Fuel Tech Inc (FTEK) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2013 Fuel Tech, Inc. earnings conference call. My name is Julianne and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Devin Sullivan, Senior Vice President of The Equity Group. Please proceed, sir.

Thank you, Julianne. Good morning and thank you, everyone, for joining us for Fuel Tech's 2013 first-quarter financial results conference call. Yesterday, after the close, we issued our release, a copy of which is available at our website, www.ftek.com.

Speakers on today's call will be Doug Bailey, Chairman, President and Chief Executive Officer and Dave Collins, Senior Vice President and Chief Financial Officer. After prepared remarks, we will open the call for questions.

Before turning things over to Dave, I would like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in forward-looking statements.

The factors that could cause 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 and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call and as a reminder, the call is being broadcast over the Internet and can be accessed at www.ftek.com. With that said, I would now like to turn the call over to Dave Collins. Dave, please go ahead.

Thank you, Devin and good morning, everyone. Thank you for participating in today's call. Consolidated revenues for the first quarter were $22.5 million, a year-over-year decline of 11%. As we discussed last quarter, 2012 was a slow year for domestic Air Pollution Control bookings, which led to a lower year-end domestic backlog and revenues in Q1 of 2013. On the other hand, quarterly foreign revenues for Q1 were up threefold from last year to $9.6 million and represented 43% of Q1 2013 revenues.

Consolidated gross margin for the first quarter was 41.9%, down from 47.6% in the prior year. The decline in consolidated gross margin is attributable to a higher concentration of foreign revenues, which carry a lower overall gross margin profile, principally our Chile project. We expect to see the reduced gross margin continue on a comparatively quarter basis through 2013 as we execute this large project.

Our selling, general and administrative expense for the current quarter decreased by $536,000, while our research and development costs increased by $427,000 from Q1 of 2012. The decline in SG&A is associated with, among other things, lower employee and sales-related costs while our increase in research and development costs is associated with continued funding of new product development initiatives. Consolidated net loss for the current quarter was $21,000, essentially breakeven, down from a profit of $1.5 million, or $0.06 per share in Q1 of 2012. Our adjusted EBITDA for Q1 of 2013 was $1 million.

Now let's move on to a more in-depth discussion of our business segments. The APC segment reported quarterly revenues of $12.9 million, down 18% from the prior year. While we have experienced slower APC revenue in the first quarter, we are looking for a strong second half of 2013 as we are seeing our domestic bid and order activity strengthen.

During Q1, we shipped our first two units for our Chile project and our engineers were continuing to prepare and organize for the installation work that started in Q2. While this work did generate revenue in the quarter, we expect to see a spike in project revenue recognition for this Chile job in Q2 due to the installation work for the first two units and our shipment of equipment for two additional units to be installed in Q3 and Q4. We expect our year-end backlog on this project to be around $6 million.

Our consolidated backlog at March 31, 2013 was $44.7 million and we have announced an additional $7.6 million in new APC bookings subsequent to the quarter close. We expect to see continued bid and order activity at an accelerated pace through the rest of 2013 for both domestic and foreign business. We expect the combination of existing orders in backlog and the anticipated new domestic and foreign orders to further lift our revenue for the remainder of 2013.

Gross margin for the APC segment declined in Q1 of 2013, as previously mentioned, due to the higher mix of lower margin foreign revenues. As a result, quarterly gross margin for our APC segment was 34%, down from 44% in the prior year. As noted previously, we expect to see lower margins in the APC segment for the remainder of 2013 as we work through our foreign backlog. A pickup in domestic orders and corresponding revenue recognition would likely have a positive impact on our gross margin.

Our FUEL CHEM segment reported Q1 revenues of $9.5 million, which was flat with the prior year. Quarterly gross margin for our FUEL CHEM segment was 53%, which was also consistent with the prior year. We expect to see our gross margin range continue in the 48% to 52% range for 2013.

Operating income for Q1 was $41,000, down from the prior-year total of $2.5 million. This decrease in operating income is associated with lower revenue and gross margins and higher investment in research and development activities.

Our effective tax rate for Q1 of 2013 was 12.5% due to the recording of discrete items in the quarter, which included the recognition of our 2012 research and development credit, which served to reduce our overall rate. Due to the mix of forecasted domestic and international revenue and income levels for the full-year 2013, we expect our annual effective tax rate to range between 38% and 43%. However, our quarterly rate will fluctuate based on geographic income levels and permanent items relative to the level of our consolidated pretax income.

Cash and cash equivalents at March 31, 2013 were $15.1 million and we remain debt-free. Our working capital balance increased slightly in the quarter to $39 million, which is consistent with our year-end balance. Cash used in operating activities was $8.4 million due principally to our status of billings and collections on our APC projects. We also used a small amount of cash in our investing and financing activities. Due to our strong cash flow, we continue to invest in research and development activities during the first quarter to enhance our product portfolio. Now I would like to turn the call over to Doug.

Good morning, everyone and thank you for joining us today. Results for Q1 2013 must be viewed within the context of a dramatically different year-over-year regulatory atmosphere with respect to our domestic APC sales. In last year's first quarter, we were the beneficiary of a more robust purchasing environment that developed during the second half of 2011.

The backlog that we built in 2011, driven almost entirely by federal mandate, converted into revenue at an impressive pace during the first two quarters of 2012. As you are all aware, when the Cross-State Air Pollution Rule was stayed at the end of December 2011, the urgency within our domestic markets all but disappeared. This rule was ultimately vacated in August 2012. However, we were already hard at work building our international business as part of a conscious strategy to pursue long-term growth and what I like to refer to as the creation of geographic regulatory diversification.

As a result, our team produced record 2012 APC bookings of $72.8 million, nearly 90% of which were generated in Latin America, China and Europe. Larger complex projects like our $36.6 million Chilean job are now being executed and will continue well into 2014.

With respect to our current domestic APC end markets, I am encouraged by the strengthening of our bid and proposal activity. During the first quarter of 2013, we announce contract awards with a value of approximately $8.9 million and subsequent to quarter-end, we announced additional APC orders valued at $7.6 million. We do anticipate additional wins for our traditional SNCR capabilities in the near term and are quoting some substantial projects that would utilize our catalyst technologies.

You may recall that, on our last earnings call, I noted that we are seeing potential projects that are larger and more complex, which could equate to some quarterly lumpiness in bookings. I believe that the combination of new order flow and continued backlog conversion from our 2012 bookings should allow us to generate increased revenue as the year progresses.

Internationally, our APC outlook remains strong, particularly in China. We are witnessing an increasing level of bid requests throughout China as more SCR, SNCR and ULTRA systems are installed to comply with NOx reduction requirements of that nation's five-year plan.

Yesterday, we announced new orders totaling $3.3 million with new and existing customers in China for ULTRA and SNCR installations. We are pleased to see continued adoption of our ULTRA technology, which provides for safe and cost-effective on-site conversion of urea to ammonia for use as a reagent in the selective catalytic reduction of NOx. This is ideal for heavily populated areas as it eliminates the dangers associated with the transport, storage and handling of anhydrous or aqueous ammonia and will continue to be a growth opportunity for Fuel Tech. Our quarter-ending backlog in China was $9.8 million.

In Latin America, equipment deliveries for our project in Chile commenced in the first quarter and the first outage for equipment installation began late last month. Work will steadily continue on this large project and it remains on track for completion in the third quarter of 2014 and we are quoting additional work in Chile for potential award later this year.

Turning to our FUEL CHEM segment, revenues and margins were essentially flat compared to last year's first quarter, reflecting the challenges of low natural gas prices and declining electricity demand. These are persistent headwinds and we are continuing to explore ways to evolve our position in this market. This includes providing additional products that utilize the FUEL CHEM business model to address multiple needs inside the boiler.

We are also promoting continuing education and partnerships between the utilities and the coal industry, especially with respect to fuel blending opportunities. An overarching consideration in the question of do we switch to natural gas is the value of the assets involved in the billions of dollars of capital expenditures that would be required to make this switch industrywide. In our mind, a mass exodus from coal is not feasible given the uncertainty of commodity prices and the likely intolerance of the taxpayer and the ratepayer to assume those costs of construction.

We believe that Fuel Tech's technologies of FUEL CHEM and APC can apply engineering and chemistry that allow utilities in the industry to burn a more economical source of coal with fewer resultant emissions. Our R&D program remains on track and we expect to commit approximately 3% of annual revenue towards our endeavors in this area during 2013.

As we discussed last quarter, we have a number of new products in various stages of laboratory and commercial testing for our APC and FUEL CHEM customers and we will consciously continue those programs. I would now like to ask the operator to please open the floor for questions.

(Operator Instructions). John Quealy, Canaccord.

Hey, good morning, folks. How are you?

Good morning, John.

So first on the outlook, Dave, I think you talked about APC picking up, especially in I think the June period on the Latin American contract business. So basically, right as we stand right now, so a couple questions, about $52 million plus in backlog at this stage for APC. Can you comment how much you think is going to be incurred and recognized in '13? Number two, for the June quarter, is that a $3 million or a $4 million spike in Latin America? And then the third question, Dave, is the margins on APC. Better than Q4, but seems like a level that we actually could compress a little bit more. So those are my first three questions.

Okay. First, on the amount of revenue on the Chile project in Q2, we could see as much as 20% of the overall project recognized in Q2 and that is resulting from the installation work that is being done, as well as the shipment of the two additional units. That will then tail off marginally in Q3 and Q4. We are going to roll some dollars over to 2014, as mentioned. That is how that spreads.

Regarding the margin, we could definitely see the margin compression, especially when you see more of the Chile project revenue come through in this next quarter. So you will likely see the margin compression there. Our blended margin in our backlog at the end of the quarter is around 26%. So that will roll out and then, lastly, help me -- if you could remind me on the third question.

The amount of backlog in total that is going to hit in '13.

So of the $52 million, that is the $44 million at quarter-end, plus the additional $7 million. We will recognize in excess of $40 million of that prior to year-end.

Got you. Okay. And then on the regulatory environment, your comments about bidding activity, can you talk about a little bit more geographic split domestic international? It is a very varied power market currently as you folks know with I say Western Europe and North America under just demand strain for generation and certainly in the US, we have got some spark spread issues. So if you could, just give us a little bit more context about the relative strength in order flow.

Sure. Without a clear EPA rule in place, as I have said before, what is driving business today are consent decree agreements between power generators, EPA, Department of Justice permits and actually this has resulted in quite a bit of domestic bidding activity. As I also said, some of this is rather lumpy and you should expect to see that kind of activity. It is quite a bit different than when we had a sudden implementation of a rule that caused a large number of utilities to very quickly deploy our traditional SNCR systems.

Now what you are seeing is conscious larger programs to comply with these consent decrees. And they are geographically somewhat dispersed. You are also seeing the Regional Haze program and the Boiler MACT rule as drivers today. Boiler MACT was finalized in December 2012, requires compliance through February 2016. So this is going to affect productions of particulates -- mercury, hydrogen chloride -- tighter CO requirements. So that is going to lead to new opportunities for burner tuning. Our SNCR technology will open up due to the CO requirement and compliance to those existing site permits.

In the industrial segment, opportunities for our catalyst technology and SCR services to maximize NOx reduction exist, but the Western states have considerable activity relative to the Regional Haze program and we expect there to be sufficient drivers to increase our revenue activity even without a clear substitute rule from CSAPR. So as you see our further announcements, those will be the kinds of things that drive our business in the United States.

And then a last one, in China, can you talk about that opportunity? Obviously, there has been a lot of focus on air pollution, etc. Can you talk about the relative pipeline there, competitive positioning? I imagine the environment from a competitive perspective is very difficult and perhaps a little bit more so given some of the macro drivers there. Thank you.

Sure. Well, the environment is pretty robust over there. You see our ULTRA technology being widely adopted and there are still many, many units that are eligible to deploy ULTRA. We have a leadership position in that, but we are not without competition. Some of those are small upstarts. As this market is relatively new, there were no substantial intrinsic competitors before and we have a great reputation for performance.

Margins are moderated in China compared to our -- let's say our domestic SNCR type installations, but nevertheless we are anticipating a very healthy continued bid win and quotation activity. We are also seeing a fairly active market for SNCR and we are also witnessing demand for flue gas FGC applications. And so our flue gas conditioning market is surprisingly picking up, but I think you should anticipate to see the bulk of our sales activity to continue along the lines of ULTRA, SNCR and the traditional things we have sold over there.

Dan Mannes, Avondale Partners.

Thanks and good morning. Hey, a couple of questions first on the FUEL CHEM segment, flat year-over-year. Are you starting to feel any benefit? We did actually see coal usage improve year-over-year given, I will say, seasonality, but we had a real winter this year and we didn't last year. And we are also seeing gas prices tick up a little bit, so we are seeing a little bit better coal utilization. Did you see that at all in your first quarter and do you expect sort of the normal seasonal downtick to go into the second quarter?

We didn't see it in the first quarter, Dan, but, to your point, there is increased interest both from customers that we have done business with before, as well as others. So there is some, I would say some (technical difficulty) in the marketplace.

Okay. And then secondly as it relates to your APC business, your working capital did tick up a chunk and it looked like your cash position ticked down some. Can you maybe give us an idea, is that mostly to Chile or is that to China? Sort of where is that AR hanging out because it looked like a pretty big spike up in AR this quarter?

Yes, we collected quite a bit of cash just after the quarter closed, the first couple weeks, so it is timing in nature. A fair amount of that is Chile-related. We do have a couple of other large projects as well that we have collected on also.

(multiple speakers). But we should anticipate as you do more and more of these larger, more complex projects that we may see working capital move around a little bit more?

That is correct.

Right.

As you think about the capitalization of the business and the amount of cash flow that is free, does that impact your thinking at all as it relates to the $25 million of cash give or take or what used to be $25 million?

Good question. Not really. We still have a line of credit for $15 million in the US. We have a $10 million accordion feature on that. We haven't extended that at all and we watch the projects that we have coming down in the pipeline. We have to provide bonds against those and in some cases letters of credit against those. So we do watch that pretty carefully, but we are comfortable with the capital base that we have.

Okay.

Dan, I think as you do more work internationally and you are executing larger projects, it's normal to expect to see a little more fluctuation in the timing of collections. We keep our eye on that pretty closely and as Dave said, our collections subsequent to quarter-end turned our cash position to a stronger position. Sitting here today, we don't have any concerns about adequate cash reserves to manage these projects.

Got it. And then just closing out, as you think about the year, it does sound like, excluding sort of the big payment -- big revenue realization from Chile in the second quarter, it sounds like the year is a little bit more back-end-loaded. And then, secondly, it sounds like maybe the new products that we have been talking about for a while sound like they are more 2H as well. Is that the right way to think about it or is there the possibility things could be coming a little bit sooner?

I definitely think the year-end is necessarily back-end weighted as it relates to APC simply because of the way the regulatory environment evolved and the way bookings evolved. I think it was absolutely extraordinary what the Company did in light of a significant change in the United States. As I noted, 90% of our bookings in 2012 came from the international markets. We had an enormous backlog domestically in the US at the end of 2011. We realized those revenues through 2012, but our bookings were, I believe, only $7.7 million domestically in APC.

So we replaced that and more with our international activities and we actually consciously were carrying out that plan back in 2010, 2011 and well into 2012 as we realized the benefit of it. I think you do learn things as you enter new markets. Certainly Chile which was a new market for us. We were a successful bidder against well-established companies and we have seen the opportunity for additional bidding down there. So again, these projects are larger, a little more complicated. They don't carry the same margin as our traditional work, but they are very accretive to what we do and the value of that is we have been able to build the infrastructure and skillsets to carry out more work on a global basis.

The transformation of the talent of organization that these projects enable us to achieve are rather extraordinary to position us to bid for additional work in all markets, including the domestic market. So we are very satisfied that we accomplished what we did in 2012 and as you just carry out the execution of those programs in 2013, the logic of the revenue and the margins and changes in levels of activity should be well apparent.

Got it. Thank you very much.

Steve Shaw, Sidoti & Company.

Hey, guys, how are you doing? I wanted some color on the R&D. One, if we can expect this quarter's number to sort of be the normal run rate throughout the year and then, two, how close we might be to some new chemicals or products.

Do you want to take that on the spending?

Yes, spending, this was a spike in the quarter. We had a number of initiatives underway in the quarter. So I wouldn't expect to see that level of spending continue. It drops down a bit.

And relative to program rollout, they really vary in timeframe. Probably the area that we have spent the most money on doesn't necessarily have a current driver, but we know long term the drivers are there. So for example, to extend our TIFI chemical injection strategy to applications other than filing and sliding and use it for removable pollutants, for example, we have successfully demonstrated that with SO3 in Mexico and elsewhere. We believe we have opportunities to mitigate SO2. There is not a current driver for that. That will be a long-term program, which we will be ready to participate.

On the other hand, there are drivers for acid gases, particularly hydrogen chloride. I mentioned earlier that the Boiler MACT rule that was finalized at year-end 2012 requires compliance. We are also seeing the opportunity to create economic chemical programs that aren't just going to be utilized because there is a regulatory requirement. So if you can remove corrosive acid gases to avoid either the deterioration of or the expenditure of very large capital expenditures on the back end, that is valuable.

So if anything, I would think our program for mitigating the generation of hydrogen chloride and corrosive gases has the earliest opportunities. When are those? Probably at best, the rollout is late this year. It could be 2014. But we have a program of really diversified projects that over time will yield these new opportunities.

We have also been conducting tests to enhance our traditional SNCR NOx reduction capabilities and if you think about that, there is two benefits. One, you can go back to previous installations and improve their performance without deploying a different technology. Two, you can make your technology more competitive versus those that require greater capital expenditures and enjoy a more competitive position.

So enhancements to existing capabilities like SNCR, new chemical programs that either provide an economic benefit or meet a regulatory requirement, but utilize our FUEL CHEM business model that therefore give us recurring revenues are the principal objectives of our R&D program.

Like any development, if you don't make the investments, you are not competitively positioned to enjoy the benefits. So that is why we consciously began that some time ago and will continue. I think our guidance for you is to look to us to spend about 3% of our revenues overall. Every one of these projects has a keen eye towards meriting investment and many of them require investments related to commercial testing before they can be marketed. So we are on top of an interesting portfolio of opportunities.

Okay, thanks, guys.

Sir, you have no questions at this time. (Operator Instructions). Lucas Pipes, Brean Capital.

Good morning, everyone. Most of my questions have been asked and answered. But I wanted to follow up a little bit more about the bookings. You had a really great year in 2013 just in the portfolio towards the international side. Now the year-to-date run rate appears to be a little bit lower than total last year levels. What should we expect in terms of bookings for the remainder of the year? Do you think you can replicate 2013 levels?

The answer to that is yes; I believe we can. We know, based upon our recent bidding and contract negotiation activities, that we should be the beneficiary of additional awards. I do believe that they will continue to be, as I said, a little lumpy. Something that we might think would be pulled into a quarter might fall into the beginning of another quarter because larger projects require longer bid analysis and negotiations. And because of their size, it is sort of a binary outcome on a large project. You either get it or you don't. So actually forecasting the total bookings that you are anticipating to realize is difficult at best.

That being said, knowing the activity that we have on a global basis, I feel good that we can continue to demonstrate growth. Why? We can see the activity level. We know that the needs on a global basis for environmental solutions is ever-growing and three, we are well-positioned to meet those needs. So I have a good feeling for the long-term prospects of our business. And I think 2013 should yield a fine result in overall bookings. But it will be lumpy on a quarter-to-quarter basis.

Great, that's helpful. I certainly look forward to more announcements of --.

It makes it harder for you to forecast, but I think you certainly appreciate why the results end up being what they are.

No, that's -- no, I completely agree with that. And maybe to circle back to the margin front again, for the full-year 2013, what kind of margin level should we target?

Let me just take a general answer to that for you, Lucas and then Dave could add some specifics. We know that a certain level of revenues that come from our Chilean job carry a moderate margin and that will temper overall traditional margins. We know that the domestic wins that we are anticipating carry higher margins. So when those are executed, they will elevate the average margin for the segment. So they range. We can see margins on projects range from 20% to 50%.

FUEL CHEM has been evidencing steady margin maintenance and I think it carries an exceptional margin, which means that the customers who utilize the program realize benefit that has great value. In reality, the value that they receive economically far exceeds the cost of the program. So we don't see any meaningful change to the margins that we see in that business. But APC will vary by project and by geography.

And Lucas, I have got APC in at about 30% for the year on a blended margin and then the FUEL CHEM is running at levels that you are seeing right now at 48% to 52% range. So you will look at a blended margin of mid-30%s this year. That depends, as Doug pointed out, on mix, so if we see more of the domestic quarters come through then that can certainly change.

Okay. That is very helpful, gentlemen. I appreciate it.

Okay, thank you for your question, Lucas.

Any other questions, operator?

We have no further questions. I would now like to turn the call over to Doug Bailey for closing remarks.

Well, thank you for your questions and thank you for participating and listening to today's call and your continued interest in Fuel Tech. We are excited, we are optimistic about our future and we do look forward to keeping you apprised of our further progress. Thank you, everybody. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.