Thermal Energy International Inc.

I'm William Crossland, CEO of Thermal Energy International. Thank you for joining us on this lovely morning for our first quarter earnings call. Our news release, financial statements, MD&A are all available on our website and have also been filed on CDAR. Following my prepared remarks, we'll have a question and answer session, at which time qualified equity research analysts 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. Before we get started, I have to point out that today's earning call may contain forward-looking statement within the meaning of applicable security laws. forward-looking statements are subject 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 our MD&A for the quarter and other filings with Canadian securities regulators. In terms of overview, it's important first to highlight that our first quarter of fiscal 2026 is compared against an abnormally strong first quarter a year ago when we reported a 63% growth in revenue and strong increases in EBITDA and net income. Q1 of last year was our highest first quarter revenue ever. In fact, even though Q1 is typically the weakest quarter of the year, last year's Q1 was the second best quarter ever in the company's history. And the only quarter to beat it was the next quarter, the second quarter of last year. So while we didn't beat last year's Q1 revenue, this year's revenue is up very significantly compared to two and three years ago. We also had an excellent start to the new fiscal year in a number of ways. We had the strongest order intake of any first quarter in our history, and our order backlog is the highest it's ever been at the end of Q1. And this has positioned us very well for a strong back half of fiscal 2026. We continue to make inroads into the pharmaceutical sector, which is becoming a very important sector for us. And we continue to pay down our bank debt with $2 million repaid over the last 12 months alone.

We had revenue of $6.9 million for the quarter.

While this was down from the exceptionally strong and record first quarter last year, it was stronger than any other first quarter in our history. And it was up 32% from Q1 2024 and 114% from Q1 2023. On a trailing 12-month basis, we had revenue of $28.2 million, which was down slightly from a year ago. but still up about 22% from 2024 and 86% from 2023. So the longer term revenue trend remains very positive. As we've described previously, during fiscal 2024 and 2025, operating expenses increased due to our investment of approximately $2 million in the future growth of the business. These investments included a new larger production facility in the UK, significant growth in the number of salespeople and engineers, and the development of our award-winning carbon reduction and efficiency scoping tool, or CREST for short, mobile app. As you can see, with these investments now complete, operating expenses have leveled off and in fact have decreased slightly. And while these expenses are impacting our bottom line, they are not yet adding significantly to the top line. Nonetheless, we remain profitable in the quarter and the trailing 12 month period, but our adjusted EBITDA was down compared to last year, due mostly to lower revenue in the quarter, even though gross margin improved during the quarter, due to product mix. For the trailing 12 months, we had adjusted EBITDA of $850,000 compared to $2.1 million a year ago. Again, the decrease was mainly attributable to lower revenue and a slightly reduced gross margin, again, due only to product mix, and product mix varies from quarter to quarter. Net income for the quarter and the trailing 12-month period follows a similar story as adjusted EBITDA. We had net income of nearly $170,000 for the quarter. That was down from a year ago, but still higher than Q1 of fiscal 2024. On a trailing 12-month basis, we had a net income of $15,000, down from the $1.1 million a year ago, but obviously still up very significantly compared to 2023. So again, the long-term trends are still positive. And importantly, we continued to generate very strong operating cash flow. For the trailing 12 months, we had operating cash flow of 1.1 million, excluding changes in working capital items, temporary changes in working capital items. And over the last three years, we have actually generated approximately $5 million from our operating cash flow.

And what have we been doing with all that operating cash flow?

We've been strengthening our balance sheet, adding to our cash balances and working capital and repaying our debt. At the end of the quarter, Q1 that is, we had cash equivalents of 4.3 million, working capital of 2.7 million and only $200,000 of bank debt remaining. In fact, a few years ago, we had almost $4 million of bank debt and we've repaid more than $3.7 million since May 2022, all from our own internally generated cash flow. We expect to pay the remaining balance by January, so just in a couple of months. The big story in Q1 was our ordered intake of $11.9 million, which was a record for our first quarter of the year, and it wasn't even close. As you can see on the slide, our order intake in Q1 of fiscal 2026 was more than four times that of Q1 last year and well above our historical average for the first quarter. In fact, it was about three times our historical average for the quarter. I also wanted to highlight For the trailing 12 months ended August 31st, we had an order intake of 30.8 million, which is also a company record and more than double what it was three years ago. I should remind everyone, though, that because of the typical revenue pattern for large turnkey projects, the majority of the revenue from the orders received in Q1 is expected to be realized in the second half of 2026. So as we've said last quarter, in fact, our overall revenues in 2026 to be weighted a bit more heavily towards the back half of the year. And one of the major orders that we received in Q1 was a $5.1 million order from a leading global pharmaceutical company. We received this after receiving $500,000 engineering contract from that same company for a potential heat recovery earlier in the year. We then received a $1 million equipment order related to the project in June, and just a week later, a $4.1 million order to fully implement and commission the project on a turnkey basis. Typically, we get these orders all in one, but in this case, this pharmaceutical company wanted to split it up, and that was certainly fine by us. It's worth highlighting the significant progress we've made in the pharma industry just over the last two years. So in September 2023, we received our first pharma heat recovery project order. Since then, we've received three more heat recovery orders from the pharma industry. And over the last two years, we've received orders for four heat recovery projects from two large multinational pharmaceutical companies. And those orders totaled about $15 million. So it's a great success and we continue to be excited about the future of our business in the pharma industry.

It's a very reliable non-cyclical industry.

On this slide, you can see that our record order intake for Q1 and the trailing 12 months led to an order backlog of 18.5 million at the end of the quarter. That's 37% higher than last year, 60% higher than the year before, and 206% higher than three years ago. So a very nice trend indeed. I'd also note that we have very strong business development pipeline full of repeat opportunities from existing customers and potential opportunities with prospective new customers. So in summary, we had the second best Q1 revenue ever down from last year, but up significantly from two and three years ago. We have a very strong balance sheet. with virtually no debt, which puts us in a strong position to continue growing the business going forward. Our record first quarter and trailing 12-month order intake have led to our strongest Q1 order backlog ever and positions us well for a strong half of fiscal 2026. And we've made great progress in penetrating the pharmaceutical sector over the last 25 months, and we see this being a very strong

sector for us going forward. 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. Thank you, Bill.

If you are a qualified equity analyst joining us on MS Teams 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. Russell, you might be muted. Looks like you are muted, actually. Yeah, I'm not sure why he's not able to unmute. Oh, there. Now it looks like he's unmuted now. Please go ahead, Russell. Thank you. That's unfortunate.

Is Russell able to ask the questions in the chat perhaps or send them to you, Trevor, in some way?

He could send them to me by email.

It looks like he's unmuted now. Hmm. Well. It's unfortunate.

Well, I apologize for any inconvenience here, but there does seem to be a technical difficulty in some regard. Please go ahead, Bill.

OK, well. Thank you everyone for your continued support of Thermal Energy International. We look forward to speaking to you again next quarter and hopefully being able to answer your questions. I apologize for the mishap this time. Thanks very much, everybody. Have a great day.