Thermal Energy International (TSXV:TMG) Q4 2026 Earnings Call

0:00 Good morning, everyone.

0:01 I'm William Crossland, CEO of Thermal Energy International. Thank you for joining us this morning for our fiscal 2026 fourth quarter and year end earnings call. Our news release, financial statements and MD&A are available 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 and institutional investors 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. Next slide, please.

0:46 Before we go any further, of course, I have to point out that today's call may contain forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are, of course, subjects to risks and uncertainties and undue reliance should not be placed on such statements. Certain material facts 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 MD&A for the quarter and other filings with Canadian securities regulators. Next slide, please.

1:24 Over the course of fiscal 2024 and 2025, we invested in scaling our business, particularly across our sales, marketing and engineering functions. We were transparent that these investments would create short-term pressure on our profitability, but we also said that we expected those investments to begin benefiting our top line and our profitability in fiscal 2026. So today, I'm pleased to share that our solid fourth quarter capped out a record year for Thermal Energy International. Our revenue in the fourth quarter was up about 4%, while our profitability was more or less on par with the year ago. when comparing it on an apples-to-apples basis, which I'll explain later. For the fiscal year, we reached new all-time highs for order intake, revenue, and profitability, and we ended the year with a very strong balance sheet.

2:17 As we move through our fiscal 2027 year, we look forward to continuing executing the strategy we announced at this time last year. Next slide, please.

2:33 Looking at our top-line performance, in the fourth quarter we had revenue of $7.1 million, representing about a 4% increase over the fourth quarter last year. The increase was primarily driven by higher gem sales in the quarter. For the full year, we had revenue of almost $34 million, which was a new record for us and represented a 13% increase compared to last year. Our revenue in fiscal 2026 was fueled by double digit increases from both turnkey heat recovery and gem sales. As you can see on the graph on the right, over the longer term, we have grown our annual revenues by almost 60% over the last three years. Next slide, please.

3:23 Gross Profit. I wanted to spend a moment discussing our gross profit for the quarter compared to fourth quarter the year before 2025. While our fourth quarter Revenue was up slightly. Our gross profit in Q4 was down 6% compared to last year. This is because the fourth quarter of last year benefited from a couple of one-time adjustments on large corporate sales. Without the adjustments, gross profit in Q4 2025 would have been very similar to what we achieved in Q4 this year. Additionally, I wanted to highlight that our gross margin for the fourth quarter of fiscal 2026 was higher than any other quarter of fiscal 2026 and up significantly from the second and third quarters. And for the full year, gross margin was up year over year, and we had record gross profit of $14.2 million, which represents an increase of 48% over the last three years.

4:20 Next slide, please.

4:25 We had adjusted EBITDA of $247,000 for the quarter, which was down 38% from the prior year. Most of the decrease was due to the year-over-year difference in gross profit. Our operating expenses were up only $17,000 and therefore decreased as a percentage of revenue. For the fiscal year, adjusted EBITDA increased by about $800,000 to $1.9 million. Next slide, please.

4:59 I thought it would be interesting to take a look at our adjusted EBITDA when also excluding the one-time employer obligation adjustment that we had to make in the quarter. As you can see on slide seven, if it were not for the one-time adjustment of about $149,000 in the quarter, our adjusted EBITDA would have been essentially flat to Q4. over the last year. Adjusted EBITDA would have been even higher, and it would have been our highest yet at $2.1 million.

5:34 Next slide, please.

5:38 Our net income for the fourth quarter was essentially flat compared to the prior year, but the real story here is that our net income for the year was a new record at $1.34 million. As you can see on the graph, On the right side, annual net income has increased 86% since fiscal 2023. Next slide, please. In addition to our record net income, we continue to generate very robust operating cash flow. In slide 9, we show how operating cash flow, excluding changes in working capital items, which tends to vary pretty significantly quarter over quarter, has increased much more and is much higher than our net income. Looking back over the last four years, we had combined net income of $3.2 million, But over that time, we generated a total of $7.3 million in operating cash flow.

6:38 Next slide, please.

6:43 So over the last few years, we've used that strong operating cash flow to materially strengthen our balance sheet by paying off more than $3 million in bank loans, including repaying over $300,000 in the last fiscal year to bring our bank debt down to under $2,000 at year end. We also returned about $500,000 to shareholders through the repurchasing of about 3.6 million shares. Next slide, please.

7:18 Another highlight for the year was our order intake, which rose to approximately $30 million, our highest ever in a fiscal year. We ended the year with an order backlog of 11.8, and since then have received an additional $7 million in orders, bringing the current order backlog up to about $19 million as of yesterday. Next slide, please.

7:47 The vast majority of orders we received in fiscal 2026, as in every year, were from repeat business with our large multinational customers. In fiscal 2026, we received $5.1 million in orders from a global pharmaceutical leader following an initial $500,000 engineering project in 2025. And the next slide. Our business model largely centers on developing long-term relationships with large multinationals who often adopt thermal energy solutions across multiple facilities as they pursue ongoing energy efficiency and decarbonization objectives globally.

8:32 A great example of this is our relationship with a global nutrition company. In fiscal 2026, they ordered their seventh, eighth, and ninth turnkey heat recovery projects from us, generating about $2.5 million in order intake and highlighting the scalability of our customer relationships. So far in fiscal 2027, we've received three more orders from this customer, totaling $2.1 million. Those orders, which were announced in August, were for another two turnkey heat recovery projects, plus an order for a major equipment package, which is one of our new offerings stemming from the strategic review we did last year and announced last year. The thinking behind the major equipment packages is that we deliver the engineering and equipment while the customer manages the installation.

9:26 This results in a faster sales cycle and greater flexibility for the customer. This is also a useful and many more. We're going to continue to do that. with solutions deployed at 28 manufacturing sites across nine countries. We're continuing to work with them to uncover additional opportunities to support facilities throughout their global manufacturing network.

10:15 Next slide, please.

10:20 The streamlined heat sponge turnkey offering we launched last year has been an early success. In fiscal 2026, we had announced roughly $5 million in simplified heat sponge turnkey orders, including two projects with the multinational building materials company and three with the global nutritional company I just discussed.

10:47 Next slide, please.

10:50 So what's next? Well, looking ahead, we're continuing to execute the initiatives that make our solutions easier to deploy and more scalable, such as developing and promoting standardized equipment packages. At the same time, we're developing indirect sales channels. We recently hired two indirect sales channel managers, one for North America, one for Europe, who will be responsible for driving the strategy in their respective markets. and finally, we see Europe as a significant and largely untapped growth opportunity for heat sponge. We will initially support the market from our US facility before transitioning to European contract manufacturing as demand builds, lowering costs and shortening lead times.

11:37 Next slide, please.

11:43 So to sum up, just a quick summary before we open the call for questions. We had solid fourth quarter to cap a banner year. We achieved fiscal year all-time highs for order intake, revenue, and profitability, with revenue up 59% over three years and profit up 86% over three years. We further strengthened our balance sheet, and we're continuing to execute our strategy announced last year which is positioning us well for sustained long-term growth. That's it for my prepared remarks. I'd now like to open the call for questions and I'll turn it over to Trevor Heisler at MBC Capital Markets Advisors who will moderate our Q&A. Please go ahead, Trevor.

12:33 Thank you, Bill. If you are a qualified equity analyst or institutional investor joining us on MS Teams this morning and would like to ask a question, please notify me by using the raise your hand feature. And the first question comes from the desk of Russ Stanley at Beacon Securities. Please go ahead, Russ.

12:55 Good morning and thank you for the questions. Appreciate the time. Maybe first on the backlog, as you noted Bill, 19 million as of yesterday. I'm wondering if you can talk about what the pipeline for new orders looks like and perhaps compare that to where you were about a year ago.

13:14 Yeah, the pipeline continues to grow, but we don't, you know, I'm always very hesitant, Russ, as you know, to disclose pipeline because pipeline aren't orders and sometimes the pipeline turns into orders and sometimes it doesn't, but we're continuing to execute our strategy. You know, so we think the future looks pretty bright. We're feeling pretty positive about what we've achieved so far and where we're going to take it. So our strategic plan that we've discussed over the last, a year or so. It seems to be we've got some good early positive results, so we think that's a positive sign for continuing our growth.

13:52 Maybe if I could around the geographic revenue mix, it looks like the U.S. sales to U.S.-based customers grew meaningfully year over year in both absolute dollars and as a share of revenue, while I think several of the European markets saw a bit of a year-over-year decline. I'm wondering if you can elaborate, I guess, what's behind those year-over-year trends, and is that just a reflection of where last year's opportunities were? Or is that more indicative of where you're seeing the strongest demand right now?

14:30 That varies year over year. Depending on the year, sometimes North America is growing more and has more sales. Sometimes it's Europe. Over the longer term, it seems to be about 50%. But the particular growth in North America more recently has to do with pharmaceuticals. So we've mentioned a number of pharmaceutical companies. orders, and we developed our pharmaceutical relationships. They started in North America. We're now trying expanding them to Europe and globally. But North America has grown pretty significantly, partially because of the pharmaceutical and also because a lot of the simplified heat sponges happen to be in Europe. And that's those the simplified turnkey heat sponge projects are in North America. as well. And that's partly because those are quick and easy projects with strong paybacks and natural gas prices are lower in North America.

15:29 So there's a better payback for that. Whereas in Europe, you know, they might be more interested in the bigger projects. So it's there's nothing we don't we don't expect that to be a continuing trend. We think both markets are going to continue to be strong for us. And it just happens to be a few a couple of years ago it was Europe and more recently it's been North America. But they both ebb and flow. and that's why we've got a good diversified revenue base and on a consolidated basis, we continue growing.

15:59 That's helpful, Collar. Thank you for that. And I think you led off the call by talking to the decision to ramp up or expand the sales and engineering. capabilities a few years ago and starting to see the benefits of that with the fiscal 26 results. I'm wondering on sales in particular, you always mentioned that it would take time for people to ramp up new additions to hit their strides, so to speak. Are you happy now with the pace of that ramp up and are you perhaps contemplating any more expansion of the internal team? And I mean that as distinct from the IMR initiative.

16:40 No, we're not anticipating any expansion of the current team. You know, we're still, you know, it's ramping up as we expected. You know, like always, there's some things outperform and some underperform, but generally we're delivering the results we expected. The growth is what we expected. We're not planning to add more people at this point, you know, significantly. The strategic growth happened a couple of years ago, and now we hope to sort of leverage those investments, continue leveraging those investments.

17:14 And on the major equipment packages, you talked about this earlier, where the customer handles the installation. I'm wondering, relative to a typical contract, I understand you forego some revenue, but can you remind us how the blended gross margins end up comparing relative to a typical contract and Any thoughts on the extent to which we should expect to see more of the major equipment package contracts going forward? Is that something that you're seeing a particular strength in demand from customers on?

17:49 Yeah, well, again, as I mentioned, it depends on the customer. It even depends on the site. Some sites are happy to do it on their own, and it depends on where the project is. So if it's in a a far-flung market where we don't particularly want to do the installation. We will try and emphasize the major equipment package. But we do see it as a growth and that it's going to continue to grow. It was part of our strategic plan to be able to leverage the business by not doing the full installation if the customer didn't want it or need it. The margin is generally a bit better and that makes sense because the proprietary part of the project is the equipment and the engineering. The installation, you know, we sub that out so the customer can always sub it out and manage that if they wanted to. So the actual installation tends to have a lower margin.

18:42 The equipment and the engineering has a higher margin. So while those projects will be smaller in terms of total revenue number, the margin should be higher.

18:52 That's great. That's all from me for now. Thank you very much. I'll pop back in the queue. Thank you, Russ. Thanks, Russ. And your next question comes from the line of Jesus Sanchez at Kastner Investment Fund. Please go ahead, Jesus.

19:12 Thank you very much, Trevor. Thank you and congrats to all the team for these amazing results. Just a couple of questions on my side. The book-to-bill ratio has been going down consecutively during the last years. At what book-to-bill ratio does our fiscal revenue hold flat, and what is the intake run rate in the first quarter, which closed on August 31st?

19:46 Sorry, thank you for joining us and thank you for your continued interest and support. What did you say was going down? I sort of missed right at the start. You said something's going down.

19:55 The book-to-bill ratio.

19:58 So which ratio? Book-to-bill. Oh, book-to-bill. Help me out. How do you calculate that ratio?

20:10 Uh... with former PDRs from the last annual reports in the last years.

20:20 I'm really sorry. The former what?

20:23 All PDRs from other annual reports of 2023, 2024, 2025.

20:34 I'm sorry, I still don't have a book to bill. You mean how quickly we get an order and it turns it into revenue? Is that what you're talking about?

20:41 I really apologize. How much does the intake compares to how much revenue we get from revenues?

20:54 To order intake compared to revenue? Yeah. But I don't see anything changing. Other than the, you know, the major equipment packages and the simplified heat, heat sponge turnkey projects will be quicker order intake to revenue. So the turnkey, the big, the big turnkey projects take a longer time to revenue. So we get an order and you know, we revenue usually over 12 to 18 months, or nine to 18 months, whereas The major equipment packages will turn into revenue much faster as will the simplified turnkey projects because they're much simpler.

21:40 We expect to be able to turn orders into revenue quicker and that's partly been shown this past year.

21:48 Do you have the intake for the first quarter that ended in August?

21:55 We haven't disclosed that yet. Okay. We did disclose, I think earlier in my presentation I said the orders received from now, since the year end, is $7 million, I believe. Somebody correct me if I'm wrong. But some of that might have been after the first quarter, so I'm not sure what the breakdown is between the first quarter and September, because the first quarter ended in August.

22:24 Also, the breakdown between Ottawa and Bristol. We have seen Ottawa growing revenue 60%, but gross margin falling, while Bristol revenue is falling and the gross margin raising. So, where does Ottawa project margin settle at the scale and what has to happen in Bristol to recover our volume? We just signed a 10-year UK property lease.

22:56 Yeah, so it all has to do with the normal ebb and flow we have with large, it all has to do with heat recovery projects for the most part. So, you know, Bristol had a bunch of heat recovery projects and the last year or so they've had fewer. That's why the revenue is down and that's why the margin is going up because a larger portion of the European revenue has been gem. And just the opposite has happened in North America. There's been a number of large heat recovery projects, Pharma as an example, as well as the simplified heat sponge turnkey projects that have been largely North America. And so therefore the revenue is growing, but the margin is going down because it's a higher proportion of the North American revenue is large projects and less equipment.

23:41 So again, it's the normal ebb and flow. The actual product margins haven't changed. It's just the timing of some heat recovery projects in both markets.

23:54 Thank you very much for the cohort. Okay, Bill, we also have two questions submitted to us by email from retail investors. The first one, can you break down your revenue into turnkey system sales and shorter duration gem sales?

24:15 What we disclose, which is in the notes to the financial, we break it down by equipment sales and turnkey project sales as well as services. And again, it changes year over year, it ebbs and flows, but roughly equipment's, you know, when you go back historically over the last number of years, Sometimes it's more, sometimes it's less, but equipment's somewhere around 50% and turnkey projects are somewhere around 50%. Turnkey is slightly higher. Maybe it's 45-55, but generally that's about the ratio. And like I said, it's in the notes to the financials.

25:03 Thank you. And the last question we have is, what is the plant utilization of the plant in Bristol?

25:11 In terms of percentage, I'm not sure, but we have lots of room left. Most of what we do in Bristol is in the Bristol plant is the gem traps. We just moved a couple of years ago and the current facility off the top of my head is probably four times or five times the size of the previous facility. So there's lots of opportunity for growth there. You know, that's why we just signed a long-term lease. So it's going to serve our purposes for a long time. Excellent. And it looks like there are no further questions at this time. Please go ahead, Bill.

25:54 Okay, thank you so much for joining everybody and your continued interest and support of Thermal Energy International.

26:01 Look forward to speaking to you again next quarter.

26:04 Have a great day.