Thermal Energy International Inc.

Okay, you can stop.

Good morning, everyone. I'm William Crossland, CEO of Thermal Energy International. Thank you for joining us this morning for our second quarter earnings call. Our news release, financial statements, and MD&A are available on our website and have been filed on CDAR. After 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 go any further, I have to point out that today's 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 and our MD&A for the quarter and other filings with the Canadian Securities Regulators. Oops, here we go. So, an overview. Let's look at what was an excellent quarter for thermal energy, including record quarterly revenue of $10.2 million, which is more than an 18% increase over Q2 last year, and is the highest quarterly revenue in company history. Our adjusted EBITDA was $814,000, which is three times the EBITDA last year, and net income at $618,000 was 20 times last year's net income for the quarter. We also finished the quarter with a strong balance sheet with essentially no bank debt. And during the quarter, we saw very strong demand, resulting in record order intake for heat sponge, which helped drive our year-over-year growth in order backlog. Why does it keep doing that there? Okay. Taking a closer look at revenues, as I said, we had record revenue of $10.2 million for the quarter. with higher revenues from both heat recovery projects and equipment sales. We also saw some of the revenue from heat recovery projects that we had anticipated for the back half of fiscal 2026 come in faster than expected. As a result, our quarterly revenue for turnkey heat recovery projects was also the highest in the company's history. On the slide, you can see the nice upward trajectory in our second quarter revenues going back to Q2 of fiscal 2023, with our Q2 revenue growing 145% over that time. On a trailing 12 months or trailing four quarter basis, revenues were down slightly from a year ago, due largely to our softer Q1 this year versus a record first quarter last year. Nevertheless, with our record revenue this quarter, our trailing 12-month revenues are now up 95% from where they were three years ago. In terms of operating expenses, we recorded $3.2 million in operating expenses for the quarter, an increase of $605,000 compared to Q2 last year. However, Q2 of this year included a few one-time costs, including $150,000 restoration costs for leased space, $90,000 invested in website design and our digital scoping tool, CREST, and an accrual to cover anticipated contributions to the staff profit-sharing plan given the strong profitability in the quarter. Other contributors to the year-over-year variance included a $110,000 increase in salary and benefits expense driven by a lower proportion of salary costs being allocated to our project costs under cost of goods sold compared to the prior year. For the 12 months ending November 30th, 2025, we had operating expenses of $11.9 million, which was an increase of about $600,000 from the trailing 12 months period the year earlier. The increase was driven largely by the items I just mentioned for the quarter, as well as some general inflationary cost increases. We tripled our adjusted EBITDA 207,000 a year ago to 814,000 in Q2 this year. You may recall that last year at this time we announced that our profitability was temporarily suppressed by higher expenses related to the substantial investments we made in our businesses. Those investments were made to drive profitable growth for the long term and those investments are now starting to pay off. On a trailing 12-month basis, adjusted EBITDA is still down, but we do expect this trend to soon reverse. It's a similar but even more pronounced story when it comes to our bottom line, our net income. In this case, our net income was up 213% to $268,000 in Q2. and I wanted to call out that with the exception of Q3 of last year, we have been profitable for the last straight 12 quarters. On a trailing 12-month basis, we had net income of $605,000, down from $672,000 a year earlier, but like the EBITDA, this trend, we expect, will soon reverse. Importantly, our business continues to produce robust operating cash flow. As you can see here, for the trailing 12 months, total operating cash flow was $1.6 million before changes in working capital. Over the past few years, we have put our strong operating cash flow to work to strengthen our balance sheet. We've been maintaining adequate reserves and strong working capital while at the same time aggressively reducing our debt all from our own internal cash flow. At quarter end, we had $2 million in cash, $3.4 million in working capital. Importantly, we are now essentially free of bank debt after paying down our term loans by more than $3.8 million since May 2022, with the last $1.9 million paid just in the last four quarters, including $130,000 in Q2. I'm very proud of the work here, resulting in a cleaner, stronger, more flexible financial foundation for future growth, and it was all done with our own internal cash flow. In terms of order backlog and order intake, you may recall we had record order intake of 11.9 million in the first quarter. In the second quarter, we received another $5.9 million in orders, bringing our six-month total to $17.8 million, which is 77% higher than our order intake for this first six months of fiscal 2025. That very strong order intake drove our order backlog to $15 million at the end of November, representing a 16% increase in backlog compared to the end of the second quarter a year earlier. Since the end of the quarter, we have received another $6.5 million in orders, driving our backlog up to $21.5 million as of yesterday, a 20% increase year over year. And in terms of heat sponge in particular, our strong order intake and order backlog has been driven in part by that. Heat sponge order intake in both the quarter and the year to date in the six months of fiscal 2026 was 3.7 million in heat sponge orders, representing an increase of 127% compared to the first six months of fiscal 2025. And this increased order intake for heat sponge is not by chance. Much of it stems from the strategy we implemented last summer, recognizing an opportunity to promote and pursue streamlined turnkey heat recovery projects focused on heat sponge applications. Historically, as you may recall, heat sponge sales were sourced primarily from a network of independent manufacturer's reps, or IMRs. While this will continue to be the case for the smaller orders, our internal sales team is targeting larger, more strategic heat sponge orders on a turnkey basis. For clients looking for a simpler, quicker heat recovery project on a turnkey basis, Heat Sponge is a great fit due to ease of installation, having no controls and simpler heat sources and heat sinks. Plus, there's no need for a detailed project development agreement. As a result, compared to our traditional, more complex Fluace, turnkey projects our streamlined heat sponge turnkey offering results in a shorter sales cycle quicker project completion and therefore quicker revenue and higher margins for tei here are some examples of our early success we've had with this strategy on november 5th we announced that we had received orders for two turnkey heat recovery projects worth a combined total of $1.5 million from a global nutrition company. These were the seventh and eighth turnkey projects with this customer to date, but were the first ones to revolve around heat sponge. And we also received $2.5 million in orders representing two heat sponge turnkey projects from a multinational building materials company at two different sites. The first was a $1 million project announced back in July, and the second, a $1.5 million project announced on December 17th. We are very pleased to see our sales team expanding the reach of this excellent product line and reinforcing our confidence in the long-term trajectory of the heat sponge business. So in terms of summary, we had a great second quarter with record revenue and improved profitability. We have a strong balance sheet with virtually no bank debt remaining. We have a very healthy order backlog of 21.5 million as at January 26, and we are pleased with the early traction of our streamlined heat sponge turnkey offering and are excited about its future prospects. As 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 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, Russ.

Good morning and congratulations on the quarter.

Thank you, Russ.

First question, just around the impact of the accelerated work on the heat recovery projects, some things, I think, coming forward faster than expected. I think on prior calls, you predicted that the fiscal year top line would probably be more H2 weighted. Is that still the case? Just trying to understand how much work may have been pulled forward.

Sorry, sorry. Say that again? Not the whole question. Straight then.

I think on prior calls you'd indicated that the top line would probably be second-half weighted, but I'm wondering, given you've had some work pulled forward on the heat recovery side, I'm wondering if that is still the case, trying to understand how much of an impact the accelerated work may have had.

Yeah, I mean, it is accelerated. I still think, you know, the second half will be strong, but we're not expecting the year to be much different from what we were expecting before.

Thanks on that. And thank you for the color around the progress or the success you've had in focusing the, you know, salespeople on large orders around heat sponge. I'm wondering, given the strategy I think, you know, was implemented last summer, I'm wondering what lessons you've learned and what adjustments you may have made on the fly in terms of how you approach this.

Well, I don't like to brag, but it's gone exactly pretty much as we expected. I mean, the orders came in a little bit faster. We're very pleased. But, yeah, in terms of this as an opportunity, there hasn't really been any surprises. It's sort of exactly what we thought, other than it's come in quicker than we had anticipated. You know, that could be because we just happened to get two clients that were very enthusiastic about it, but the projects were – the orders came very quickly, and we're executing the orders quite quickly. So, you know, as you know, Russ, with turnkey projects – A, it's a long sales cycle, and these ones have a much shorter sales cycle because there's much less analysis to be done, and they're much quicker to implement. With a heat sponge, it's a very simple heat source and heat sink. With the larger turnkey fluid projects, often it's a variety of heat sources and a variety of heat sinks. So, you know, we can implement the projects quicker, which means when we're doing a percent complete basis for our turnkey projects, we can revenue that much quicker. So the revenue hits the bottom line. So it's all going quite well. We're quite pleased with it.

Thanks for that, Collar. Maybe if I could, just on gross margins, the level for the quarter, is that just a function of a heat recovery project? quarter, or were there any other headwinds or even tailwinds to call out?

No, no. It's generally, I mean, the margin does jump around a little bit, primarily as a result of product mix. So that's really all that's happening there. But I will say that in general, all our product lines, we've had generally increasing margins, you know, since the inflationary period that, you know, that followed COVID. So we have improved our margins a little bit over that time. They're now back to where they were. They dipped a bit for a while. They're now back to where they were. But over the last few quarters, we have seen a generally increasing margin by product line. But the majority of the difference you see is primarily product mix.

Got it. And, you know, understanding the success you've had with heat sponge as a product, just more generally, when you look at which customers to – to pursue your recent wins have been with existing customers, and we know there's still a lot of runway to go with existing customers. How do you allocate or think about prioritizing additional wins with existing customers over chasing new customers? I'd love to hear your thoughts on how to balance those two.

Well, as we've talked before, in terms of new customers versus existing customers, and are you talking specifically about heat sponge or more generally?

More generally.

Yeah.

Understanding the recent wins were heat sponge, and I'm thinking it must be easier to go after business with existing clients that you're a known entity with, but there's the obvious diversification benefits of grabbing a new customer, so I'm just thinking how you prioritize things.

Yeah. You're right. It is a little bit of both. We have our target list of customers and target list of companies, but we also have target applications. So, whether there's certain applications, we've done a project, with a certain type of company that has a certain application is, you know, meat processing. If we have a great application for meat processing, then we might go after, even if it's not a new customer, we'll say, okay, what other companies have this exact same application at site? or spray drying or milk companies. So it's really twofold. So often where the new customers come from is because we start with an application at another company that is very similar to what they have. And we say, you know, we can say, look, we did it with this company, we can do it with you as well. So that's usually how the new customers come about. Having said that, this, you know, this building materials company that we did these two heat sponge ones, I don't think we had done that sort of business before. So that was... That was totally new, which was great. So now we have that application and we can search up for other companies that also have that application on their sites. So again, in summary, it's knowing customers or knowing applications is usually how we focus our efforts.

Maybe one last question and I'll get back in the queue. Just wondering, you know, after a strong quarter, Can you talk about, and, you know, obviously taking the debt level down, congrats on the balance sheet, but just wondering how you're thinking about M&A at this point, what kind of opportunities you might be seeing out there, and how competitive the bidding might be for any of your prize targets?

Yeah, we're still looking. We're keen. I wouldn't, you know, I don't think I have a sense of how strong the bidding is, any acquisition, because we're not that far along at any material opportunity. Having said that, with any of the acquisitions we've done before, there wasn't really any bidding. You know, usually we're looking for pretty unique cuts companies, and we are a fairly unique partner for them. So typically, much like our heat recovery projects, we don't often compete with other people because they're fairly unique situations.

That's all I have for now. Thank you very much. I appreciate the call, and congrats again.

Thanks for your continued interest, Russ.

Okay, and it looks like there are no further questions at this time. Please go ahead, Bill.

Okay, well, thank you very much, everyone. Thanks for your attention, and thanks for your continued interest in Thermal Energy International, and have a wonderful day.