Thermal Energy International: Questions to William Crossland | Value Bridge
Archieve - Everything William Crossland Said
Business Summary
The company provides energy efficiency solutions through turnkey projects and custom equipment, serving multinational food, beverage, and pharmaceutical clients. Historically, turnkey made up about two thirds of revenue, but during the pandemic custom equipment grew to two thirds; now the mix is reverting toward turnkey with order intake already back near two thirds turnkey and one third custom. Backlog is typically recognized within 12 months, though the final 5–10% of larger turnkey projects can extend longer. Gross margins normally range 35–40%, with slight downward pressure as turnkey grows, though gross profit dollars rise. Revenues reached about $30 million, with order sizes sometimes as large as $4–5 million, creating natural lumpiness.
Growth is driven by European expansion, where stricter carbon reduction rules and higher energy costs support adoption, while North America is rebounding. The new U.K. facility, nearly triple the prior site’s capacity, enables further scaling without immediate revenue impact. Project development agreements (PDAs) show strong demand, with conversion rates historically around two-thirds. The CREST platform has nearly 100% user training completion, with impact expected over 6–24 months. Acquisitions historically occur around 1x revenue, focusing on proven, revenue-generating technologies or strong distribution channels. Staffing has grown significantly over the last 18 months, positioning the company to execute on a deep pipeline.
Catalysts & Milestones
2023 - Revenue mix flipped to one third turnkey and two thirds custom equipment
2024 - Turnkey order intake rebounded to about two thirds of new projects
2024 - New U.K. facility opened, tripling capacity versus the prior site
2025 - CREST platform adoption phase with impact expected over 6–24 months
2025 - Potential acquisition targeted within 12 months
Investment Highlights
Revenue near $30 million, but large $4–5 million orders create natural lumpiness
Gross margins normally 35–40%, though turnkey expansion adds slight downward pressure
Turnkey order intake already at about two thirds of projects
New U.K. facility offers nearly 3x prior capacity, enabling scalable growth
PDA conversion historically around two-thirds, supporting backlog visibility
Future Growth Drivers
Expansion of turnkey projects with higher revenue scale despite lower margins
Stronger European demand due to stricter carbon reduction policies and energy prices
New U.K. facility capacity enables scaling without near-term capex
Acquisitions around 1x revenue to add technologies and distribution reach
CREST digital platform adoption with expected benefits over 6–24 months
Risk Factors
Tariffs of 25% could cost several hundred thousand dollars if unmitigated
Order lumpiness from $4–5 million projects distorts quarterly results
Founder-owned sellers hold unrealistic valuation expectations despite ~1x revenue benchmark
Macro uncertainty or political shifts may delay projects, visible in order intake slowdown
Sales staff require up to 3 years before reaching full productivity, delaying revenue impact
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Capital Allocation
25/04/2024 Can you discuss the M&A environment and your targets?
It is always competitive, but we look for companies that fit well with us and make strategic sense for both sides. Historically, we focused on new technologies, expanding from one technology at founding to about 10 today. We remain interested in proven, revenue-generating technologies, not pre-revenue or early-stage businesses.
Now, distribution is also a priority. Acquiring companies with strong penetration in verticals or geographies where we lack presence would be attractive. There are many companies in the sector, and we will continue to look for opportunities that can add value to our business.
25/04/2024 What multiples have you paid for acquisitions, and do you have a target range?
We do not have a target range. The main priority is that acquisitions are accretive to shareholders. Historically, we have paid around one times revenue, but valuation always depends on the specific opportunity.
19/09/2024 What are you seeing in acquisitions and current valuation expectations?
Most acquisitions we evaluate are private, founder-owned businesses. Valuation expectations from founders are usually unrealistic, which has not changed. That said, our past deals have generally been around 1x revenue, though profitability and markets always affect the final valuation. Using that as a guide, we still see good opportunities available.
30/10/2024 What opportunities are you seeing on the M&A front in terms of targets and valuations?
It is still early days. We have had some very preliminary discussions with a couple of companies, but nothing concrete yet. I have generally thought that around one times revenue is a reasonable valuation benchmark, depending on profitability. We are continuing to pursue opportunities and would like to complete an acquisition within the next 12 months, but the right fit is key.
Operations
25/04/2024 Can you give a split on turnkey versus custom equipment revenues?
Turnkey and custom equipment were about 50/50 this quarter, compared to one third turnkey and two thirds custom last quarter and last year. Before the pandemic, it was two thirds turnkey and one third custom, but the pandemic significantly impacted turnkey.
Custom equipment kept growing through the pandemic, and now turnkey is also growing. On an LTM basis, turnkey revenue is about double last year. While not quite at pre-pandemic levels, turnkey order intake is at record highs, exceeding pre-pandemic records. The share of revenue from turnkey is rising, and growth is strong.
19/09/2024 When will the new U.K. facility start operating and what is the impact?
It is already operating and has been for a few months. The team is very pleased with it, and when I visited recently, it was clear the facility is a significant upgrade. It offers much more capacity, a better location, and effectively doubles what the prior site could handle. Overall, it has been very well received.
19/09/2024 How eager are customers to engage in project development agreements (PDAs) and what is the conversion rate?
We have seen strong growth in PDAs, to the point where the team was stretched, so we slowed intake and increased pricing. The conversion rate looks good, though still early to measure precisely given the ramp-up over the past few years. Historically it has been around two-thirds, and I expect similar results this time. We are also ensuring that customers are truly engaged before moving forward, which supports both pricing and conversion quality.
30/10/2024 How are the recent staffing investments progressing, and are you confident in their contribution to revenue?
So far so good. We are very pleased with the team, which has grown aggressively over the past 18 months. At this point, we believe we are largely set for the next 12 months, perhaps adding one or two people as needed, but no significant additions. We are very happy with the group we have built and confident in their ability to deliver.
30/10/2024 Do you plan to add more staff in the next 12 months?
The emphasis is on maybe. We do not have plans right now to add anyone, but I cannot rule it out completely. At present we are very happy with the team we have built.
30/10/2024 When will the onboarding of new hires translate into revenue contributions?
It takes time because the sales process is highly technical. Salespeople generally contribute little in their first year, start to gain traction in their second year, and by the third year perform like established area managers. Engineers also require a learning curve, though shorter, to understand our technologies and execute projects. Over the last 18 months, we hired salespeople first and, more recently, engineers as we saw the pipeline build. We are investing ahead of growth to ensure we have the team ready to execute.
30/10/2024 How are operations at the new UK facility, and what revenue should we expect from it?
The new UK facility does not in itself create additional revenue. The move was necessary because revenue growth, especially in GEM traps, left us with no space in the prior facility. The new site has nearly three times the space and throughput capacity, positioning us to continue scaling revenue. It is about enabling future growth rather than directly adding revenue today.
28/01/2025 What is the current count and value of project development agreements (PDAs)?
The number of PDAs has not really changed because we have been awarded a number of contracts over the last 12 months. It was not in the deck this time, but the figure is similar to the last time we reported.
What matters is that we track both the total value of projects under development and the weighted value. The weighted value has gone up, which makes us feel fairly positive about the future.
29/04/2025 Are you seeing more interest in separating engineering contracts from equipment, and what are the pros and cons for Thermal Energy?
I'm not sure there are any pros and cons, and we are not seeing this as a trend. This is the first time it has happened. Normally, from a project development agreement, we present a fixed price with guaranteed savings, which is usually enough for customers to proceed. They do not typically want to spend $500,000 on detailed engineering unless they are certain they will go ahead with the project.
It could be the way this customer operates or simply caution since it is their first project with us. We are indifferent as long as we secure the project in the end. Engineering projects do carry higher margins, and we saw that last year when a large portion of revenue came from engineering. But overall, it does not matter to us, and we have not seen this structure become a trend.
Competition
19/09/2024 Are recent backlog orders from new or repeat customers?
Most large orders are from repeat customers, as clients typically start small with engineering work or a GEM trap order before expanding. For example, about a year ago we announced a $4 million turnkey project in the pharmaceutical sector with a new customer. Generally, however, most of our business continues to come from repeat clients.
Growth
25/04/2024 Are there any geographical sales trends to highlight?
Yes and no. For a couple of years, we expected European growth to exceed North American growth, and we are starting to see that. Last year European revenue was higher than North American, but this year North America is rebounding. Over time, we still expect European revenue to surpass North America, mainly due to higher fuel and energy prices in Europe and stricter carbon reduction goals.
A lot of the growth focus is in Europe, and many of the nine people we added over the past year are based there. We believe this will continue to drive European expansion.
30/10/2024 Are you focused on winning new customers or expanding with existing ones given the large installed base?
The bias is still with existing customers, maybe about 60%, but it is not overwhelming. Our area sales managers and head of sales in North America and Europe spend much of their time targeting both existing and new customers, and we also have a Director of Global Partnerships dedicated almost exclusively to expanding existing customer relationships across multiple sites.
Overall, it is roughly a 60/40 split, but in both cases the approach is highly focused. We carefully identify the right customers, those with the capital and a strong desire to meet carbon emission reduction targets. That was exactly the case with the recent confectionery company contract. The team identified them as a customer with aggressive sustainability goals, and our project helps them achieve those. It is never a shotgun approach, always targeted.
28/01/2025 How is CREST adoption progressing among users?
It is too early to determine how effective CREST will ultimately be, but we already have data on usage. Nearly 100% of users have completed the required training, and during recent drop-in sessions there were very few questions, which is encouraging.
We will continue to tweak the platform over time as with any app, but initial take-up has been as good as we could have hoped. The real impact will be visible over the next six, 12, and 24 months.
29/04/2025 Have you seen customers delaying projects, and how strong is your pipeline?
We do have a bit of a lull right now, but our pipeline is exceptionally strong. We are actively developing more projects with a number of customers, and we have not seen a real slowdown in market demand or project development.
As noted earlier, there has been a modest slowdown in order intake, but customer development activity remains strong. So while timing may shift slightly, we are confident in the overall strength of our pipeline.
Financials
19/09/2024 Is backlog in line with expectations and what is its composition?
Yes, it is in line with our expectations. The year has just begun, and order intake is consistent with what we projected. The mix continues shifting toward large turnkey projects, which is what we expected. They previously represented about 60% of our business before reversing to one-third, while custom equipment became two-thirds. Now it is approaching 50-50, with turnkey growing faster, and we expect that trend to continue.
30/10/2024 Should we view gross margins in the low 40s as the new normal, or will mix changes create further pressure?
As turnkey projects increase as a percentage of revenue, there will likely be a little downward pressure on gross margins. The impact is not large, but it exists. Importantly, turnkey projects generate much higher revenue, so gross profit dollars may rise even if the margin percentage falls. We are probably halfway back to the pre-pandemic revenue mix and expect to eventually return to two thirds turnkey and one third custom equipment.
28/01/2025 How did revenue mix break down this quarter and how will margins evolve in H2?
Yes, as you said, we don't disclose the exact breakdown of turnkey versus custom equipment, but turnkey represented about two thirds of our revenue in the past quarter compared to about a third the same quarter a year ago. The margins were lower than typical and lower than we would expect this quarter. Normally, margins are between 35% and 40%.
So, for this quarter they were at the lower end of that range, but we don't expect that to continue.
29/04/2025 Can you explain the gross margin impact from new projects and higher expected costs?
This is one of the challenges with heat recovery projects, as revenue and profitability are booked on a percent-complete basis. Each quarter we must estimate the percent completed and the new budget, which introduces some volatility. We also build risk and contingency amounts into the budget, but those are only booked at the end of the project.
Often, margins rise at the end when risk and contingency are recognized, since we cannot account for them until costs are fully known. If costs rise midway through, margins are affected at that time, but we often catch up later. So margins naturally vary from start to finish, and that is simply how the accounting policies work.
Outlook & Guidance
25/04/2024 How much of the backlog is scheduled for completion in the next 12 months?
Almost all of it. Generally, when we receive orders, we expect to recognize them as revenue within 12 months. Large turnkey projects can sometimes take longer for the last 5% or 10%, but typically close to 100% of backlog is completed within that timeframe.
30/10/2024 What was the revenue mix this quarter between turnkey projects and custom equipment compared to a year ago?
Pre-pandemic, turnkey was about two thirds of revenue and custom equipment was one third. The pandemic reversed that, with turnkey projects becoming very difficult to execute, while custom equipment grew at about 30% compounded annually. By 2023, it had flipped to one third turnkey and two thirds custom. In 2024, turnkey has started to come back, not yet at two thirds but moving toward that ratio. In terms of order intake, we are already back to about two thirds turnkey and one third custom equipment, and I expect the revenue mix will return to that balance this year.
30/10/2024 Order flow has picked up since August 31. Are there hurdles or headwinds, or is this just project lumpiness?
We do not see any changes in the marketplace or new headwinds. The lumpiness you noted is just the natural rhythm of the business. Some quarters are very strong and others less so, but the longer-term trend remains very positive. Q1 is usually our weakest quarter, with fewer significant orders, so this pattern is consistent with history.
Risks & Macro
28/01/2025 What risks do tariffs and political shifts pose, and are customers changing focus from emissions to energy savings?
It is early, and I do not want to speculate on what Trump may or may not do, but tariffs are a risk. We operate in both North America and Europe. GEM is manufactured in the UK and shipped to North America, while heat recovery can be made in Canada or the US. If tariffs of 25% apply and cannot be mitigated with customers, the short-term impact could be a couple hundred thousand dollars. In the longer term, we would adjust by sourcing equipment in the US. We have done this before and can do it again. GEM from the UK is less of an issue, and we could eventually manufacture in the US if needed.
On emissions, during Trump’s first term we saw no impact. Many of our top customers are multinational food, beverage, and pharmaceutical companies with publicly disclosed carbon reduction targets. It is hard to imagine them abandoning those commitments. Most initiatives are driven at the State level, not federal, and we expect that dynamic to continue. This time could be different, but I do not expect a significant change.
29/04/2025 Are you seeing macro uncertainty cause customer hesitation, or is the slowdown just business lumpiness?
It is hard to know. Looking at order intake, there has been a slowdown that started before tariffs became an issue. Some people began talking about a slowdown last fall. It could be early signs of broader weakness, or simply the lumpy nature of our business.
With $30 million in revenue, we are bigger than we used to be but still relatively small. When order sizes are $4 million to $5 million, it creates lumpiness. It might also be early signs of a slowdown or customer uncertainty due to tariffs. But we are well positioned because we have manufacturing and suppliers in all our key markets, so tariffs should not significantly impact us.
Personal Questions
19/09/2024 How satisfied are you with new hires and do you need more staff?
We are pretty happy with the team. We added three more people since year end, but that should be sufficient for now. Ramp-up of the new salespeople has been good, with a director of sales in Europe and a VP of sales in North America. The sales team is strong, and we do not plan to actively hire many more people in the near future.
Disclaimer:
The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.
This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company's views. Readers should independently verify any information before making decisions based on it.
Sources
Earnings Calls