Thermal Energy International Inc.

Good. Are we recording? Can we start?

Yep.

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 31st. Our news release, financial statements and MD&A will be posted on our website and have been filed on CDAR. 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 discussion and analysis for the quarter and our other filings with the Canadian securities regulators. 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 31st. 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 two 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 31st, 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 two 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. 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 two years. It's important to note that trailing 12 months 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 months 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 UK 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 two 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 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 uk operations to a much larger industrial production facility that has more than double the throughput capacity of our prior relocation in the last 12 months We've added a total of nine people, two people to our sales and marketing team, six people to engineering and production, and one 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 on our EBITDA and net income. in each of the last two 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 two 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 timeframes. Looking at our order intake for the past two years on a trailing 12-month basis, we had $29 million in orders for trailing 12 months ending August 31st, which is up about 7.8% from a year earlier and more than double what we had two years ago. This slide also shows two of our more notable orders that we received subsequent to Q1. On September 23rd, 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 two years ago. Since the end of the quarter, our backlog has increased by almost $5 million to 18.4 million as of October 28th. 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, that is projects in development, is well above what it was two 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 four quarters, despite the fact that we've received seven 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 NBC Capital Markets Advisors, who will moderate our Q and answer. Please go ahead, Trevor.

Thank you, Bill. If you are a qualified equity analyst joining us on MS Teams this morning and would like to ask a question, please notify me by using the raise your hand feature on the screen. And your first question comes from the line of Russ Stanley at Beacon Securities. Please go ahead, Russ.

Thanks. Good morning, Bill, and congrats on the quarter. Wondering if you can talk a little bit to revenue mix in the quarter. My turnkey key revenue projects maybe will share revenue. That was roughly and how that compares to the year ago level, year ago levels, given the shift that you talked about in the past. Thanks.

Yeah, thanks. Thanks, Russ. Yeah. To refresh people's memory, pre-pandemic, and we've said this many times, turnkey was about two-thirds and custom equipment was about one-third. Those are the two 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 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 two-thirds, sorry, turnkey was only one-third and custom equipment was two-thirds. And then in 2024, it started to come back. It's not back to where it was yet in terms of two-thirds turnkey and one-third custom, but it's getting there. But in terms of order intake, I would say it is back to the two-thirds turnkey and one-third 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 us.

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 40s for the last couple of quarters. You note in the MD&A that the revenue mix shift is the 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 two-thirds, one-third.

We probably see a little bit of, you know, as we increase the amount of turnkey projects in terms of percentage, you know, it probably will be a little bit of downward pressure on it still. Not much, but a bit, I would think. But obviously, the turnkey projects represent a much higher revenue number generally. So, you know, so the gross profit might not necessarily go down, but the percentage might don't go down a bit. So, yeah, 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. It's sort of two-thirds turnkey, one-third custom equipment.

So maybe just on order intake, it looks like – Order flow has really picked up quite nicely since August 31st. Looks like you've already booked maybe almost twice as much twice as much in revenue in the first two 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.

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

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

Yeah, it's, it's, it's still early days. We've had some very preliminary discussions with, uh, with, with a couple of companies, but it's, I would still say it's still very early stage. Um, so it's, you know, I don't really have any further feedback in terms of, of valuations. I've always thought that sort of a one times revenue is, is a reasonable number depending on the profitability, obviously. Um, but yeah, there's no real update there. We're, we're still pursuing it. It is something we would like to do in the next 12 months. And, uh, We're just looking for the right fit.

Maybe one more question and I'll end it off. Maybe if I could ask around the staffing investments that you've made, you know, you stressed that they're 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, you know, given the ads you've made and just wondering if you're confident in the you know, their contribution revenue is going to track to your expectations.

Yeah, again, early days, but so far so good. Yeah, 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, you know, we think we're, Pretty much set now, you know, might add one or two people here or there as needed. But we think we're in pretty good shape, you know, 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. Yeah, we've got a great team. So we're pretty lucky.

Maybe if I could sneak in one more.

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

Maybe on the contract we went from earlier this week, noting that that's a new customer, I believe, for you. You know, and you still have, as I understand it, 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 sales? you know, the thousand sites that they operate globally. And I imagine you're doing both, but I'd love to hear more about where the, where the bias is at this point. Thanks.

Yeah. It's, I mean, the bias is still with existing customers, but not a huge bias. So, um, you know, if, if I was just a ballpark, it's probably 60% of the time is spent, uh, targeting existing customers with the general sales team. But on top of that, you know, with our, with our area sales managers and our, um, you know, our head of sales for both North America and Europe. But on top of that, we also have, you know, 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 existing customers and the target additional new customers. You know, 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, you know, which ones have, you know, 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 60-40, roughly 60-40 split. But in both cases, it's a very focused approach.

That's great. Thank you very much for the color, Bill. I'll hand it off, but congrats again on the court.

Thanks, Russ. All right, Bill, and your next question comes from the line of Jesus Sanchez at Castaner Investment Fund. Please go ahead.

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

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. You know, right now we have no plans, but you never know.

But you are happy with the team right now?

Very happy with the team now, yes.

And when do you expect this onboarding will finish and we can see these new sales people, engineers, really in the revenue?

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 two years, earlier on, we added four or five 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 our 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. 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.

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

Yeah, I mean, I wouldn't expect additional revenue from the UK 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, you know, we say two times, but really it's more like three times 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.

That will be all. Thank you very much, Bill. Congrats.

Thank you, Jason. Any further questions, Trevor?

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

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.