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

Thank you for joining our earnings call for the second quarter ended November 30, 2024, our news release, financial statements and MD&A will be posted on our website and have been filed with SEDAR. [Operator Instructions] First, 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 financial statements, our MD&A for the quarter and our other filings with the Canadian securities regulators. In terms of a quick overview, our revenue continued to be very strong in the second quarter as we again set new records for quarterly revenue and revenue on a trailing 12-month basis. We remain profitable, however, changes in product mix and the investments we've made in the future growth of the business, lowered our EBITDA and our net income for the quarter. Nevertheless, we continue to have positive operating cash flow, we exited the quarter with a strong balance sheet, and we're well positioned for growth. Taking a closer at our top line, our revenue for the quarter was a record $8.7 million, up from $7.1 million a year ago and more than double our revenue from the same quarter 2 years ago. Our turnkey heat recovery business was a standout performer, achieving its highest quarterly revenues in 5 years and record revenue on a trailing 12-month basis. The significant growth in our heat recovery business reflects continued strong demand for turnkey energy efficiency solutions and the effectiveness of our solutions in meeting our clients' needs. When looking at the trailing 12 months ending November 30, our revenue is at an all-time high of $30.7 million representing an increase of $4.6 million from the 12-month period the year before and more than double from 2 years ago. EBITDA. While the company remained profitable for the quarter, the substantial swing in product mix had a negative impact on our gross profit. EBITDA and net income. As many of you are aware, turnkey heat recovery projects, while contributing significantly to our top line growth typically carry lower margins. This shift in revenue composition was the primary factor in influencing our profitability metrics this quarter. Our EBITDA for the quarter was $270,000 compared to $830,000 a year ago and a loss of about $30,000 second quarter 2 years ago. In addition to product mix, our lower EBITDA reflects the higher expenses related to the substantial investments we've been making in the future growth of the business. For the trailing 12-month period, we had EBITDA of $1.6 million compared to $3.2 million the prior 12-month period and a loss of about $700,000 for the trailing 12 months ended November 30, 2022. As I called out in our previous earnings call, the trailing 12-month 2024 period included our exceptionally strong quarter for fiscal 2023, which had EBITDA of $1.2 million in that quarter alone. Meanwhile, our trailing 12-month 2025, had a higher cost base, mostly due to $2.3 million related to investments to drive future growth, including headcount, digitization and systems automation and costs related to our new larger U.K. plant. Most of the benefits of these investments are still to be realized. We had net income of $28,000 compared to $486,000 in the second quarter of last year and a loss of about $270,000 2 years ago. For the trailing 12 months, 2025, we had net income of $672,000, which was down from $2.1 million the year before, but still up significantly from a loss of $1.8 million 2 years ago. Similar to my comments on EBITDA on the prior slide, the trailing 12 months 2024 included our exceptionally strong fourth quarter and the trailing 12 months 2025, expenses include a $2.3 million in the investments we've made for future growth. Now let's talk about these investments a little bit. As we discussed over the last 2 years, we've been investing significantly in the future growth of the business, and most of the benefits of these investments are still to be realized. Our investments included moving our U.K. operations to a much larger production facility with more than double the throughput capacity as well as growing our team, adding 18 new positions over the last 2 years. As you can see in the slide, we added 6 people to our sales and marketing team, 11 people to engineering and production and 1 in finance and admin. On the technology side, we developed and launched a custom-developed mobile app called CREST, which stands for carbon reduction and efficiency scoping tool which is exactly what it is because CREST helps our sales and engineering teams quickly and efficiently identify thermal energy savings and carbon reduction opportunities and projects while in sight with customers. We're also investing in a robust global accounting program and ERP software to create agility in our accounting, manufacturing and fulfillment. And again, while these investments have lowered our profitability in the short term, it will help drive profitable growth in the long term. Turning to our balance sheet. At the end of November, we had cash and cash equivalents of $2.8 million, which was lower this quarter due to temporary fluctuations in working capital items. At quarter end, we had $3.7 million in working capital and $1.9 million in debt. I'd like to highlight that even with the significant investments we're making for future growth, we continue to generate positive cash flow from operations, which is somewhat unusual for a company of our size particularly our similarly sized peers. Over the last 2 years, we have reduced our debt by $1.8 million and increased our working capital by $1.9 million, all from internally generated cash flow. That's something we are quite proud of and plan to continue. Order intake. While order intake for fiscal 2025 started off slower than anyone would have liked, we were encouraged to see a sharp increase in the second quarter compared to the first quarter driving our order intake to $10.1 million for the first 6 months of fiscal 2025 and resulting in an order backlog of about $13 million at the end of the second quarter. Both figures are still lower than they were a year ago, but our pipeline and value projects and paid development with customers remains as strong as ever, and the recent momentum we're seeing in the business is very encouraging. Since the end of the second quarter, we received an additional $5 million in orders, including the $2.8 million in repeat business from a leading multinational pharmaceutical as we announced back in December. That was our third significant order from that customer since they signed a global master services agreement with us back in September 2023. So just over 1.5 years. The orders received since quarter end increased our order backlog to about $18 million as at January 27, 2025. So Summary. In summary, we're proud of the record revenue performance achieved this quarter and over the trailing 12 months ended November 30. While the shift in product mix and our investment in future growth have lowered our profitability, we continue to have positive cash flow from operations and our balance sheet continues to strengthen. Importantly, while we have yet to really see the benefits we have significant investments we've made in the business, we believe they position us well for our next stage of growth and we expect these investments will bear fruit for us in fiscal 2026 and beyond this concludes my prepared remarks. I 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&A. Please go ahead, Trevor.

[Operator Instructions] And it looks like our first question will be coming from Jesús Sánchez from Castañar Investment. Please wait a second while I unmute your line. Jesús your microphone should be opened. Please go ahead. Okay. We don't tend to have Jesús here. We have Russell Stanley online. I'm going to unmute your mic Russell, just a second, please. Please go ahead, Russ.

Can you hear me?

Yes.

Great. Maybe just to dive in on the revenue mix for the quarter, understanding that the gross margins reflect the lower margin, lower gross margin heat recovery projects. Can you give us some color as to how revenue mix broke down in the quarter? And how you expect it to evolve for the second half of the year? I know you don't provide guidance, but just trying to understand how to -- how we should expect gross margins to evolve from here?

Yes. Thanks, Russell. So yes, as you said, we don't disclose the exact breakdowns of turnkey versus customer equipment. But turnkey represented about 2/3 of our revenue in the past quarter compared to about 1/3 the same quarter a year ago. The margins were lower than typical, and lower we wouldn't expect this quarter. We expect the margins will typically be, as I've said before, sort of between 35% and 40%. So for this quarter, they're sort of at the lower end of that, but we don't expect that to continue.

Great. And then I'm sorry if I missed it, but in the deck, but I guess what is the latest count around project development agreements and I think you talked about the value of the PDA pipeline, looking particularly strong. Wondering if you can quantify that at all?

Yes, I can -- the number of PDAs, because we've actually been awarded a number of contracts over the last 12 months. The number of PDAs hasn't really changed. It wasn't in the deck this time. It hasn't really changed much from the last time we reported it. But we track it these things pretty carefully, both the total value of the projects that are under development and more importantly, the weighted value. And I can tell you the weighted value has gone up. So we're feeling fairly positive about the future.

Got it. And then maybe around CREST, I know it's early days on that, but just wondering if you can provide color on how effective it's proving to be and how well people are using it given it is new?

Yes. I mean, certainly, too early days to determine how effective it's going to be. But we do have some data on how people are using it. And we had some training that was to be done by all the users. And I could say, close to 100%, if not 100% of everybody has completed all of the training and the last 2 Fridays, we've had sort of drop-in sessions for anybody to drop in and ask some questions. And the good news is that there wasn't a lot of questions, so there's some positive feedback. We will be -- we will continue to tweak it over time as you do with any app. But initially, I would say the take-up is as good as we could have possibly hoped and the impact will show over the next 6, 12, 24 months.

Got it. Maybe just one last question before I get back in the queue, hand it off. Just around the recent or less recent election, Trump's reelection in the U.S. changing political wins elsewhere, I guess, 2 questions. One, thoughts on tariffs globally impacting sales. I imagine that would be more the GEM steam trap revenue component that might be vulnerable there. And then secondly, historically, or recently, you've talked about how the emissions benefits of your suite have come to dominate the energy savings as far as the customers go, and I'm wondering if that conversation is changing at all with the changing in political wins, if you will?

Yes, it's still early days, and I would never want to speculate what Trump may or may not do, but we have looked at it. Obviously, it's a risk when he starts talking about tariffs. And the risk for us is we do operate pretty much on a North American and a European basis. So some of -- it's not just GEM, some of the heat recovery. Generally, GEM is manufactured in the U.K. and then shipped to North America. Heat recovery can be manufactured in Canada or the U.S. Sorry, somebody should we were getting some interference here. So we've actually taken a look at it, right, because we can source the equipment in the U.S. if we do have a couple of big heat recovery projects right now that we're executing in the U.S. And so that that's where there could be a potential tariff. And so we've looked at it that probably if the tariffs are 25%. And if it applies to us and if we can't work with our customers to mitigate the impact, it will probably have about a couple of hundred thousand dollar impact us in the short term. In the longer term, because that's equipment that's already been ordered for projects, so we can't cancel those orders. But in the longer term, we will make sure we source the equipment. If tariffs where an issue, we'll source the equipment from the U.S. We've done it before. We can do it again, the GEM coming from the U.K. is less of an issue. There's things that we can do there. We can also longer term manufacture the product in the U.S. if we have to. So bottom line is we think it's a couple of hundred thousand dollar short-term impact if in the worst case, and that is where he imposes 25% tariffs on our product going into the U.S. And then on the world's desire to reduce carbon emission, that's a good question. I could tell you in his first term, it had no impact whatsoever that we were able to determine. Now he seems more aggressive this time. But it's hard for me to imagine our top customers, all very large multinational, food and beverage, pharmaceutical, all of whom have very publicly disclosed their carbon emission reduction targets and they're global companies as well. It's hard for me to imagine that all of a sudden, they're going to say, well, we don't care anymore. And those targets that we said we were going to achieve, we're not going to achieve them and we're not going to pursue them, there could be something like that over long term, but that's hard for me to imagine that it's going to change just because Trump has said that. The second thing is, what we realized last time is that most of the carbon emission reduction initiatives are driven at the state level, not at the federal level. So again, last time we saw virtually no impact. This time it could be different, but I don't expect it to be significantly different.

Thank you. [Operator Instructions] And it looks like there are no further questions at this time. Please go ahead, Bill.

Okay. Well, thank you, everyone, for your continued interest and support in Thermal Energy International. We look forward to speaking to you again next quarter. If you have any further questions, don't hesitate to reach out. Thanks so much, and have a great day.