had a very strong start to fiscal 2025 with record revenue for both the quarter and the trailing 12 months ended August 31. And net income -- EBITDA and net income were both up compared to Q1 of last year and have both increased in each of the last 2 sequential quarters as well. We exited the quarter with a strong balance sheet, and we are well positioned for growth, and we continue to have a very favorable outlook with strong market fundamentals.

In terms of revenue, we had revenue of $8.5 million for the quarter, our highest quarterly revenue to date, representing an increase of 63% compared to Q1 last year and 171% compared to Q1 of fiscal 2023. The quarter benefited from the strongest turnkey project revenue we've seen since before the pandemic. While we're pleased to see such a resurgence in our turnkey business, the timing of turnkey projects can result in our quarterly revenues being quite lumpy at times. This is why management prefers to look at things over a trailing 12-month or longer basis. Looking at the 12 months ended August 31, or TTM, we had revenues of $29.2 million, which was also a record number for us. Importantly, our trailing 12-month revenue was up significantly over last year and up 93% from 2 years ago.

We had EBITDA of $553,000 for the quarter, which represents increases of $139,000 compared to Q1 last year and $783,000 increase compared to Q1 of 2023. On the trailing 12 months, EBITDA was $2.1 million, which was down $200,000 from the trailing 12 months a year ago, but up $3.2 million over the past 2 years. It's important to note that trailing 12-month last year include our exceptionally strong fourth quarter of fiscal 2023, which had EBITDA of $1.2 million in that quarter alone. And trailing 12-month this year had a higher cost base as well, mostly due to $1.6 million in additional expenses related to investments to drive future growth of the business, including increases in staff, digitization and system automation and costs related to our new much larger U.K. facility, including leasehold improvements, additional rent and new equipment. So even though we had $1.6 million in extra growth-related expenses, EBITDA was only about $200,000 lower.

Net income for the quarter was $300,000, representing increases of $147,000 from last year and $818,000 compared to 2023. For the trailing 12 months, we had net income of $1.1 million, which is down $200,000 from the year before, but up $3.3 million from 2 years ago. Similar to my comments on the trailing 12-month EBITDA on the prior slide, trailing 12-month net income included our exceptionally strong fiscal 2023 fourth quarter and the trailing 12-month 2005 (sic) [ 2025 ] expenses include the investments we made for future growth. So again, even though we had $1.6 million in extra future growth-related expenses, net income was only about $200,000 lower.

Now to talk a little bit about this investment in future growth. I know I've mentioned this previously, but it's important to highlight again the significant investments we've made in our business in fiscal 2024 and beyond. To keep up with growing demand, we moved our U.K. operations to a much larger industrial production facility that has more than double the throughput capacity of our prior location. In the last 12 months, we've added a total of 9 people, 2 people to our sales and marketing team, 6 people to engineering and production and 1 in admin. And we've invested in technology, including our custom-developed mobile app called CREST, which stands for Carbon Reduction and Efficiency Scoping Tool. CREST will enable our sales and engineering teams to efficiently identify thermal energy savings and carbon reduction opportunities while on site with our customers. We are also investing in a robust global accounting program and ERP software to create agility in our accounting, manufacturing and fulfillment. Importantly, while these investments lowered our profitability in the trailing 12 months period, most of this has yet to contribute to our top line, but will enable the next stage of growth for Thermal Energy.

This slide shows the growth in our EBITDA and net income in each of the last 2 sequential quarters or since we first announced the growth investments I just highlighted -- since we first announced the growth investment I just highlighted. Q1 EBITDA was $131,000 higher than Q4 2024 and $231,000 higher than Q3 2024. That's an improvement of 72% over the last 2 sequential quarters. Similarly, net income was up $19,000 compared to Q4 2024 and up $265,000 from Q3 2024. That's about a sevenfold increase.

On to the balance sheet, at the end of August, we had cash and cash equivalents of about $5 million and working capital of $3.8 million. And we continue to lower our debt, which is now down to about $2.1 million at the end of August. Like our revenues, order intake can be quite lumpy on a quarterly basis, which is again why we focus more on the trailing 12 months and longer time frames. Looking at our order intake for the past 2 years on a trailing 12-month basis, we had $29 million in orders for trailing 12 months ending August 31, which is up about 7.8% from a year earlier and more than double what we had 2 years ago.

This slide also shows 2 of our more notable orders that were received subsequent to Q1. On September 23, we announced repeat business in the form of an order for a heat recovery project and heat pump project valued at approximately $2.2 million from a leading multinational pharmaceutical company. And that was our second project with this company. And earlier this week, we announced a heat recovery project valued at approximately $1.5 million from a multinational confectionery company and a new customer for Thermal Energy. This project is at a Canadian site, but the customer has more than 20 plants around the world.

We exited the fiscal quarter with an order backlog of about $13.5 million, which was about 16% higher than it was at the end of Q1 last year and up about 121% from 2 years ago. Since the end of the quarter, our backlog has increased by almost $5 million to $18.4 million as of October 28.

A quick look at activity pertaining to our project development agreements or PDAs, which usually precede turnkey project orders. At the end of Q1, we had 32 projects in development. While the number of live PDAs with -- that is projects in development is well above what it was 2 years ago, it has dropped from a year ago. However, the number and value of the projects we're working on has stayed quite stable over the last 4 quarters despite the fact that we've received 7 new projects totaling $18 million during that time. And as I mentioned during our call last month, we are increasing our PDA pricing to reflect the continued strong demand we're seeing for our project development agreements.

In terms of outlook, we remain quite bullish on our outlook as this is a very exciting time for Thermal Energy. The significant reinvestments we made in our business strongly position us for our next stage of growth. As always, I would like to remind people that our revenues can be quite lumpy from quarter-to-quarter depending on the timing of projects, but overall demand remains high, market fundamentals are as strong as ever. And importantly, improving thermal energy is still and always will be the fastest, cheapest and easiest way for our customers to reduce their carbon emissions.

So in summary, our first quarter and trailing 12-month revenues represent new record highs for our company. We are pleased with the strong improvements in EBITDA and net income for the quarter, both on a year-over-year and sequential quarter basis. We have a strong balance sheet, and we're well positioned for growth. And finally, we have a very favorable market outlook, and we are excited for the future.

So now that concludes our prepared remarks. We would now like to open the call for questions. I'll turn it over to Trevor Heisler at MBC Capital Markets Advisors, who will moderate our Q and answer. Please go ahead, Trevor.

[Trevor Heisler]

[Operator Instructions] And your first question comes from the line of Russ Stanley at Beacon Securities.

[Russell Stanley, analyst]

Congrats on the quarter. Wondering if you can talk a little bit to revenue mix in the quarter, turnkey heat recovery projects, maybe what share of revenue that was roughly and how that compares to a year ago levels given the shift that you talked about in the past?

[William Croslland, executive]

Yes. Thanks, Russ. Yes, to refresh people's memory, pre-pandemic, and we've said this many times, turnkey was about 2/3 and custom equipment was about 1/3. Those are the 2 different ways we generally deliver our solutions to our customers. As a result of the pandemic, the turnkey was very difficult to execute given travel restrictions and site lockdowns. So turnkey slowed down very significantly, but custom equipment continued to grow at about 30% compounded annually throughout the -- over the last several years. As a result, last year, and I'm going to go back to sort of 2023, so the year before last, I guess, it had totally flipped such that 2/3 -- sorry, turnkey was only 1/3 and custom equipment was 2/3. And then in 2024, it started to come back. It's not back to where it was yet in terms of 2/3 turnkey and 1/3 custom, but it's getting there. But in terms of order intake, I would say it is back to the 2/3 turnkey and 1/3 custom equipment. So we will get there probably this year back to the sort of ratio that we have traditionally had. I hope that helps, Russ.

[Russell Stanley, analyst]

That does. That's great. It dovetails into my next question, just understanding the margin differentials there. It looks like gross margins have settled in the low 40s for the last couple of quarters. You note in the MD&A that the shift -- the revenue mix shift is a driver behind that. I'm just wondering, is there anything unusual in the quarter that you would call out? Or should we view current levels as the new normal? Or might we see a few more points in downward pressure just from -- given the order intake mix is back to that 2/3, 1/3 split?

[William Croslland, executive]

We probably see a little bit of -- as we increase the amount of turnkey projects in terms of percentage, it probably will -- there'll be a little bit of downward pressure on it still, not much, but a bit, I would think. But obviously, the turnkey projects represent much higher revenue number generally. So the gross profit might not necessarily go down, but the percentage might go down a bit. So yes, so as I said, we're probably halfway back in terms of revenue, we're probably halfway back to where we were before. And we expect eventually we'll get back to where we were before at sort of 2/3 turnkey, 1/3 custom equipment.

[Russell Stanley, analyst]

Maybe just on order intake, it looks like order flow has really picked up quite nicely since August 31. It looks like you've already booked maybe almost twice as much -- twice as much in revenue in the first 2 months of Q2 than you did in all of Q1. Maybe still trailing a bit behind year ago pacing, but I'm wondering, are there any particular hurdles or headwinds you're encountering? It sounds like the demand picture is still very strong. And just wondering if what we're seeing here year-over-year is just the nature of the business with respect to the lumpiness of heat recovery projects in particular?

[William Croslland, executive]

I think so. We don't see any changes. There's no changes in the marketplace. So I think you hit the nail on the head, Russ, and you said it's just the sort of natural lumpiness. Sometimes we have a phenomenal quarter and sometimes we don't. But over a longer period of time, the trend has always been -- the trend continues to be very positive. So, yes, I would chalk it up to sort of the traditional lumpiness of the receipt of orders. Q1 tends to be our weakest quarter at any rate. So it's usually not a lot of significant orders come in Q1.

[Russell Stanley, analyst]

Got it. And maybe if you could talk about opportunities on the M&A front, wondering what you're seeing there with respect to attractive targets and valuation expectations for [ vendors ] and what you're seeing on that front?

[William Croslland, executive]

Yes, it's still early days. We've had some very preliminary discussions with a couple of companies, but it's -- I would still say it's still very early stage. So it's -- I don't really have any further feedback in terms of valuations. I've always thought that sort of a 1x revenue is a reasonable number depending on the profitability, obviously. But yes, there's no real update there. We're still pursuing it. It is something we would like to do in the next 12 months, and we're just looking for the right fit.

[Russell Stanley, analyst]

Great. Maybe one more question, and I'll [ hand it ] off. Maybe if I could ask around the staffing investments that you've made. You stressed that they are not yet really contributing to the top line, which is quite normal, I suppose. I'm just wondering, are you happy with the pace of ramp-up on the personnel front and how they're progressing given the adds you've made? And just wondering if you're confident in the -- their contribution revenue is going to track to your expectations?

[William Croslland, executive]

Yes. Again, early days, but so far, so good. Yes, we're very pleased with the team as it is right now. We've had some pretty aggressive additions over the last, say, 18 months. And we think we're pretty much set now. It might add 1 or 2 people here or there as needed. But we think we're in pretty good shape for the next 12 months in terms of the team without really having to make any further significant additions. And we're very happy with the team we've got. Yes, we've got a great team. So we're pretty lucky.

[Russell Stanley, analyst]

All right. Maybe if I could sneak in one more...

[William Croslland, executive]

As many as you want, Russ, you can ask as many questions as you want.

[Russell Stanley, analyst]

Maybe on the contract win from earlier this week, noting that that's a new customer, I believe, for you, and you still have, as I understand, a lot of runway for growth with existing customers. So I'm just wondering how you're approaching sales at this point? Are you out there hunting new customers? Or is the focus on the existing customer base given your 1,000 sites that they operate globally. And I imagine you're doing both, but I'd love to hear more about where the bias is at this point?

[William Croslland, executive]

Yes. It's -- I mean the bias is still with existing customers, but not a huge bias. So if I was just to ballpark it, it's probably 60% of the time is spent targeting existing customers with the general sales team. But on top of that, with our area sales managers and our Head of Sales for both North America and Europe. But on top of that, we also have a person that is the Director of Global Partnerships, where he is focused almost exclusively on existing customers and building relationships to enter multiple sites. But overall, it's probably about 60-40.

Having said that, it's a very focused list, both with the target customer -- both with the existing customers and the target additional new customers. It's not a shotgun. It's more of a rifle. We spend lots of time trying to identify which customers make the most sense for us, which ones have -- we've got enough experience now. We know what type of industries, what type of processes can definitely use their services. So we're looking for the types of customers that have, a, the capital to do it; and b, the desire to do it with some carbon emission reduction targets. And that's basically how this most recent project came available, the confectionery company. We identified them, the sales team identified them as a customer that had some aggressive carbon emission reduction targets and our project that we did for them met those targets and helped them achieve those goals. So that's always part of it. So overall, it's about, say, a roughly 60-40 split. But in both cases, it's a very focused approach.

[Trevor Heisler]

All right, Bill. And your next question comes from the line of Jesus Sanchez at Castanar Investment Fund.

[Jesus Sanchez, analyst]

Honestly, a lot has been asked already. Just piggybacking on the question related to the expenses in operations. You mentioned maybe adding 2 more people in the next 12 months. Is that right, Bill?

[William Croslland, executive]

The emphasis is on maybe. We don't have any plans right now to add anybody, but I don't want to say we aren't going to add anybody in the next 12 months. So right now, we have no plans, but you never know.

[Jesus Sanchez, analyst]

But you are happy with the team right now.

[William Croslland, executive]

Very happy with the team now, yes.

[Jesus Sanchez, analyst]

And when do you expect these onboardings will finish and we can see these new salespeople, engineers really in the revenue?

[William Croslland, executive]

So -- I mean, again, it's difficult. But because it's such a technical sale, if you look at the people we've added over the last 2 years, earlier on, we added 4 or 5 salespeople. Generally, it's difficult for salespeople to get much in the way of revenue in the first year. They usually get some small orders. In the second year, they start hitting their stride. In the third year, they should be operating -- we would expect them to be operating just like a traditional area sales manager. So it does take a couple of years to get them up to where we would want them to be.

We add salespeople for future growth. We generally add engineers when we see in the pipeline that future growth is coming, more imminently. Engineers also take some time to get up to speed again, to understand their technologies to be able to do projects for us. There is definitely a learning curve there, not as long as there is with the salespeople. And that's why when you look at over the last 18 months, the salespeople were hired generally 12 to 18 months ago. But in the last 12 months, it's been mostly engineers because we see that pipeline building, we see the opportunities ahead of us, we want to make sure we have the team to be able to execute the revenue.

[Jesus Sanchez, analyst]

Makes a lot of sense. Another question, if may I, about the U.K. facility, how things are going in this new country, how are the operations order? And if we expect what kind of revenue -- additional revenue we expect from this expansion to the U.K.?

[William Croslland, executive]

Yes. I mean I wouldn't expect additional revenue from the U.K. just because of the facility expansion. We moved to the new facility because the revenue had grown so significantly, especially the GEM traps. That's where the GEM traps are fabricated and finished. And we were just totally out of space. And so this new facility has -- we say 2x, but really, it's more like 3x the space and the throughput capacity that the previous space did. So it's really sort of setting us up to be able to continue growing the revenue because, again, like I said, the last facility was -- we were just totally out of space.

[Jesus Sanchez, analyst]

That will be all.

[William Croslland, executive]

Any further questions, Trevor?

[Trevor Heisler]

It looks like there are no further questions at this time. Please go ahead, Bill.

[William Croslland, executive]

Well, I would like to thank everyone for taking time this morning to join the call. We look forward to speaking to you again next quarter. And if you have any other further questions, don't hesitate to reach out to us via the website. Thanks, everyone. Have a great day. Bye for now.