BQE Water Inc. (BQE) Earnings Call Transcript

Thank you for standing by. At this time, I'd like to welcome everyone to the BQE Water 2026 Investor Call. [Operator Instructions] I would now like to turn the conference over to BQE Water Management. Please go ahead.

Good morning, everyone, and welcome. My name is David Kratochvil. I'm the President and CEO of the company. And again, I would like to give you a warm welcome on behalf of our entire team to our call to review our financial results so far this year. And today with me on the call are our Chief Financial Officer, Heman Wong; and Executive Chairman, Peter Gleeson. We will start the call with Heman summarizing the highlights of the financial results, and we'll then provide a few comments to set these financial results in a broader context. And I need to remind everyone on the call today that the discussion will contain forward-looking statements about future business and financial expectations and that actual future results may differ from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our financial report and MD&A. Further, this call will refer to certain non-GAAP financial measures such as proportional revenue or adjusted EBITDA, and reconciliation of these measures to the closest GAAP financial measures is included in our MD&A, which is available on our website. So now I will pass the floor on to Heman for his highlights of the financial results so far. Heman, please go ahead.

Thank you, David. I'll now go through the second quarter 2026 financials compared to the last year second quarter. In our Q2 revenue under GAAP, we had $9.2 million and proportional revenues of $11.3 million, which is compared to $11.3 million and $12.9 million for the same period last year in Q2. A further breakout of revenue into 3 sections is our recurring water treatment fee, our short-term operations and advisory and design services for chemical services. Our recurring water treatment revenue for Q2 was $3.1 million, which is an increase of $1.9 million, and this is due to the addition of 5 new operations that started in 2026, namely, it was Britannia, New Brunswick Nuclear Project for CRI, Alex Mountain in Eastern Canada, the SART plant in China, and also the Wharf Mine in the U.S. Short-term operations was $4.2 million compared to $3.7 million. And during the second quarter, we continue to provide services for Eagle Mine, emergency treatment services for Eagle Mine for the full quarter, which is the same as last year. And the additional revenue is because we started new seasonal operations at Bell Mine and at the Valley Tailings facility, which we commissioned last year. In terms of advisory and design services, it was $1.9 million compared to $6.5 million of last year's second quarter. And this is mainly due to the onetime plant equipment sale of the Valley Tailings project, which we built and sold the equipment and commissioned last year. In terms of our JCC, which is our joint venture in China, our share results was 25% increase compared to the same period last year. And this is mainly due to an 8% increase in the quantity of copper recovered and also by a 38% increase in the average copper prices during the period. Overall, our net income for the second quarter was $1.8 million compared to $1.9 million of Q2 2025. And our adjusted EBITDA of Q2 was $2.4 million compared to $2.5 million of the second quarter of 2025. In terms of our working capital, which is defined as current assets less current liabilities as of June 30 was $21 million compared to $21.4 million at December 31, 2025. With that, I'll now turn the call back to David.

Thank you, Heman. I guess from my perspective, I just want to make a few remarks and comments to set the results in the broader context of a longer-term picture for everyone. I guess Heman went through the details of the second quarter year-to-date. We always encourage investors to look at the company performance not on a quarter-to-quarter basis, but always look at the longer term, at least 1 year overall year financial results. And for those of you who have followed the company now for a few years, probably appreciate the fact that 2025 was truly what I would call a leap year. And it's evident in the financial results. So in 2025, we doubled basically our GAAP revenue and our net income increased by 67% in just 1 year. So truly, truly a leap year. Why did that happen? And how does that set into the longer-term context? So several larger projects happened during the year, namely, as those of you know who follow the company for a while, we had basically almost a full year of short-term operations at the Eagle Mine where we help with the emergency response at the Victoria Gold heap leach operation in Yukon. And we also had onetime projected sale of equipment for the ERDC, Valley Tailings project that Heman mentioned. Now those 2 projects are with excellent opportunities for us to really mobilize our entire team and start to develop additional resources to grow sustainably for the long term. But in the context of the year-to-year performance, they were truly one-off projects. When you actually subtract for that year 2025, our technical services revenue was $28.2 million. And you have to realize that, that revenue of $28.2 million GAAP revenue included the short-term operations, which were then still reported under technical services. You probably have noticed that we started reporting the short-term operations separately this year for everyone to see that our technical advisory services, the true advisory services separately from the short-term operations. Last year, we mixed those 2 together, it was $20.2 million. But when you subtract the onetime ERDC equipment sales and the full year of short-term operations, not just the Eagle sites, the true advisory services for the full year were $7.5 million. So the way I kind of look at this '26 is a year of consolidation of this rapid growth. We increased our headcount. We reorganized and our current capacity to generate revenue true advisory technical services has grown from the $7.5 million last year to this year, capacity to generate revenue of roughly $9.5 million for the year. So roughly 25% increase. And that's in line with what -- those of you who follow our investor deck presentation are posted on the website, you see that what we achieved over the last 5 years is compounded annual growth rate of 25%. So this build-out in capacity internally that we are experiencing this year, investing in new resources is roughly in line with producing the long-term compounded growth rate of 25%. Now aside from viewing this year as a year of consolidation so that we're not really seeing a dramatic decrease or increase of performance moving forward, but it's really consolidation. I'd like to spend a few minutes and describe the strength of our pipeline, project pipeline that we analyzed recently. So overall, in the project pipeline, we have currently 40 projects. The projects are active in various stages of project development. All of those 40 clients or projects have already spent some money with us, but they're in different stages of development. Some are very early studies, lock the team contract. Some are very advanced and close to construction. But overall, in the pipeline, we have 40 projects. Out of the 40, we've identified 17 as what we call high-impact projects. And the high impact for us means that it's either projects that have recurring revenue potential at the end or they're with a completely new and strategically important client and/or have a large marketing value within the industry, so are viewed as sort of setting standards in the industry. So if they -- if these projects meet one of these 3 criteria, they become what we call high impact. And just to get a little bit of a breakdown of how -- what are these projects about? There's only one project that's purely driven by recovery of value from waste. The rest of them are all compliance-driven projects. Out of those high-impact projects, over 80% are based or using at least part of our intellectual property. So there's really just a small minority of these where they are generic projects where we actually do work for clients who come to us and want us to work on projects that literally no special IP is needed. But the vast majority of projects require our IP. And for the overall pipeline, when I look at it, the spread or the distribution between the different types of IP and technologies is also quite even. So we've got roughly 1/3 of these being selenium projects where obviously we stand out strongly. There is roughly 25% that's cyanide recycle or destruction against strong IP. And there's roughly 20% that sulfate removal driven. And so it's not really with any one client either. We have the distribution of clients within the pipeline. There is no skewing. I think the largest chunk of these projects will be probably less than 20% with one client and the rest of them are distributed amongst a number of different clients. I just want to close these comments about where we are at today. We feel pretty confident about our pipeline moving forward. We feel that our performance for the rest of the year is going to be strong. I can -- we don't provide guidance. And for those of you who follow the company, there's always uncertainties. There's always distribution of outcomes. But in this distribution of outcomes, what I would say is that the probability that we are going to be meaningfully or significantly below the results of last year is very unlikely. And the probability that we're going to be meaningfully or significantly higher than last year is also unlikely. And with that, I will just open the floor to questions and be happy to answer any of the questions that you might have.

[Operator Instructions] The first question comes from the line of Robert Gignac.

My first question is just on your new segmenting of your short-term operations services. Thanks for that. That's very helpful. I think it gives us more insight into that division between Technical Services and shorter-term operations. How should investors be thinking about how projects could move from short-term to long-term operations? And are there projects that could remain active in the short-term segment for an extended period of time?

Yes. Robert, thank you for your question. Very good question. The short-term operations is a mix of projects. And I can say that it's within that mix, we do have projects that we see these short-term operations as the entry point for long term. So there will be those, absolutely. And it's part of the -- the short-term operations typically are shortcuts to basically get to operations without having to go through lab testing, engineering, construction, commissioning. Usually, the short-term operations are on existing facilities. And sometimes the clients have short-term machines they need to sort out. But for us, it could be an entry point into long-term operations. So that's one type. The second type is where truly this is a temporary situation. So water accumulation buildup on site. Client has 1.5 million cubic meters of water, they need to get rid of that volume, but there is nothing beyond that. There will be those, absolutely. And I think there are also projects where we feel that it's a short term from the point of view of fixing an issue. The client already has resources on site. So we're just assisting them. But it's really building credibility and reputation in the industry. So it's part of -- part and parcel of building our reputation. And I think that your point is very important, and that is that what really stands out for BQE in the space is we're one of very few players who can respond very quickly in an agile manner to demand for help in operations. There are companies who are doing engineering and advisory consulting services. But the operation piece being able to fix current issues and/or take over operations, that's a really unique feature of our capabilities.

That's very helpful. My next question is actually just regarding regulatory changes. Bill C-39 was tabled in Parliament this week. It aims to speed up federal approvals for major projects. It also has some changes for the Fisheries Act, including a new mechanism for proponents to pay fees to offset impacts on fish and fish habitat. How do you see the bill affecting your business, both in terms of the pace of new mine development and any changes in the regulatory drivers for water treatment?

I think the answer is in the short term, I don't necessarily expect impact. For new projects, new projects that are completely getting off the ground as a result of this bill, it's too early to tell. But I would say that one of the things that we've seen in the industry truly is the need for social acceptance. So regardless of the government push funding, facilitated permitting, the need for social acceptance is still there. And I think that if we can help our clients with achieving social acceptance, without them having to offset any impact financially under this law, it would always be seen as a win.

Your next question comes from the line of Nicholas Cortellucci from Atrium Research.

The first thing I wanted to ask about was gross margins. So Q1, they were pretty small and then Q2 is kind of back up to your guidance and standards, but we've seen north of 50% in the past. So what is the right number to look at you guys at on a forward-looking basis for gross margin?

Do you want to...

So when we look at the 3 types of revenue, they each have their own margin -- gross margin in the mix. And within each bucket, each project will also have their own gross margin mix. And especially for Q1 and Q2, where predominantly it is the short-term operations and the technical services. But going into Q3 and Q4, we do see a lot more operational or long-term operation services. And those are where we have higher margins. I think what you have seen in the past year is going to be our margins going forward without putting numbers in front of everybody right now. But yes, so it depends on the mix of the projects coming in right now, but it is expected that in Q3 and Q4, where operational services the drop will be kicking in, although we have full quarters of certain sites where those are seasonal, meaning they were not running in Q2 or only running for 1 month in Q2 that will have a full 3-month impact.

For the net margin, I just want to make a comment there that again, everybody probably on this call knows that our business model does not include investments into hard assets. So we don't necessarily grow -- we don't need to invest in hard assets to grow the company. However, we do need to invest into our most precious resource, which is our people, our staff. And as I alluded to in my opening remarks, we are basically targeting roughly 25% increase in the advisory services revenue generation capacity. And that really involves hiring and training, onboarding new staff. So those costs of growth are reflected in the net margins. And they are not necessarily evenly spread through the year, right? So we do go through periodic strategic planning and reviews and budgeting. And the hiring happens in stepwise fashion. So in some quarters, you may see a jump. In others, you may see a fall in the sort of the sales and development expenses related to really increasing the internal revenue generating capacity of the business.

Perfect. And then the other question I had was about M&A, given the cash balance and probably the borrowing capacity of the company. Have you guys done anywhere on the M&A front? Are there things in the pipeline that you're looking at that you want to share more about?

Just a few comments, maybe back to you. So again, I think last year, we made the investment into amalgamating aquatic toxicology into our business. We're still very much focused on that integration, the full integration of that service into the business. It's been going really well. And I think the -- by the end of this year, we will be really in a position that we can call this truly part of our internal part of our business. So with that already behind us, our eyes are on the next target or next few targets. We have some potential targets identified. We've spoken to investors in the past about discipline engineering services companies. We are currently very busy on multiple larger pre-feasibility or feasibility studies, working with some of these potential partners or companies that we may be interested in acquiring. But the timing of this, we also were very cautious in a sense that we really need to make sure that the companies we work with are truly philosophically aligned, and we're really happy with their work product. And so the nature of these larger studies is that they typically take sometime a year, maybe more than a year in the 12 to 16 months or so. And that's just one project, right? So if we want to test someone and date the time frame is a year or -- but there is active opportunities and projects that we're working on right now with some of those companies. So that's, I guess, the update on what we initially provided to investors about discipline engineering M&A. There are a couple of other targets that we identified, but nothing that we can report on today other than the discipline engineering.