Thermal Energy International Inc.

I'm William Crossland, CEO of Thermal Energy International. Thank you for joining us this morning for our third 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 and institutional investors joining us on MS Teams will be able to ask some 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 some forward-looking statements within the meaning of applicable security laws. Wait a minute. Okay, there we go. 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 MD&A for the quarter, and our other filings with the Canadian Securities Regulators. In terms of an overview, I'm pleased to share that thermal energy delivered solid performance in the third quarter, highlighted by record Q3 revenue of $9.4 million and record trailing 12-month revenue of $33.3 million. We also saw signs of operational leverage with sharp improvements in adjusted EBITDA and net income, both in the quarter and over the past year. Our balance sheet remains very healthy with virtually no debt and strong cash and working capital positions. And our order intake for the quarter was up 26% with our trailing 12 months up 41% to an all-time high of $31.3 million. We had revenue of $9.4 million for the quarter, which is a record for our fiscal third quarter. It also represented a 62% increase compared to our third quarter last year. Our heat recovery revenues remained near all-time highs, and our gem revenues were up year over year as well. Looking at the trailing 12 months ended February 28th, we had revenue of $33.3 million, which is a new record amount and up 92% from three years ago. We had operating expenses of $3.1 million in Q3, which was up about $548,000 from a year ago. However, the variance was mainly due to an increase in foreign exchange loss of $402,000. On a trailing 12-month basis, operating expenses were up $1.6 million, and again, the largest variance driver was a $538,000 decrease in foreign exchange gains. Other significant drivers included approximately $240,000 as a one-time investment in technologies and facilities, an increase in staff incentive cost of about $109,000 because of significantly higher profit, and a $480,000 increase in general salaries and benefits. As many of you know, we invested a fair amount in growing our business starting in fiscal 2024 and fiscal 2025. This included expanding our sales, marketing, and engineering team. As we communicated then, we expected these investments to negatively impact profitability over the short term, but they would begin to pay off in fiscal 2026. This is clearly significant. demonstrated here on slide number six. While our adjusted EBITDA was down in both Q3 2024 and Q3 2025, it has reversed course quite significantly. In fact, adjusted EBITDA climbed to $519,000 for the quarter, up $686,000 year over year, and highlights the operational leverage possible as we scale our business. On a trailing 12-month basis, our adjusted EBITDA almost doubled year over year to about $2.1 million. It's a very similar story when it comes to net income, which was up $741,000 in the quarter to $338,000, which was a nice but expected reversal from what we reported in Q3 the last couple of years. Again, on a trailing 12-month basis, we had net income of $1.3 million, which was an increase of about $1.1 million from a year earlier. From some of our previous earnings calls, you will know I like to highlight that our business produces robust operating cash flow. On slide 8, we show how operating cash flow excluding changes in working capital items, tends to be significantly higher than our net income. You can clearly see this is the case when looking back at our trailing 12-month periods for each of the past four years, during which time our operating cash flow totaled $7 million. A year ago, For the trailing 12-month period, our net income was only about $230,000, but we generated nearly $1.6 million in cash flow. And for our most recent 12-month period, our net income was approximately $1.4 million, but we had cash flow of more than $2.2 million. And so over the last few years, we've used our operating cash flow to materially strengthen our balance sheet, bolstering liquidity, maintaining a solid working capital position, and aggressively reducing down debt. And this year, we also spent about $500,000 buying back 3.6 million shares. We ended the quarter with $4 million in cash, up 41% from the $2.8 million we had at year end, And we had $3.7 million in working capital in the third quarter up 53% from the 2.4 million at year end. Additionally, we are now essentially bank debt free after paying down over $3.9 million in term loans since May, 2022, including 1.4 million in the last four quarters. And we've done all of this with our own internal operating cashflow as a result. We now have a cleaner, stronger, more flexible financial base to support continued growth. In addition to our strong financial results for the quarter in Q3, we continue to receive a good flow of orders, including repeat business. I want to take a moment to highlight some of the key orders we received in the quarter. Back in the middle of December, we received a $3.2 million turnkey heat recovery order from a leading multinational frozen food company. This is our second heat recovery project with this customer, which happens to have over 40 manufacturing sites around the world. Also around the middle of December, we received a $1.5 million order for a turnkey heat recovery project from a multinational building materials company. This project includes four two-stage heat sponge boiler economizers to be installed at a second customer site. We had our first turnkey order from this customer last July at a different site. The third order I wanted to highlight is a $1 million turnkey heat recovery project secured in February. The scope includes installing a two-stage heat sponge economizer on each of three natural gas fired boilers to capture waste heat from their exhaust stream. This marks our ninth turnkey projects with this global customer and our third consecutive heat sponge turnkey deployment with them. Since 2019, we've delivered more than $14.6 million in projects for this client and have now at least partially penetrated 28 of their manufacturing sites across nine countries, with many more to go. The orders I just highlighted contributed to a total order intake of $8.7 million for the quarter, up 26% from last year, and $31.3 million for the trailing 12-month period ended February 28th. which is up 42% from the same period a year earlier. At the end of the third quarter, we had an order backlog of about $15 million. While this is down a little from a year earlier, given the higher order intake and higher revenue, the slight reduction in our backlog highlights that we have been more efficient at converting orders into revenue over the past couple of quarters. And we attribute this, at least in part, to the investments we made in our engineering team these past couple of years. So, as a quick summary, before opening the call up for questions, we had record Q3 revenue and record trailing 12-month revenue. We achieved significant increases in adjusted EBITDA and net income for the quarter and trailing 12 months. Our balance sheet has been strengthened and remains very solid with virtually no bank debt, and we had strong order intake for the quarter and for the trailing 12-month period, and we continue to have a healthy order backlog. Overall, we believe we are very well positioned to continue executing our strategy and creating long-term value for our shareholders. That's it for my prepared remarks. I would now like to open the call for questions. I will turn it over to Trevor Heisler at NBC Capital Markets Advisors, who will moderate our Q&A. Please go ahead, Trevor. Thank you, Bill. If you are a qualified equity analyst or institutional investor 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 Don Angelo Volpe at Beacon Securities. Please go ahead, Don Angelo.

Hey, good morning, guys. Thanks for taking my question. I'm calling on behalf of Russell Stanley. So first off, just given the impact that the revenue mix has on gross margins, can you provide any color on the revenue mix this quarter and how that compares to the revenue mix within your current backlog?

Um, yeah, it's, it's, it's, as I've said before, traditionally Turkey projects were about two thirds of our revenue, um, and equipment sales were about a third. And, you know, during the COVID period that, that switched because we couldn't get to site and now it's trending more back towards two thirds, one third. So that's basically where it's at, both from our, uh, our revenue standpoint and our backlog.