Fuel Tech Inc (FTEK) 2003 Q2 法說會逐字稿

Good day ladies and gentlemen. Thank you for joining Fuel-Tech NV Q2 Earnings Conference. My name is Caitlin and I’ll be your coordinator today. At this time you are all on listen only mode. There will be a question and answer session following your presentation and you will receive instructions on how to ask questions at that time. If at any time during the call you require assistance, please key *0 and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. At this time I’d like to turn the program over to your host, the Director of Investor Relations, Miss Tracy Krumme. Ma'am, please go ahead.

Thank you Caitlin. Welcome to Fuel-Tech second quarter conference call. By now all of you should have received a copy of today’s release. If you have not, please call us at (203)425-9830 and we’ll be happy to send you one. Joining me on the call this morning are Steve Argabright, President and COO and Scott Schecter, Chief Financial Officer.

As a reminder, the matters discussed in this conference call, except for historical information, are forward looking statements that are subject to certain risks and uncertainties and could cause actual results to differ materially from those set forth in our forward looking statements. The factors that could cause these results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed. Listeners should not assume that the statements made in the call remain operative at a later time. Fuel-Tech undertakes no obligation to update any information discussed in this call.

As a reminder, this call is being broadcast over the Internet and can be accessed at our website www.fueltechnv.com. With that said, I would now like to turn the call over to Steve. Steve, please go ahead.

Thank you Tracy and good morning. Thank you for joining us today to review our financial and operating results for the second quarter. As we reported, second quarter earnings of $0.03 per diluted share compared to $0.05 per diluted share of the second quarter last year. Net sales in the second quarter increased 24% to $10m, compared to $8m in the second quarter of last year.

We are very pleased to announce that during the second quarter we booked $9m in Air Pollution Control contracts, plus $2.1m announced in July, brining us to a year-to-date total of $13.3m. These bookings were primarily due to the approaching SIP Call deadline, which requires significant NOx reductions for utilities and industrial units.

Capital is still in short supply in some cases, however, as evidenced by the fact that these totals reflect the cancellation of a recent booking due to cash flow considerations. Work to date will be covered and we have been told that the project will likely be reinitiated next year. On the brighter side, we expect revenues due to SIP Call NOx reduction requirements to continue into 2006, well past the May 2004 deadline.

We are also pleased by the success we have had in further penetrating the selective catalytic NOx reduction market, with NOxOUT ULTRA. Our technology for the on-site conversion of urea to ammonia for uses of reagent in the SER process. During the second quarter we received an order for this technology for $2.2m from a Mid-West utility on a 360 Megawatt coal-fueled boiler. On July 1, 2003, we received an additional order for $2.1m. This represented our third ULTRA contract for large coal-fueled units.

As we announced last quarter, we received a contract from a North-Eastern utility to provide a temporary trailer mounted NOxOUT system to reduce NOx, as an alternative to purchasing allowances. Even though the price of 2000 allowances has fallen below $4,000 a tonne, the utility is still enjoying a sizeable net gain from this installation. We believe the price of NOx allowances will remain at high levels through 2004 and 2005, making them a less viable compliance alternative. As a result, our salesmen are continuing to actively market our NOxOUT process on a return on investment basis to facilities impacted by the SIP Call next year.

Turning to our non-regulatory driven operations. We continue to be extremely exited about the growth opportunities available with Fuel Chem, our fuel treatment chemical business. We have seen more market activity here in the last three to four months than we have in the last year. During the quarter we entered in to a strategic agreement with Peabody Energy, the world’s largest coal company, to work together to jointly market our proprietary Targeted-In-Furnace Injection technology to utilities using high sodium coal. Tremendous synergies exist here and the agreement will benefit both sides. Through their relationship with us, Peabody can now be confident that a solution exists for controlling slagging and fouling in furnaces and boilers, even when high sodium levels are encountered. It benefits us by enhancing our credibility to have the backing of a major, well-respected coal company, as well as enjoying new contacts and market intelligence.

We are continuing our discussions with several other major coal suppliers about the potential for joint marketing. We have already made new utility contacts as a result. In addition, we are in discussions with EPRI, the Electric Power Research Institute, about working together on a project. We’re heavily involved in several trade organizations, including the American Coal Council and the National Coal Transportation Association. Participating in, and presenting papers to, these organizations broadens our market penetration and further enhances our credibility.

During the quarter we also announced successful application of Targeted-In-Furnace Injection at Western Farmers Hugo station, a 475 Megawatt coal-fueled unit in Oklahoma. In just a short period of time our technology proved that it was capable of eliminating problematic slag build up. Potential benefits to the Hugo station include reduction in unscheduled outages and downtime, reduced boiler cleaning costs and elimination of damage due to the boiler from slag accumulation. In addition, Hugo personnel were able to operate the boiler at lower NOx levels by reducing oxygen levels. Station representatives were so pleased with the success of our technology that they have discussed our success in a press release and have been, and will continue to be, a reference for us for prospective customers. This is especially meaningful as we now have the backing and proven testimony of another satisfied customer.

We mentioned on the last call that we expected to have four or possibly five new units starting up on our Targeted-In-Furnace Injection technology this summer. We’ve already started up three of these, the fourth is scheduled to start next week and we are in final discussions with the fifth. Results to date have been excellent. We expect significant additional business to be gained during the next six to eight months, which will give us the critical mass we need to move forward.

Regarding our oil-fueled business. We expect some gains compared to last year as oil prices stabilize at lower levels. Unlike coal applications this is not an unsold market, but our technology has proven to be superior to the traditional techniques used in this market segment. As a result, we are aggressively marketing in the Caribbean and Eastern US where there are numerous opportunities.

On the Software side, we continue to make progress. Most recently we upgraded our ACUITIV CFB visualization software to the latest version, 3.3. This new release, which adds significant functionality, is expected to broaden market acceptance by allowing the visualization of larger models, providing more intuitive navigation and interfacing with additional OEM CFB codes. We are continuing our development efforts to further refine the product, as well as looking for alliances and strategic partners to further enhance our opportunities.

I will now turn the call over to Scott for the financial overview.

Thanks Steve. Good morning. We’re very pleased with our results this quarter. As Steve mentioned, we reported net sales for the three months ended June 30, 2003, of $10m versus $8m for the same period last year. Net sales for the six months were $18m, up 36% from the $13.2m last year. This growth was driven primarily from strong Air Pollution Control revenues, which were up 41% in the six months versus last year. This is the result of the pending deadline of the SIP Call, requiring significant NOx reductions for utility and industrial units of 19 States by May 2004. As Steve explained, we anticipate that these revenues will continue into 2006, which is well beyond the SIP Call deadline.

The second quarter our Fuel Chem revenues were up 23% from last year, and up 20% for the six month period. This was due, in part, to our increased penetration and recent activity in this market, as well as the successful start up at Western Farmers Hugo Station.

Net income for the quarter was $600,000 or $0.03 per diluted share, compared to $1m $0.05 per diluted share in the same quarter last year. Our gross margins were 36% in the second quarter, up from the first quarter 33% but down from 49% last year. Year-over-year decrease is due to the fact that a significantly larger percentage of revenues in the second quarter and six months of 2003 were generated by TURNKEY projects, which have a much lower margin than our traditional scope. These margins are expected to improve the beginning of the third quarter.

In the second quarter our SG&A and R&D expenses combined remained relatively flat over last year, at $3m. The SG&A component was slightly higher, up $97,000 in the second quarter from last year, which is attributable to the addition of sales resources for the Fuel Chem business and, to a lesser degree, to the addition of resources in support of the marketing and development of the ACUITIV software. Going forward, we anticipate that our SG&A costs will increase as higher sales volumes, particularly in our Fuel Chem business, lead to increased selling costs. As we stated before, over and over, our market penetration of the Targeted-In-Furnace Injection technology is a strategic priority.

We continue to have a strong balance sheet. We ended the quarter with $6.2m in cash and working capital of $12.2m. The decline in cash for the year-end was driven primarily by the repayment of $1.8m in debt and by the reduction in accounts payable and accrued expenses. We paid off the debt because our interest costs greatly exceeded what we were earning on our cash. Our availability under our credit line increased dollar for dollar with the debt repayment, so our financial capabilities were not impacted. If we had not repaid the debt in the second quarter, our cash balance would have been approximately $7.8m versus the $8.3m we reported at the end of the first quarter. Our current backlog stands at approximately $9.3m.

Looking forward, we continue to expect our year-end results to show modest improvement on the revenue line over 2002. As Steve mentioned, however, we expect to be at or around our critical mass level for Fuel Chem at year-end. We look forward to further penetration into this market. Additionally, we expect to report new orders in our Air Pollution Control business up to the remainder of the year.

With that said I’d like to hand the call back over to Steve for his closing remarks.

Than you Scott. In summary, we are extremely optimistic about our prospects for growth in the future. The SIP Call deadline is drawing closer and our [RLI] approach to the market is going to bring significant attention and is our ULTRA technology. The Peabody Energy agreement and our recently announced success at Hugo Station are [bell-weather] events on Fuel Chem side with more to come in the near future. Caitlin I would now like to open the call for questions.

Ladies and gentlemen, if you wish to ask a question at this time you may do so by keying *1 on your touchtone telephone. If your question has been answered, or you wish to withdraw it, please key *2. Questions will be taken in the order received. Please key *1 to begin. Your first question Sir comes from Robert Kirkpatrick of Cardinal Capital.

Good morning. I was wondering if you could extend a little bit on your software sales. You talked some in the last call about the number of places where the software was being evaluated. I was wondering how those evaluations were going and, Scott, whether you did book any sales in the quarter?

Let me handle the first part Rob. The evaluations are coming along. One thing we needed was some of the functionality that has now been made available in 3.3. We think that’s going to definitely broaden our acceptance in the market. As far as additional bookings, no there has not been any in the second quarter.

Help me out, I don’t understand how long a typical evaluation might be for someone thinking of buying this software?

If they have the proper hardware, which we’ve discovered has been an issue as well from the graphics card perspective. We’ve been solving that problem by carrying some inventory ourselves. Not that they’re a huge expense, but people evaluating new software are not anxious to learn how to improve their hardware so we’ve overcome that hurdle. I would say once the hardware is at the point where it needs to be, then probably 30 to 60 days.

Okay. Generally, it still runs on a regular PC, just with the right graphics card?

That’s correct. We’ve got it running on a laptop. Our General Manager of that Group carries the laptop with him that he can actually demonstrate the software on.

Okay. The number of Fuel Chem units that contributed sales during the quarter was three, Scott?

That contributed sales on the coal side I think it’s three, right Steve?

Yes.

Okay. Thank you so much.

You’re next question Sir from Alan Weichselbaum of Fulcrum.

Hi. Good morning. How are you? You keep on talking about the critical mass of boilers or utilities that will be using Fuel Chem. What is that number and why is that number the critical mass? What will happen at that point?

Well we’ve been talking for quite some time about needing between six and ten units with some names. By that I mean some well-known utility names attached to a couple of those units that are going to express the fact that yes indeed the technology does work. We’re in final discussions with several utilities that would qualify as those named utilities. We now have five units installed and the sixth one starting up next week. Discussions with these people, the major utilities side and the rest, like I said [call] very rapidly in the last three or four months. The Western Farmers situation being a reference has helped considerably if they’re willing to host people from other utilities to observe for themselves the results of the tests. That’s been very helpful and certainly spurred activity in the last sixty days.

As has the Peabody announcement. Anything that adds credibility is going to push the sales that much quicker.

When you say six to ten, that, in your opinion, seven to eight boilers are enough that it becomes not word of mouth, but enough that it gives you credibility that this does work?

Yeah, I think so. Again it’s important that we have some names attached to those, some well-known utilities. The other thing is working with Electric Car Research Institute, the actual project, is going to help considerably. Again, it’s a third party with credibility saying this technology really is unique, and it does work, the return on utility investment is significant. All those things contribute to success we think we’re going to see in the next [indiscernible].

The companies that you are currently in later stages of negotiations with. Are you also putting something in to say that if it does work we’d like to be able to announce it? Are you going to run into the problem were you have utilities that will not let you use them as a reference?

Well we’re certainly willing and have offered incentives for being able to use the utility as a reference to write joint papers, to present at conferences. In fact Western Farmers Group has agreed to do that. There is an incentive involved in that.

One last question. The potential market, in your opinion, is how many boilers for Fuel Chem?

Well there are 132 facilities, an average of two to three units per facility, that are on our database for burning Western coals. We’ve said, based on that analysis, that we think the market is about $200m. An average sized unit, somewhere between $750,000 and $1m revenue per unit. That’s how we came to that number.

Okay. Thank you.

The next question from Tony Campbell of Knott Partners.

Good morning. Has the JV with Peabody resulted in any clients? I guess I’d some additional detail of how that’s working. Are there other such joint ventures [indiscernible].

Well Tony, JV is a little strong. This is simply a marketing agreement. Yes we are talking to four or five additional coal companies and coal distribution companies. That’s moving along nicely, in fact there are some meetings this week and the following week. Have we made any progress with the Peabody situation? The answer to that is yes, from the perspective of them recommending to their customers and contacts Fuel Chem technology and Targeted-In-Furnace Injection. We are scheduled to make some high-level corporate calls with Peabody executives so that’s the tack we’re taking now. Other ideas include packaging of coal, transportation costs and our process all in one ball and presenting it to customers and managers [indiscernible]. There’s lots of ideas under discussion with Peabody and others. We think it’s going to be a significant help to us in the forward.

Okay. Scott, can you give us an idea of what you think the cash balances will be like by year-end?

It’s a bit hard to say because it all depends on project activity at year-end. I certainly would expect cash flow to be positive going forward. At any given time we can have a negative blip to it for a short period of time so within a quarter there’s a lot of variation. We should be cash flow positive going forward.

So we should be looking at a higher level of cash flow at year-end?

Again, we should be. If it’s lower it means within probably 30 days it’ll be considerably higher again. It depends on the level of activity and how all that falls. I would expect it to be higher than it is today.

And the [ELPHI]. Remind us how big it is?

I’m sorry.

You’re bank credit line.

$10m

Well shouldn’t it be higher because you paid back the $1.5m.

The line itself is $10. Our availability under it was that much lower based on $1.5m

Okay. Thank you.

You’re next question from Robert Kirkpatrick of Cardinal Capital.

Could I just confirm that you said air pollution sales were up 41% year-over-year and Fuel Chem sales are up 23% year-over-year.

In the quarter?

For the quarter versus the quarter in the prior year.

Okay. Fuel Chem was up 23% was correct and Air Pollution Control was up 41% was the six months, 36% oh no no I’m sorry. I don’t know if I said Air Pollution Control exactly but let me get back to you on that.

Okay that would be great. Thank you.

At this time Sir I’m showing that there are no further questions.

Again I’d like to thank everyone for their interest in Fuel-Tech and for joining us on this call today.

Thank you.

Ladies and gentlemen, this concludes your program for today. You may now disconnect.