Thermal Energy International Inc. (TMG:CA) Q2 2026 Earnings Call Transcript
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Overview
The earnings call reveals strong financial performance, with significant revenue and net income growth, improved operating cash flow, and aggressive debt reduction. The raised guidance for sales and EPS, along with a robust order backlog, suggests positive future prospects. Despite inflationary pressures and supply chain risks, the company's strategic focus and successful HeatSponge projects contribute to an optimistic outlook. The Q&A session supports this sentiment, with no major concerns from analysts. Overall, the positive aspects outweigh the negatives, indicating a likely positive stock price reaction.
Key Financial Performance
Quarterly Revenue $10.2 million, an 18% increase year-over-year. Reasons: Higher revenues from heat recovery projects and equipment sales, and some anticipated revenue from fiscal 2026 came in earlier than expected.
Adjusted EBITDA $814,000, tripled from $207,000 a year ago. Reasons: Investments made in the business to drive long-term growth are now paying off.
Net Income $618,000, 20x last year's net income for the quarter. Reasons: Improved profitability driven by higher revenue and operational efficiency.
Operating Expenses $3.2 million, an increase of $605,000 year-over-year. Reasons: One-time costs such as $150,000 restoration cost for leased space, $90,000 for website design and digital tool development, and an accrual for staff profit sharing due to strong profitability. Also, a $110,000 increase in salary and benefits expense.
Trailing 12-Month Revenues Down slightly year-over-year due to a softer Q1 this year versus a record Q1 last year. However, up 95% from three years ago.
Trailing 12-Month Adjusted EBITDA Down year-over-year but expected to reverse soon. Reasons: Temporary suppression of profitability last year due to higher expenses from substantial investments.
Trailing 12-Month Net Income $605,000, down from $672,000 a year earlier. Reasons: Similar to EBITDA, temporary suppression due to prior investments.
Operating Cash Flow (Trailing 12-Month) $1.6 million before changes in working capital. Reasons: Strong operational performance.
Cash and Working Capital $2 million in cash and $3.4 million in working capital. Reasons: Strong operating cash flow used to strengthen the balance sheet and reduce debt.
Bank Debt Essentially eliminated, with $3.8 million paid down since May 2022, including $130,000 in Q2. Reasons: Aggressive debt reduction using internal cash flow.
Order Backlog $15 million at the end of November, a 16% increase year-over-year. Reasons: Strong order intake, particularly for HeatSponge.
Order Intake (6-Month Total) $17.8 million, a 77% increase year-over-year. Reasons: Strong demand and strategic focus on HeatSponge turnkey projects.
HeatSponge Order Intake (6-Month Total) $3.7 million, a 127% increase year-over-year. Reasons: Strategy to promote streamlined turnkey heat recovery projects focused on HeatSponge applications.
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Operating Highlights
HeatSponge Turnkey Offering: The company implemented a strategy to promote streamlined turnkey heat recovery projects focused on HeatSponge applications. This resulted in a shorter sales cycle, quicker project completion, and higher margins. Early successes include $1.5 million in orders from a global nutrition company and $2.5 million in orders from a multinational building materials company.
Order Backlog and Intake: The company achieved record order intake of $17.8 million in the first 6 months of fiscal 2026, a 77% increase year-over-year. The order backlog reached $21.5 million as of January 2026, a 20% increase year-over-year.
Record Revenue: Achieved record quarterly revenue of $10.2 million, an 18% increase year-over-year, driven by higher revenues from heat recovery projects and equipment sales.
Profitability: Adjusted EBITDA tripled to $814,000, and net income increased 20x to $618,000 compared to the same quarter last year.
Cost Management: Operating expenses increased due to one-time costs and inflationary pressures, but profitability improved due to prior investments paying off.
Debt Reduction: The company paid down $3.8 million in term loans since May 2022, becoming essentially free of bank debt, strengthening its financial foundation for future growth.
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Risk or Challenges
Operating Expenses: Operating expenses increased by $605,000 compared to Q2 last year, driven by one-time costs such as restoration costs for leased space, website design, and staff profit-sharing contributions. Additionally, there was a $110,000 increase in salary and benefits expenses due to a lower proportion of salary costs being allocated to project costs. General inflationary cost increases also contributed to higher operating expenses.
Trailing 12-Month Financial Performance: Trailing 12-month adjusted EBITDA and net income are down compared to the previous year, despite improvements in the current quarter. This indicates potential challenges in sustaining profitability over a longer period.
Inflationary Pressures: General inflationary cost increases have impacted operating expenses, which could continue to pressure margins and profitability.
Supply Chain and Order Fulfillment: While the company has a strong order backlog, there is no explicit mention of potential risks related to supply chain disruptions or challenges in fulfilling the increased order volume, which could pose operational risks.
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Guidance & Outlook
Revenue Projections: The company expects the trend of record revenue to continue, driven by strong demand and order intake. The streamlined HeatSponge turnkey offering is anticipated to contribute to quicker revenue generation and higher margins.
Profitability Outlook: The company expects the trend of increasing adjusted EBITDA and net income to reverse the recent trailing 12-month declines, supported by strong order intake and operational improvements.
Order Backlog and Intake: The order backlog has increased to $21.5 million as of January 2026, representing a 20% year-over-year increase. This strong backlog is expected to support future revenue growth.
HeatSponge Business Growth: The HeatSponge turnkey offering is expected to drive quicker project completion, faster revenue realization, and higher margins. The company is optimistic about the long-term growth trajectory of this product line.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What is the impact of the accelerated work on the heat recovery projects, and is the fiscal year top line still expected to be H2 weighted?
A:The accelerated work has had an impact, but the second half of the year is still expected to be strong. The overall year is not expected to differ much from prior expectations.
Q:What lessons have been learned and adjustments made from focusing salespeople on large orders around HeatSponge?
A:The strategy has gone as expected, with orders coming in faster than anticipated. The shorter sales cycle and quicker implementation of HeatSponge projects have contributed to faster revenue realization. There have been no major surprises.
Q:What factors influenced the gross margins for the quarter?
A:Gross margins are primarily influenced by product mix. Margins have generally increased since the inflationary period post-COVID and are now back to pre-COVID levels. Any differences in margins are mainly due to product mix.
Q:How does the company prioritize additional wins with existing customers versus pursuing new customers?
A:The company focuses on both existing customers and new customers. They target specific applications and use successful projects as references to approach similar companies. New customers often come from identifying applications similar to those of existing customers.
Q:What is the company's current approach to M&A opportunities?
A:The company is actively looking for M&A opportunities but is not far along with any material opportunities. They typically target unique companies where there is little competition for acquisition.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on how competitive the bidding environment is for M&A opportunities, stating they are not far along with any material opportunities.
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RTX Transcript
Thermal Energy International Inc. (TMG:CA) Q2 2026 Earnings Call Transcript
Positive1-27
The earnings call reveals strong financial performance, with significant revenue and net income growth, improved operating cash flow, and aggressive debt reduction. The raised guidance for sales and EPS, along with a robust order backlog, suggests positive future prospects. Despite inflationary pressures and supply chain risks, the company's strategic focus and successful HeatSponge projects contribute to an optimistic outlook. The Q&A session supports this sentiment, with no major concerns from analysts. Overall, the positive aspects outweigh the negatives, indicating a likely positive stock price reaction.
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