Thermal Energy International Inc. (TMG.V) Q4 FY2025 Earnings Call Transcript & Summary

Good morning, everyone. I'm William Crossland. CEO of Thermal Energy International. Thank you for joining us today for our earnings call for the fourth quarter and fiscal year ended May 31, 2025. Our news release, financial statements and MD&A are available on our website and have been filed on SEDAR. Following my prepared remarks, we'll have a question-and-answer session, at which time qualified equity 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 get started, I'll 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 financial statements and our MD&A for the quarter and our other filings with Canadian securities regulators. Here's a quick overview of what I'll be highlighting in this morning's call. First, we had record fiscal year revenue of $29.8 million. And while our revenue was down for the quarter, our gross margin and adjusted EBITDA margin improved in Q4. We significantly paid down our long-term debt, both in the quarter and the year. And looking ahead, our record Q1 order intake positions us well for a strong second half of fiscal 2026. And finally, we've identified a few key strategic opportunities to drive sales growth and margin improvement going forward. Now looking at our revenue on Slide 4. While our revenue for the fourth quarter of 2025 was down 9% year-over-year, we achieved record revenue of $29.8 million for the year. And this slide is great in illustrating how our revenue can be lumpy from quarter-to-quarter and why we tend to focus more on the trailing 12 months. As you can see, our fourth quarter revenue was down each of the past 2 years, but our fiscal year revenue increased by 41.2% over the last 2 years. We remain profitable in the quarter and the year. In fact, despite our lower revenue in Q4, our gross margin improved to 53.9% and our adjusted EBITDA margin improved to 5.8% for the quarter. Fourth quarter adjusted EBITDA was about $400,000, down 6% from the prior year. Contributing to the decrease was an increase in foreign exchange loss of $349,000 and an increase in general operating costs of $280,000 related to the growth in our team. These amounts were partially offset by higher gross margin and a decrease in quarterly R&D expenses. For the year, we had adjusted EBITDA of $1.05 million, down from $2 million the year before. The largest driver of this year-over-year variance was that fiscal year 2025 operating expenses included an additional $813,000 related to the growth in our headcount, primarily in our sales and marketing and engineering team. Also contributing to the decrease were the lower gross profit for the year and inflation-related increase -- increases to regular operating costs. Our net income was down for the quarter and the year, but also still positive for both. In addition to the drivers I just discussed, for adjusted EBITDA, net income from the quarter was impacted by a lower amount of income tax recovery than the previous fourth quarter. And for the year, we had about a $5,000 increase in income tax expense. But again, the main driver for the decreases in adjusted EBITDA and net income was the growth in our headcount. We continue to have a very strong balance sheet with cash and cash equivalents of $2.8 million and working capital of $2.4 million at year-end. Importantly, we significantly paid down our bank debt, repaying $2 million in fiscal 2025, including $1.1 million in the fourth quarter alone. Over the past 3 years, we have repaid $3.6 million in acquisition and pandemic-related debt with just $329,000 remaining at year-end. The remaining balance will be fully repaid by January 2026. The full repayment of our debt should not only help our bottom line going forward, but also give us more flexibility with future growth plans. While our revenue for fiscal 2025 was a record, our order intake of $21.8 million for the year was down from the prior year. Likewise, our order backlog of $12.9 million at year-end was down from the prior year. For those of you who have been following the story for some time know that our business can be quite lumpy at times with significant variance in the timing of orders. The good news is that we saw a strong rebound in orders coming in subsequent to year-end with order intake of $11.4 million between June 1 and September 22. As a result, our backlog has grown to $24.3 million as at September 22, which is a record for this time of year. The rebound in order intake included $11.3 million in orders received in the first quarter of fiscal 2026, which is a record amount for our Q1 period, and it is about 4x what we had in the first quarter last year. Within that $11.3 million, there are 4 orders we announced back in June and July that had a combined total of about $7.5 million, including $5.1 million in follow-up orders from one of the world's largest pharmaceutical companies. It's important to point out that given the typical revenue pattern for large turnkey projects like these, most of the revenues from these previously announced orders is expected to be realized in the second half of fiscal 2026. As such, we expect overall revenues in fiscal 2026 to be weighted more towards the back half of the year. I'd also note that our business development pipeline remains strong with numerous repeated opportunities from existing customers and potential opportunities with prospective new customers. The substantial investments we've made in our business over the past 2-plus years have weighed on profitability, but they've also positioned us to scale the business much better. Building on this foundation, we have identified several strategic initiatives to further scale the business and drive profitable growth. These include develop indirect sales channels in North America and Europe, develop and promote standardized equipment packages, establish BEI manufacturing in Europe, and leverage our award-winning carbon reduction and efficiency scoping tool or CREST for short, for both our direct and indirect sales channels. I'll take a few moments now to provide a high-level overview of each of these initiatives. First, we look to add indirect sales channels in North America and Europe by developing and cultivating networks of independent manufacturers' representative companies or IMRs per short to focus on smaller equipment sales. Many industrial products, including boiler and steam system-related products are often sold by networks of IMRs who are responsible for promoting, selling and commissioning products in their territories. IMRs usually also have service groups including those people that provide ongoing service to boilers, burners, steam traps, et cetera. Importantly, these representatives have established relationships and are in regular contact with end users. While BEIs distribution model already uses a manufacturer representation network, there is an opportunity for the rest of our business to leverage IMRs to cost-effectively increase sales of equipment. In addition to providing extensive geographical coverage, the potential benefits include the opportunity to further grow sales with less investments as MRIs operate on 100% success-based markup basis. And having MRIs handling smaller orders will free up our internal sales team to focus on larger, more strategic opportunities. Next, we see an opportunity to increase sales by developing and promoting a line of standardized equipment packages and standardized preengineered heat recovery solutions for smaller or less complex projects. IMRs could sell -- could then sell these from a line card along with their other products and services. For smaller projects, this would reduce project development times as there would be no bespoke design required, and we would expect to benefit from a faster sales cycle as these smaller projects could be quoted on and sold directly from CREST survey data, as we'll talk about in a minute. BEI HeatSponge have been a great business for us, but sales have been mostly limited to North America so far. We see significant potential for HeatSponge sales in Europe. As a result, we see an opportunity to expand HeatSponge sales by adding manufacturing in Europe. At first, BEI's existing U.S. shop, which supply components for assembly and testing in Europe. And later, as orders increase, we may possibly move the European manufacturing business to a contract manufacturing shop in Europe. Europe is largely an untapped market for HeatSponge and having a manufacturing operation in Europe would result in shorter lead times in a more cost-effective way to service the European market. As mentioned earlier, each of these initiatives can be supercharged by CREST, our powerful mobile app platform that not only uncovers thermal energy savings and carbon reduction opportunities, but also saves time, accelerates the sales cycle and helps both our sales team and new independent representatives spot opportunities that might otherwise be missed, including cross-selling and other repeat business potential. Additionally, CREST can help reduce the time needed for internal salespeople and IMRs training and ramp-up time. So in summary, some key takeaways from the presentation are we have a strong balance sheet with little debt. Our record first quarter order intake and growing backlog position us well for a strong half -- second half of fiscal 2026. We have identified a few key opportunities to drive sales growth and margin improvement including develop an indirect sales channel, so our internal sales team can focus on larger, more strategic opportunities, increasing sales of standardized equipment packages, expanding BEI into Europe and leveraging CREST in each of these areas and throughout our business. I hope to provide additional details on each of these opportunities in the coming quarters as plans progress and we have updates to share. This concludes my prepared remarks. I would now like to open the call for questions. I will turn it over to Trevor Heisler at MBC Capital Market Advisors, who will moderate our Q&A session. Please go ahead, Trevor.

Thank you, Bill. If you're a qualified equity analyst joining us on MS Teams and would like to ask a question, please notify me now by using the raise your hand feature. And it doesn't look like we have any questions at this time, Bill. Please go ahead.

Okay. Well, thank you for your continued support of Thermal Energy International, we look forward to speaking to you again next quarter. Have a great day.