Thermal Energy International Inc.

Good morning, everyone. I'm William Crossland, CEO of Thermal Energy International. Thank you for joining us today for our earnings call for the third quarter ended February 28th, 2025. Our news release, financial statements and MD&A are available on our website and have been filed on CDAR. Following my prepared remarks, we will have a question and answer session, at which time qualified equity research analysts joining us on MS Teams, we'll be able to ask questions. If you're joining us online, you should be able to see our slide presentation on your screen now. So before we get started, I'll point out that today's earning 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 other filings with the Canadian Securities Regulators. As an overview, although our revenue is a little softer in the quarter, our revenue for the year-to-date period was at an all-time high, 25% ahead of last year. Compared to last year, our quarterly margins were impacted by heat recovery projects that delivered much higher than normal margins last year and a bit lower than average this year. We see the current period as a temporary lull as our business development pipeline remains very strong. Moreover, our strong balance sheet and the investments we've made in our business over the past two years has positioned us to drive profitable growth. Revenue for the quarter. was 5.8 million, reflecting a decrease of 4.1% from the year before. This decrease was primarily driven by lower contributions from heat recovery projects as several existing projects neared completion, while newly launched ones were still in early mobilization phase. When looking at the trailing 12 months ended February 28th, our revenue was 30.5 million, which is just off the record mark we set for the trailing 12 month period, November 30th, 2024. As you can see on the slide, our trailing 12 month revenue is up 76% over the past two years. Our EBITDA for the quarter swung to a negative 130,000 as a result of the lower revenue and reduced gross margin on heat recovery projects. Plus, we continue to incur additional growth oriented expenses that are expected to drive results in fiscal 2026 and beyond. We remain EBITDA positive on a trailing 12 month basis with EBITDA of about 1.1 million. And I want to point out that our profitability over the past two years has been lower as a result of the significant investments we've made in our business. Importantly, we're not currently planning to incur any additional growth oriented expenses over the coming quarter but instead are going to focus on maximizing the return on the investments already made we expect these investments to start realizing benefits to our top line and to our profitability in fiscal 2026 which is right around the corner For net income, we had a loss of $400,000 for the quarter, but again, we remain profitable on a trailing 12 month basis with net income of $230,000. Again, we expect the investments made in our business to allow us to continue driving higher revenues and for those higher revenues to contribute more to profitability. Our balance sheet remains strong. At the end of February, we had cash and cash equivalents of $5.1 million and working capital of $2.4 million. We also continued to pay down our long-term debt, which was down to $1.4 million at quarter end. Over the last two years, we've reduced our debt by approximately $2.1 million and our net working capital increased by approximately $600,000, all from internally generated cash flows. I'd like to talk briefly on a subject that's getting a lot of press these days, tariffs, and more specifically, the on-again, off-again threat of a trade war with the United States. Although there's a lot of uncertainty with regard to tariffs and trade policies will likely continue to evolve, we do not expect them to significantly disrupt our operations. Based on what we currently know, we believe that tariffs are unlikely to have a material negative impact on thermal energy. Our supply chain is both flexible and geographically diverse. Since most of our manufacturing is outsourced, we typically work with various manufacturing partners and suppliers across various regions, often within the same country where our projects are based, which mitigates the threat of changing trade conditions. And we also wanted to highlight that we have established a US presence with EEI Boiler Room Equipment, which is based in Pennsylvania. By the end of the third quarter, we had year-to-date order intake of 17 million, including orders of about 7 million in the quarter. While our revenue for the year-to-date was at an all-time high, our order intake for the year-to-date remains behind where we were at this time last year. Our engineering and production team has done a good job converting our backlog, which stood at 14.8 million at quarter end. Since the end of the third quarter, we received an additional 2.3 million in orders, including the $1 million heat recovery expansion project we announced on April 16th. The orders received since quarter end have increased our order backlog to 17.1 million as at April 28th, 2025. I wanted to emphasize that while our order intake has been lower so far in fiscal 2025, our business has always been fairly lumpy in terms of when orders come in and when revenue is booked. But our business development pipeline remains very strong with many repeat opportunities with existing customers, as well as potential opportunities with prospective new customers. We continue to see a lot of demand for our energy efficiency and carbon emission reduction solutions and the payback on our projects from energy savings remains strong. A good example of that demand is the $500,000 engineering contract we signed in February with a new customer, another leading multinational pharmaceutical company. This was our largest engineering contract ever. The scope of the engineering work to be completed under this contract is significantly more comprehensive than what we typically deliver under a project development agreement. In fact, we entered into a project development agreement with this client about a year ago and completed it. And based on the results of that engagement, they wanted us to carry out the full detailed engineering for the project. That typically doesn't happen until we receive the order. But this client prefers to approve things in stages. but the fact that they've already spent more than $500,000 in this project leaves us optimistic we can turn this into a complete turnkey heat recovery project. This multinational pharmaceutical company is committed to achieving substantial carbon emission reductions and is aligned with the United Nations Race to Zero campaign, a global initiative encouraging non-state actors, including businesses, to take decisive steps towards halving their global emissions by 2030, and they have come to thermal energy to help them achieve their goals. A great example of repeat business is the $1 million heat recovery expansion project I mentioned earlier that we announced this month. In 2019, we completed a turnkey Fluace heat recovery project for this leading food and beverage company at this very same US location. After experiencing the benefits firsthand of our project and our installation, the customer invited us to collaborate on an expansion project to recover additional waste heat from this multi-boiler site. To date, we have successfully delivered 11 heat recovery projects across 10 of the customer's global locations and installed 4,000 gem traps at 60 of their sites. Our partnership continues to grow with many more opportunities for future projects, but both at these existing sites and at over 200 additional locations, we've yet to engage. So in summary, we had record revenue for the first nine months of fiscal 2025, but had softer revenue and margins in the third quarter. We fully believe we are in a temporary lull and are encouraged by our strong business development pipeline. Importantly, the significant reinvestments we made in our business over the past two years positions us well for our next stage of profitable growth. And we expect these investments will start to bear fruit in 2026. This concludes my prepared remarks. I would now like to open the call for questions. I'll turn it over to Trevor Heisler at NBC Capital Market Advisors, who will moderate our Q&A. Please go ahead, Trevor.

Good morning and thank you, Bill. If you are a qualified equity analyst 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 your first question comes from Russell Stanley at Beacon Securities. Please go ahead, Russell.

Good morning, and thank you for taking my question. Bill, just to start with a question around the $500,000 engineering contract. That structure, I think, separates the engineering from the equipment. I'm just wondering if you're seeing more interest in that type of structure from other customers, new or existing, and Can you talk about the pros and cons of that structure for thermal energy?