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

Ladies and gentlemen, welcome to the Annual Meeting of Thermal Energy International, Inc. Please note, the meeting will be recorded. I would like to introduce William White, Chair of the Board of Directors of the corporation. Mr. White, the floor is yours.

Good morning, and welcome to the Annual Meeting of the Shareholders of Thermal Energy Inc. My name is William White. I'm the Chair of the Board of Directors of Thermal Energy International, and I will be acting as Chair of the meeting. As is our custom, we will conduct the formal portion of our meeting first. Following the conclusion of the formal meeting, Bill Crossland, Thermal Energy's CEO, will provide a presentation on the company's financial performance in the fiscal year 2024 and a business update. Following this, there will be an opportunity to ask general questions. Validated shareholders may ask questions in the Ask a Question text box on the web portal. Please note that this meeting is being recorded. I'd like to introduce each of the board members and management who are on the call. From the Board, William Ollerhead; and Mike Williams; and David Spagnolo. And from management, we have Robert Triebe and Julia Zhang. I'd also like to introduce Debbie Weinstein, Corporate Secretary for the corporation, who will act as Secretary of the meeting. The company has appointed TSX Trust Company to act as scrutineers of the meeting who is represented today by Emma Mackenzie and the Cassandra Logo. The company has been provided with an affidavit of mailing -- confirming the mailing of this meeting materials, and I have received a preliminary report on attendance from the scrutineers and have determined that a quorum is present. Therefore, I declare the meeting to be regularly called and properly constituted for the transaction of business. We will conduct the votes on the matters before us by a poll. On a poll, each registered shareholder or their duly appointed proxy holder is entitled to vote on the matter and has 1 vote in respect to each share entitled to be voted on in the matter and held by that shareholder. The poll will be open for all resolutions at the same time. Click the voting button on the left menu of your screen when the poll is announced. This will allow you to choose to vote on each resolution immediately or wait until the conclusion of the discussion on each resolution prior to casting your vote. There will be an opportunity to ask questions on each resolution in turn. To submit a question, click the Ask a Question button on the left menu of your screen and type your question in the text box. Once discussion of all items of business has concluded, I will give you 20 seconds to enter your votes and then declare voting closed on all resolutions. The first item of business is the presentation of audited and financial statements of Thermal Energy for the year-ended May 31, 2024, and the auditor's report. Links to the electronic copies of the financial statements and auditors' report were delivered in advance to each of the shareholders. I would ask that any questions on the financial statements or auditor's reports be postponed until after the formal business of the meeting has been completed. The polls are now open for voting. I will describe each of the matters to be voted upon in the meeting. The first matter to be voted upon is the election of directors. The number of directors currently holding office is 5. The following 5 individuals, all of whom are currently directors of the company were identified in the management information circular that accompanied notice of the meeting for election of directors. William Crossland, William Ollerhead, Mike Williams, David Spagnolo and William White. Is there any further nominations?

There is no nomination from there.

Thank you. As there are no additional nominations, I declare the nominations closed. There are 5 individuals nominated for 5 positions. The second matter to be voted upon is the appointment of auditors and to authorize the Board of Directors to fix their remuneration. The company has proposed a KPMG LLP be reappointed as auditors of Thermal Energy to hold office until close of the next Annual Meeting of Shareholders or until their successors are appointed and that directors be audits to fix their remuneration. Is there any discussion about the 2 matters proposed for voting? If there's no further discussion, we will move to a vote on these matters. If you have not already done so, registered shareholders or valid proxy holders, please click the voting button on the left menu on your screen in order to vote on each resolution. We will provide 20 seconds for shareholders to submit their votes. So the 20 seconds have passed. We will be wrapping up voting. Now that everyone has had the opportunity to vote, I now declare the polls closed. We will now take a moment to determine the results of the polls. We have been informed by the scrutineer that the preliminary vote report shows that a majority of the votes cast at the meeting have been cast in favor of the nominees for election to the Board and in favor of the reappointment of KPMG LLP as auditors of the corporation and authorization of the Board of Directors to fix the remuneration. In light of the voting results, I declare that the nominees named for election to the Board have been duly elected to hold office until the close of the next annual meeting of shareholders. And that KPMG LLP has been appointed as auditors of the Thermal Energy International, Inc. for the upcoming year, and the Board of Directors has been authorized to fix their remuneration. So that concludes the formal business scheduled to come before the meeting. I remind you that there will be a management presentation following this formal portion and an opportunity to ask questions after that. Ladies and gentlemen, thank you for attending today's meeting.

Thank you, Bill, and good morning, everyone. Next Slide, please. And one more. So this morning, I'll quickly go over a few key highlights from fiscal 2024. Before discussing investments, we've made to drive the future growth of the business. I'll then review our first quarter results and our strong outlook before taking your questions. But before we go any further, of course, I need to point out that this presentation may contain certain forward-looking statements within the meaning of applicable securities laws. And for additional information, please refer to our filings with the Canadian Securities Regulators. Okay? Next slide, please. We had an exceptional year in fiscal 2024, with record revenue and EBITDA. Our revenue of $25.9 million was 23% higher than fiscal 2023 and 63% higher than fiscal 2022. And our EBITDA of $2 million was $260,000 more than last fiscal year and up more than $2.7 million from 2 years ago. And then finally, our net income for the year was $982,000 or almost $1 million, representing an increase of $262,000 from fiscal 2023 and an increase of more than $2.8 million from 2 years ago. Even with these solid results, it's important to note that our EBITDA and our net income would have been even higher if it weren't for the significant investments we made during the year and the future growth of the company, and I'll talk more about that shortly. Next slide, please. Fiscal 2024 saw the resurgence of our turnkey project business that struggled a bit during the pandemic. In fact, our heat recovery project revenue for this year was the highest it's been since before the pandemic. We also saw continued strong demand in our custom equipment side of the business, which is primarily HeatSponge and GEM. And in order to keep up with the GEM demand, we moved our U.K. operations to a larger industrial unit on the outskirts of Bristol, the larger production facility, which is pictured in this slide, is 2.5x the size of our old location and therefore has more than doubled the throughput capacity. On the Investor Relations front, we secured our first ever sell-side analyst coverage with Beacon Securities initiating coverage back in February, and we started hosting quarterly earnings calls in April. We also experienced a very significant increases in share price, trading volumes, and value traded in our stock during the fiscal year. Next slide, please. This slide highlights the significant investments we made in the 12 months ended August 31, 2024, to drive the future growth of the company. The investments were in 3 main areas: plant, people, and technology. I already touched on the relocation of our U.K. plant, so I'll move on to people. Our continued growth is largely a function of adding more salespeople and engineers. And in the 12 months ending August 31, we added a total of 9 people, including 2 people to our sales and marketing team, 6 people in engineering and production, and 1 in admin. The 2 salespeople we added were in France, which is a new market for us. These 9 additional staff positions, we added in the past 12 months are in addition to the 8 people we added in the previous 12 months. So that's a total of 17 people over 2 years, including 5 in sales, 10 in engineering, and 2 in finance and admin. And I should emphasize, obviously, that these additional sales and engineering people naturally take some time to ramp up, the salespeople in particular, generally don't contribute too much in the first year or so. But ultimately, these additional salespeople will increase our order intake and revenue, while the engineers will enhance and grow our project development and execution capabilities. Finally, on the technology side, we're also investing in the future growth and efficiency of the company. We're implementing robust global accounting and ERP software to create agility and efficiency in our accounting manufacturing and fulfillment, and we have developed our own proprietary mobile app called CREST which stands for carbon reduction and efficiency scoping tool. And that's exactly what it is. Next slide, please, and I'll talk a little bit about more about CREST. So our CREST app consists of a custom developed tablet-based app connected to a back-end database. It will enable our sales and engineering teams to efficiently identify thermal energy savings in carbon reduction opportunities while on site with our customers. CREST will eliminate the traditional post-visit site survey write-up process that sales and engineers have always have had to do and it will all reduce proposal turnaround time and effort while also protecting our intellectual property and data. We believe CREST will result in faster proposal preparation and shorter sales cycles. It should also result in quicker identification of more cross-selling opportunities. It's been in development for some time. I've talked about it before but we're now very excited to be launching it this week. Next slide, please. So turning our attention to our fiscal 2025 performance to date. The next few slides will show our financial performance for both the first quarter and the trailing 12 months ended August 31, 2024. Next slide. So as you can see here, we had a very strong start to the year with record revenue for both the quarter and the trailing 12 months. Revenue in the first quarter was $8.5 million, representing an increase of 63% compared to Q1 the year before and a 171% increase compared to 2 years ago. For the trailing 12 months, we had revenues of $29.2 million, which was up about 26% over last year and 93% higher than 2 years ago. Next slide, please. So EBITDA. Q1 EBITDA was $553,000 which represents an increase of about $139,000 compared to Q1 last year and an increase of $78,000 compared to Q1 in 2023. For the 12-month period, EBITDA was $2.1 million, which was down $240,000 from the year before, but up $3.2 million compared to 2 years ago. But you need to keep in mind that the most recent 12 months includes the $1.6 million in additional expenses related to the investments to drive the future growth of the business that I just spoke about. Without these investments, the current profitability would, of course, be much higher. Next slide, please. Net income for the quarter was $309,000, up $141,000 from Q1 last year and up [ $818 ] from the year before. And for the 12 months, we had a net income of $1.1 million, which is down $260,000 from the year before, but up $3.3 million from 2 years ago. And similar to my comments on EBITDA a moment ago, net income for the most recent 12-month period have obviously been also impacted by the additional $1.6 million in investments we've made to drive future the growth of the business. And importantly, while these investments lowered our profitability in the recent 12-month period, their contributions to our top-line are still to come. Next slide, please. Now to talk about our progress sequentially by quarters. This slide shows the growth in profitability over the last 3 sequential quarters or since we first announced our growth investments. In Q1, EBITDA was $131,000 higher than Q4, and $231,000 higher than Q3. That's an improvement of 72%. Similarly net income was up $19,000 compared to Q4 and up $265,000 compared to Q3. So that's about a sevenfold increase. Next slide, please. We also exited the quarter with a strong balance sheet. At the end of August, we had $5 million cash on the balance sheet and working capital of $3.8 million. We also continued to lower our debt, which is down to $2.1 million at the end of August compared to $3 million a year ago and almost $4 million 2 years ago. Next slide, please. At the end of the first quarter, our order backlog was $13.5 million. That's about 16% higher than at the end of Q1 last year and up about 121% from 2 years ago. By October 28, we had reported -- when we reported our Q1, our order backlog increased to $18.4 million. Next slide, please. So some notable orders that we received subsequent to the end of the first quarter. You can see this slide highlights 3 of our most notable orders. In September, we announced $2.2 million in repeat business from a leading multinational pharmaceutical company. This order was for a heat recovery and heat pump project. Near the end of October, we received a heat recovery order for approximately $1.5 million from a multinational confectionery company. This is for a Canadian site of a new customer, which has more than 20 sites of potential interest to us. And most recently, on November 11, we announced 3 orders totaling $1 million for our wholly owned subsidiary boiler room equipment. Next slide, please. Project development agreements or PDAs. At the end of Q1, we had 32 live PDAs. While this is well above what it was 2 years ago and well above what it was pre-pandemic, the number of live PDAs is down from the same time last year. That being said, the number and value has stayed quite stable over the last 4 quarters despite the fact that we've received 7 new project orders totaling $18.4 million during that time. In light of the continued strong demand we're experiencing, we have increased our PDA pricing. Next slide. Taking a look at our outlook. I'd start by saying, we feel this is a very exciting time for Thermal Energy. We've invested in our next stage of growth with benefits from these investments still to come. As always, I'll remind you that our revenues can be lumpy from quarter-to-quarter depending on the timing of projects. But overall, demand remains high, and the market fundamentals are as strong as ever as supported by the fact that improving Thermal Energy remains for our customers, the fastest, cheapest, and easiest way for them to reduce their carbon emissions. Next slide. So with that, I'd like to take any questions you might have. I'll turn it over to Julia Zhang, our Chief Financial Officer; and Rob Triebe, our Chief Operating Officer, who will moderate our Q&A. So please go ahead, Julia and/or Rob.

Thank you. Thank you, Bill. Yes. We'll kick off with a couple of questions that are along the same line. One question is why does it take so long to finalize PDAs. And the other question is the approximately 35-plus PDAs in the past 2 years have not resulted in many sales contract. So both questions about the time required to close PDAs.

Yes. So I mentioned during the pandemic, it was a challenge, right, to do our project development agreements and our turnkey projects. There was site lockdowns, there was travel restriction. So that business was challenged pretty significantly. Customers weren't really interested at that point They're more interested in dealing with the pandemic. So when we emerged from the pandemic, the first thing we did is challenge our sales team to generate more PDAs so we can get that business going again, and they were very successful at doing that. Maybe a little bit too successful. We've got lots of projects that we've been working on. In terms of the timing, you have to keep in mind, these are pretty complicated projects, often with multiple options. So we can usually finish the analysis in sort of 4 to 8 months, although it's 4 months, I would say, is probably pretty rare. It's usually somewhere in 6 to 12-month, we can finish it. Now along the way, there's a lot of back and forth with the customer. As I said, these tends to be complicated projects. So we usually have what we call a mid-development review where we go back to the customer and show them what we've found so far and get further guidance from them on the direction they want to head. And I have explained that before in many of investor presentations, where there's a diminishing returns on the energy you save. So as an example, maybe the first $500,000 of energy we can save them is a 1-year payback. And the next $500,000 is a 3-year payback. So we have to go to them and say, well, look do you want to save $500,000 with a 1 year or $1 million with a 2-year, what's your goal? So there's usually a number of different options. So after we have that mid-development review, we go back and develop the final project that they're most interested in. Once we've got the final proposal, we then have to line up with their capital budgeting cycle. So as an example, if we finished our work in December or January, and they're on a calendar fiscal year. Well, then we probably missed the capital budget for that next year. So we have to wait till their capital budget cycle starts for the following year. So that could delay it months or even years. It has to be the right time for the customer as well. But overall, we don't want to start doing the -- we're not doing PDAs for the sake of doing PDAs. We are -- we want to make sure we've got a real project that the customer is interested in doing. Having said that, not every PDA does turn into a project for whatever reason. And I would say we've been fairly successful when the question that how come you haven't resulted in any projects. They've resulted in a lot of projects. As I said in my presentation, we had 7 projects in the last 12 months and more if you go back 24 months. So they are converting, but it does take time, just the nature of the projects and the nature of the customer's capital budget, budgeting cycle.

Thank you, Bill. Another question that has just come in along the same line. So I will carry on with this one. Could you speak a bit about the PDAs to understand the 7 PDAs over the last 12 months, are all bigger projects preceded by PDAs.

I'm not sure what the question is.

Speak a bit. Well, the question is, are all bigger projects preceded by PDAs.

Oh, I see. Okay.

But the statement before that was, could you speak a bit about the PDAs to understand the 7 over the last 12 months. Then the question, are all the bigger projects preceded by PDAs?

Yes. I'm not sure what we -- there's a lot of detail in terms of those specific projects in the press releases or as much details we want to give with respect to the 7 projects. And generally, yes, all large projects are preceded by a PDA, not always, but then 9 times out of 10. Sometimes, if it's a customer that we know very well, and we've done a very similar project with them, maybe that in that case, we might be able to get the order before without a PDA. But generally, yes, all large projects are preceded by a PDA.

Thank you, Bill. All right. On to a different subject. Regarding the efficiency of your new CREST tool, should that help TDI develop more customers easily and fast and generate extra PDAs? In the presentation last week, Bill indicated TDI was cutting back on PDAs. So does this not conflict the purpose of the tool. So question one, should CREST help more easily generate PDAs? And question 2, was there a comment about cutting back on PDAs and does this conflict with the first? Over to you, Bill.

Yes. So CREST will -- we expect CREST will result in more of all our business, not just PDAs, but equipment sales and projects. It will speed up the process a fair bit. We believe we've grown the company from one technology to 6 technologies that are used fairly frequently in a total of 10 technologies. And often it's a challenge for the sales team to go out and sell all the technologies at once. So that was part of the goal of the CREST is when they're out there visiting the site, the app will prompt them to ask different questions. Because when you think about it, the human mind can only think about one thing at a time. So when they're out trying to focus on selling one product, they're really focused on selling that one product. They're not selling the rest. So this will allow them when they're out there. The app will prompt them for additional information about the site, the size of the boiler, other sort of information that we can use to identify an opportunity that will all be back in our database. And so we think it will speed up the sales cycle pretty significantly, and it will speed up the cross-selling opportunities. So if they're selling once -- one technology, it will identify where there's an opportunity for another technology. I don't think I -- so that's the first part of the question. I don't think I ever said we're cutting back on PDAs. I think we -- I probably said we've increased our pricing, as I said in the presentation, and that's -- we have done that. And we are making sure that the number of PDAs isn't excessive. We can only do so many. And then what happens is you're growing your team, your ability to do PDA, you can only either do the PDA or execute the projects. So if you've got too many projects to execute, and we've had a lot of projects to execute in the last 12 months. Then your team starts to get stressed. So we think we're maybe a little bit ahead of a few more PDAs and we would like to grow the business at the rate that we think is sustainable. So we increased the pricing. So no, it's not counterproductive at all. It's -- CREST is there to speed up the sales cycle and do more cross-selling, which ultimately will result in more and better projects for us.

Thank you, Bill. Thank you. Thank you. There has yet to be a report of the successes by the new VP of Sales, Mr. Harden. I guess that one is not a question, but I guess I'll turn it into a question. Can you report on the successes of the new VP of sales, Mr. Harden?

Yes, I'm not sure I wanted to get into reporting on the successes of individual people, but the North American team had some objectives for this year, and they largely met those objectives. And so we think, generally, it's going quite well. So I think that's probably all I'll say at this point.

Thank you. Thank you, Bill. And a question for the Chair of the Board. It is recognized that the Board renewal is a good governance practice. Thermal's Board membership has remained constant over a long time with some members being on the board for almost 2 decades. With lack of diversity, especially geographical, given its international operations, when can the shareholders expect to benefit from a refreshed board?

Well, that's a good question. And we've listened to it before. We're actually working through our ethics, governance, and compliance committee that David Spagnolo leads to have that as a task around identifying candidates and then processing those candidates to see if they're ones that we should be voting on within the Board has somebody to bring in. It has been slow in terms of getting candidates that we found to be really viable and also meet the criteria that you were just discussing around geographic. And we actually got to the point where we had a -- we came to the conclusion that we're doing a better job, or we have a better likelihood of doing a good job by dealing with referrals more than just resumes that are available with the Institute of Corporate Directors. We had one quite good candidate who is a female and very well respected in the position that she's had. But unfortunately, that didn't work out that she was willing to join because of other obligations. So David has a key priority for the coming year, and we're looking for more referrals from the Board and from others that we know. So we expect to have the additions for the types that we want in the coming year.

Thank you very much. Thank you, Bill. Just shifting some more questions and making sure we get to all of them, which it looks like we will be able to. So next question. The flavor from some of the answers appears to be along the lines that growth at this time can be expected to be limited. What is the investment thesis for new investors given that many companies strive to grow more aggressively?

Curious, curious. I wouldn't have thought that the comments indicated growth was limited. So that certainly wasn't the intent. We've been pretty clear for many, many years now that growth of 20% to 30% compounded annually is really our goal and what we've achieved in the past and what we plan to continue achieving. That's our goal, and we see no reason not to continue achieving that. Just as it was in the past, some years will be more, some years will be less. But over the longer term, that's where we're headed. And then we hope to layer in acquisitions, again, as we have in the past on top of that as well. But -- so generally, our goal and our outlook is sort of 20% to 30% compound annual growth rates organically and every few years, another acquisition, complementary acquisition on top of it. So that's the strategy, and that's the case today.

Thank you, Bill. So next question, BEI touted 3 pipelines, a boiler manufacturer, and 2 school districts. Where are the reported sales to these 3 groups?

I'm not sure what that -- where that information came from. Perhaps if -- whoever asked that question, they could reach out to us specifically and say where they got that because I'm not really sure what they're talking about. They're a pipeline for a school group or -- so yes, I'm not sure. I couldn't tell you. So just reach out to us, and we'll provide additional detail and clarity if we can.

All right. Thank you, Bill. The next question, which I believe is back, was the -- what stage is TEI at with the Curtiss-Wright purchased sales agreement to sell traps into their large power and energy client base?

Yes. And you say power and energy, it was nuclear energy that was the focus there. And as you can probably imagine, anything in the nuclear energy takes a long time to develop. We think the GEM trap is a very good candidate for use in nuclear energy, but it takes time to get the approvals of the energy and sort of get that ball rolling. We're still working on it with them, but it's nothing we expect in terms of significant orders in the short or medium term.

All right. Thank you, Bill. I actually -- we are at the bottom of the questions, and there's a follow-on. So thank you for the follow-on. I believe it's a follow-on about the question with regards that we -- growth at this time can be expected to be limited. It looks as though the follow-on is that you may have said that we overachieved with the team, that they overachieved with our team. So that's the comment that perhaps triggered the expectations, Bill. So anything that you'd like to address perhaps on the statement that we might have overachieved with the team?

To be honest, I'm not sure where I said overachieved, but all I can think of is that when I was talking about PDAs coming out of the pandemic, we tasked the sales team to sign -- get some PDAs from our customers. And perhaps they were a little bit more successful than we expected. That's -- I think, again, I'm not exactly sure where specifically what I said about overachievement, but...

Very good. And yes, thank you for adding to that answer as well. With that, I do not -- I believe we've answered every single question. If we missed you, please submit again, but I have done my best to be diligent, and I think we are at the end of the questions. So I give it back to you, Bill, and the team.

I'd just like to thank everyone for joining us today and for your interest in Thermal Energy and your questions and...

You know what, Bill, I'm going to do it. Here's -- there's -- but I will call this the last question, otherwise -- here's -- in other words, do you have capacity to grow 30%. In other words, do you have capacity to grow 30%?

Do we have capacity to grow? Yes, we do.

Thank you. Thank you. Again, question came in. I'm trying to do my best to address. But at that point, there are no more questions. So again, Bill, back to you and the team.

On the capacity issue, we've -- as we mentioned, we've added a lot to the team in terms of people, 17 people over the last 24 months. That was a growth stage. We don't have any plans right now because we feel we can continue growing quite nicely with the team we've got. There might be 1 or 2 added here, but the majority of our growth for the next 12 months is already built into the team. So we're pretty happy with where we're right now, so yes, we definitely have that capacity. So once again, I'd like to thank everyone for joining us today and for your interest in Thermal Energy and your great questions. We look forward to sharing our second quarter results and updates with you in late January or early February. Let's have an energy-efficient day. Thanks so much.

Thank you, everyone, for attending today's meeting. You may now disconnect.