Fuel Tech Inc (FTEK) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Fuel Tech, Inc. Earnings Conference Call. My name is Shantale and I will be your facilitator for today's call.

At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Devin Sullivan of The Equity Group. Please proceed, sir.

Thank you, Shantale. Good morning, everyone, and thank you for joining us for Fuel Tech's 2014 Third Quarter Conference Call. Yesterday, after the close, we issued a copy of our press release, a copy of which is available at the company's website, www.ftek.com. Speakers for today's call will be Doug Bailey, Chairman, President, and Chief Executive Officer; Dave Collins, Senior Vice President and Chief Financial Officer; and Bill Cahill, Corporate Controller. After prepared remarks, we will open the call for questions.

Before turning things over to Dave, I'd 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 our forward-looking statements. 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 third quarter and nine months totaled $21.4 million and $60.3 million, respectively. Our revenues in both periods are down from the prior year, principally due to a drop in our APC segment revenues, which we will cover in detail in just a moment. Our consolidated gross margin has remained consistent with the prior year for both our third quarter and nine-month periods, and approximates 46% and 44%, respectively.

Our net income for the third quarter totaled $1.2 million or $0.05 per diluted share, while we reported net loss of $614,000 or $0.03 per diluted share for the nine-month period. Our favorable results in the third quarter reflect seasonally higher FUEL CHEM sales and associated gross margin, which offset declines in our APC segment revenue and associated gross margins.

Our adjusted EBITDA for the nine months totaled $3.4 million. Consolidated United States or U.S. revenues for the third quarter and nine months totaled $10.7 million and $33.7 million respectively. And our foreign revenues for the third quarter and nine months totaled $10.8 million and $26.7 million respectively. As discussed above, our revenues in both periods are down from the prior year, principally due to a drop in our APC segment revenue, and this decline impacted both U.S. and foreign revenues.

The decline in U.S. APC segment revenue is tied to the continuing uncertainty with EPA regulations, specifically CSAPR, and the decline in our foreign APC segment revenue is tied to the continued progress for completion of our Chile project, which has only one of six units left for outage scheduled for the second half of 2015.

Our selling, general and administrative expense for the third quarter and nine months decreased by approximately $1.2 million and totaled $8.1 million and $25.8 million in each period, respectively. These declines were principally associated with the reduction in our personnel costs and commission expense. Our research and development costs for the current quarter and year-to-date periods were down $82,000 and $976,000 respectively from the prior year, and totaled $379,000 and $1.8 million for the third quarter and nine-month periods, respectively.

Now let's move to a more in-depth discussion of our business segments. Our APC segment reported third quarter and nine-month revenues of $11.1 million and $33.2 million, respectively and represent declines in revenue from the prior year periods of $12.3 million for the third quarter and $23.4 million for the nine months. Our backlog in September 30, 2014, was $19.6 million.

For the third quarter, two items contributed to the decline in APC segment revenue: first, continued progress towards completion our Chile contract reduced revenue by $4.9 million; and second, a decline in U.S. revenue driven by three specific contract orders that were booked in late 2012 and early 2013, with equipment deliveries in the third quarter of 2013, reduced revenue by $9.3 million. Our 2014 results did not have a list of similar projects.

For the nine-month period, these same two items contributed to the decline in APC segment revenue as follows: progress toward completion of our Chile contract, $9.9 million; and a decline in U.S. revenue $14.8 million.

Lastly, we are seeing a high level of interest from our recent acquisition of particulate control technologies, and we expect to see incremental order flow and revenue next year, which will provide additional momentum for a return to growth in our APC segment business. Today, we have announced $5.8 million in new particulate control orders, and we expect to announce additional orders as we continue to work with prospective customers.

Our APC segment gross margins for the third quarter and nine-month periods ranged between 35% and 41% for the current and prior year periods, which is reflective of the gross margin profile of the Chile project and is consistent with prior discussions. We do expect to see some margin improvement in the APC segment as the Chile project revenue is replaced by new work, but the margin profile will be dependent on the mix of future product technology orders.

Our FUEL CHEM segment reported third quarter and nine-month revenues of $10.3 million and $27.2 million, respectively. These results are flat in the third quarter and down slightly in the nine-month period. As previously discussed, this decline was observed in the first quarter of 2014 and related to customer outage schedules. Our customer list remains strong and we have a number of new business opportunities which, we think will deliver year-over-year growth going into 2015.

Our third quarter and nine-month gross margins for our FUEL CHEM segment have approximated 53% and we expect to see our gross margin range between 48% and 52% through 2015. Our effective tax rate for the current quarter was low due to the mix of income in [loss] geographies and the tax reporting within each of those jurisdictions as well as the level of pretax net income compared to permanent add-back items. We continue to expect to see a long-term effective tax rate between 38% and 43%, but we'll look for the remainder of 2014 to be low due to projected income levels.

Cash equivalents at September 30, 2014, were $15.6 million, and we are carrying a small short-term debt balance of $1.6 million from our China-Pacific Rim operation. Our working capital balance has decreased $9.2 million to $39.4 million during the first nine months of 2014, principally due to business acquisitions and intangible asset purchases. Cash provided by operating activities for the first six months was $1.4 million and our spending on investment activities for nine months totaled $13.2 million, including $11.1 million for the aforementioned acquisitions.

For 2015, we expect to see improved bookings and revenue from our APC segment, and our FUEL CHEM segment revenue is expected to grow modestly. We will continue to monitor SG&A spending and expect the current expense levels to continue into 2015.

Finally, our spending on the CARBONITE business is expected to increase in 2015 around the developments of various technology applications, and we will continue to provide directional updates in subsequent quarters.

Now, I'd like to turn the call over to Doug.

Good morning, and thanks, everyone, for joining us on the call today. We reported a profitable third quarter and maintained a strong financial position despite a dynamic environment in which we operate. Compared to operating losses of $1.1 million and $0.7 million in the first and second quarter respectively, we achieved an operating profit of $1.4 million in the third quarter while maintaining spending on our strategic initiatives.

I'd like to take just a few minutes to give you a high-level view of what's driving our 2014 results, as well as some opportunities we see in the quarters ahead. First of all, our FUEL CHEM segment remains a consistent and profitable performer in the face of persistent macroeconomic headwinds such as decreasing load capacity, fuel switching and overall national decline in energy use. This business segment has been a steady overall generator of annual gross margin despite variations that may appear at the customer unit level on a quarter-to-quarter basis.

FUEL CHEM continues to pursue creative ways to integrate its TIFI technology into the profile of utility industrial boilers across the country and as we look to expand internationally around the world. By targeting the problem areas of the furnace, our TIFI programs improve heat rate and boiler efficiency, reduce slagging and other impurities inside the furnace, and allow operators to burn more economical fuel.

One of the avenues for growth is our TIFI on-demand solution that allows customers to apply the technology only when needed, generally during periods of increased boiler usage. This program has been well received, with third quarter results benefiting from modestly from its implementation in new accounts. We should see more in the way of contribution we're getting in the fourth quarter along with some gains from additional new-account activity at the 50-plus-percent margin level this business segment has traditionally delivered.

Our greatest challenge in 2014 has been to maintain momentum in our APC business segment. While our U.S. business is accustomed to periods of cyclicality, it's witnessed sustained challenge this year with deferred purchases stemming from protracted regulatory delay. Our successful diversification into chosen international markets has helped offset this softness. However, it's not unreasonable to expect that our full year 2014 APC revenues on a consolidated basis will likely be about $30 million below that of 2013.

We do realize respectable gross margins for this business, but this year-over-year volume change will account for the bulk of our difference in operating income in 2014 over the prior year. Despite this environment, our APC business team is advancing a number of impactful long-term opportunities, driven by the combination of Fuel Tech's internal initiatives as well as some exciting and still-forming industry trends.

U.S. power and utility companies continue to evaluate strategies for reducing plant emission in order to comply with state and EPA air quality guidelines including retrofitting of existing plants with emissions reduction equipment and changing the fuel mix of generating units.

APC bid-and-quote activity is expanding and we anticipate an improved market environment in 2015. We continue to track a large pipeline of near-term domestic utility and industrial APC project opportunities in a variety of industries where we have a large legacy base and are well known and a respected emissions control partner.

Recent drivers for NOx reduction requirements have included permitting issues with industrial plant expansions, consent decrees and compliance with regional haze requirements. With respect to the Cross-State Air Pollution Rule, the U.S. District Court of Appeals lifted its stay in late October, paving the way to begin Phase 1 of the renewed implementation of CSAPR on January 1, 2015, with Phase 2 set to start in 2017. The lifting of the stay will allow EPA to replace the CAIR rule and move forward with plant reductions in NOx and SO2.

CSAPR will help ensure that important health benefits are not delayed and that downwind states can achieve required emission levels. In addition, CSAPR also helps states maintain the National Ambient Air Quality Standard requirements for ozone since NOx emissions are a precursor to ozone emissions.

Our new particulate control offerings, acquired as part of the PECO-FGC transaction, are providing another opportunity for APC growth. We see good demand in the ESP rebuild market and a consistency in quotation activity. Much of this is being driven by the Utility MATS and Boiler MACT rules, which have compliance deadlines of 2015 and 2016 for particulate control.

EPA has proposed a new rule for greenhouse gases for existing power plants, known as the Clean Power Plan. This proposed plan includes improving efficiency at existing sources. Fuel Tech, through its FUEL CHEM business segment, is well positioned to address the efficiency improvement needs of many existing power plants.

We continue to focus on our opportunities in China, which comprised approximately 15% of our backlog as of September 30. The largest emitter of greenhouse gases in the world, China operates over 1 million boilers, 80% of which are fueled by coal. China continues to advance a policy to reduce harmful emissions and joins the rest of the industrialized world in tackling this threat to its national and economic security.

We recognize that a strong local presence in China is necessary to succeed. Our operation in Beijing, which opened in 2007 and is now in new and larger offices, continues to address a market for air pollution control systems that is more than twice as large as the U.S. market was at its peak. We are continuing to explore ways to strengthen our local presence and our competitive position in China. We are confident that our efforts will produce a more significant return on investment in this region. In particular, we are striving to build an effective platform. We're expanding sales into a market for our other technologies such as Flue Gas Conditioning and FUEL CHEM.

Finally, I'd like to comment on an important accomplishment in the third quarter that reflects over a year of technology assessment and market planning. This initiative underscores our strategic priority to build a larger base of recurring revenue and a whole new vision for Fuel Tech. I'm referring to the September 2014 acquisition of the intellectual property rights and know-how associated with the CARBONITE process that leverages our core competencies to create a business that we call fuel conversion. This will, over time, enable new opportunities for Fuel Tech to diversify into adjacent markets, generate recurring revenue with margins and a return on invested capital that are expected to be quite attractive. This technology platform will allow us to expand our delivery of innovative solutions to industries utilizing carbonaceous fuels. This acquisition is an important step in the development process that we expect will culminate in the launch of a new generation of products that can convert coals of various ranks into higher-value engineered carbon products.

We understand the CARBONITE technology and intend to apply our knowledge, our know-how, and our industry networks to refine the acquired IP, further define the end markets and launch strategies to serve them. We can leverage our knowledge of coal chemistry, combustion dynamics, system design and process optimization; develop and commercialize products that are cleaner both during their production and their end-use as compared to conventional products and their associated processes.

CARBONITE-derived products can be created by first converting coal into coal liquids and high BTU char. In turn, examples of products derived from CARBONITE char include substitutes for anthracite coal, reductants for steel production, ferroalloy feedstock, adsorbents, formed coke, and carbon stock that is virtually mercury-free.

In certain markets such as foundry coke, we have been in a position to improve the supply chain currently constrained by an aged infrastructure that is challenged by its emissions control. We intend to create a next-generation process that is flexible and lower in overall cost as compared to existing batch process methods. This, in turn, then will enable us to deliver products with the inherent quality, economics and efficiency advantages of faster, continuous processing coupled with dramatically improved emission controls.

Dave mentioned that R&D spending for the nine months of 2014 were down actually about $1 million from the level of $2.8 million from the same period in 2013. But recognizing that the acquisition of the CARBONITE intellectual property is much akin to our ongoing R&D spending, this would indicate that, in fact, we have increased our commitment to this strategic initiative. Although early in the process, we believe that CARBONITE technology will allow us to expand our business into a third dimension, making better use of our country's abundant natural coal resources while adhering to our vision to help create a cleaner, more energy-efficient, and sustainable environment.

So I'd now like to ask the operator, if you would, please, to open the floor for questions from our analysts and institutional investors. Operator?

(Operator Instructions) Your first question comes from the line of Lucas Pipes of Brean.

Hey, good morning, everybody. Those were some very interesting comments you just made here in regards to these new business opportunities of coke exposure. I think for most of the investors, this is going to be kind of a new market that's probably not very well-understood. Could you maybe just explain in a little bit more detail what exactly, what market exactly you're having in mind? And what opportunities you see and where you think your value niche is going to be in that ...

You're referring to fuel conversion, Lucas?

Yes. Sure. Well, these are established markets with aged generation technologies in many ways and very good commercial technologies in other ways. When you think about the way this process works, it gives us the opportunity to strategically partner with those companies that can utilize products from this process that we would not necessarily, in turn, market ourselves, such as coal liquids. Those product streams are well-suited to go into existing channels for further refinement and marketing by those companies, and we are in strategic discussions for those opportunities.

The solid substance that's left -- and by the way, if you think about this in simplistic terms, a ton of coal can be converted into a barrel of coal liquids and still have about 65% of solid matter concentrated in high BTU value. That, in turn, can be sold into a number of markets in that form, which is pollute and reduce, or it can be a further refined form using custom recipes to make other products, formed coke being a good example. This is an industry that is served by very aged -- including infrastructure, and is ripe for a new generation of technology based on continuous versus batch processing. It's one where, by reducing the cycle time for manufacturing, you achieve a better quality at a lower cost. And there are a number of different business models by which you can enter this market.

But we've seen strong interest from our market planning by existing customers for large opportunities to buy on a recurring revenue basis, annual basis, products that are much better suited for today's industrial needs. I'm referring not only to the way in which energy must be more efficiently used, but emissions must be better controlled. And it's a great opportunity for Fuel Tech to address its combined know-how to create products that are made of a solid matter as opposed to a liquid matter, as we do in chemicals, but create an end result that's highly beneficial. And obviously, it'll take time for us to further develop and elaborate our specific marketing strategies, but I think I've given you an indication of some of the markets that we think are interested in products of this nature.

That's very helpful. So I think you were alluding to it towards the end of your comments, that it might be a little bit too early to comment on CapEx, profitability, potential, things like that, but maybe do you have an idea where this could go and how quickly? That would be helpful.

Sure. Well, first of all, in all of our analysis, we know that this process lends itself to excellent return on capital. You're talking about plants of smaller footprint that have lower, minimum threshold level of capital cost to be productive to operate, synthetic minor sources on emissions, flexible relative to location of your feedstock, location of your customers, and that offers multiple choices as to how you create and finance each of those plants. Our business models, quite truthfully, range from pure licensing strategies all the way to pure ownership, whereas the optimal return on investment is probably a hybrid ownership with strategic partners.

So these opportunities are existing markets needing new technology. It's a great example of how the coal industry is looking to innovative companies like Fuel Tech to bring it technologies that allow a very valuable resource, such as we have, to meet today's expectations on overall environmental responsibility as well as strategic use of low-cost, abundant resources. So we're in a great position to help achieve that. But the details of how we roll that out, you'll have to be patient with as we develop those and then take them to market. But we'll be sure to announce them.

Great, great. Well, this was already very helpful. I appreciate that. And then, maybe just on the kind of current business outlook. How should we think about your backlog, or better, you're working through your backlog? What sort of lumpiness can we expect here over the next couple of quarters? I'll leave it at that for now.

Well, in particular, as Dave mentioned, we have one unit need to complete in Chile out of a six-unit program. At the request of the customer, they rescheduled their outage where that final unit will move from 2014 to 2015. So look for some revenue recognition to move out within time there.

We are seeing increasing interest of the technology that we call it advanced SNCR that we've developed through our R&D program. We quoted some large projects that, if we were to win them, I guess, you would characterize those as large lumpy wins, but they represent, in fact, in my mind, two particularly excellent opportunities, one in the U.S., one in Europe, that would add substantially to our backlog.

That would be for work that would predominantly play out over 2015, 2016. Too early to say if we won that, but our bids are in. I think that we're going to see a slow but steady reinstatement of programs under CSAPR as the compliance schedules are finalized, and that's still going to take a number of months. But knowing that, that's back to stay, we're seeing plans being reorganized to address those compliance needs, and therefore, our pipeline of quotation activity is still strong. So I think we're seeing a steady up-ramping back in our APC market here in the U.S.

In China, we've seen, as the market has developed and matured a little bit, certainly increased competition. We've also seen bids tendered that are very, very low. That has resulted in a lesser win rate that probably, therefore, has softened our bookings order rate giving rise to the lesser year-on-year growth. But I will tell you that we are looking for strategies to strengthen our competitive position. We know our technologies have good application in certain segments of that large market over there, and we're not going to miss the opportunity to capitalize on what we can do from a market side to enhance what we think we already have from the technology side.

Good technologies do get copied over there, and certainly we see the competitive environment much keener. We'll look for ways to lower our cost and -- but, as I said, most importantly, enhance our market position primarily through cooperative strategies that we can sell our solutions as part of bigger solutions.

Great. Well, this is -- I'll jump back in queue but I appreciate all the detail.

Thanks for your question, Lucas. Good to talk to you.

(Operator Instructions) Your next question comes from the line of Doug Dyer of Parkland Advisors (sic -- Heartland Advisors).

Good morning, Doug.

Hello, gentlemen. You've got some customers that have kind of been on hold, obviously, waiting on the EPA. If they have proposals that are maybe a little bit old, getting a little bit stale, do they ask, or is anything being done, to maybe reprice a contract based on any pricing changes or any equipment changes?

Yes. We are going back through and refreshing proposals. So we are working through that process with customers.

And what are you seeing in -- are there any major changes in terms of either equipment or pricing? Or is it just kind of minimal changes?

No, no structural changes. I think it's pretty consistent. So from a margin perspective, we would expect to see a similar type of result. I think the biggest question is what type of technology if there needs to be a change and in the technology that's sold. That's the biggest question. Right now, many of them are status quo, but once they have a final understanding of regulation and time lines, then they'll make the determination on what type of technology.

All right. Thank you.

(Operator Instructions) At this time, there are no additional questions in the audio queue.

Okay. Well, we thank you for the questions that you did ask, and we are certainly available for one-on-one questions and calls later. So thank you for your time. I do assure you that Fuel Tech remains fully committed to enhancing the value of its shareholders' investment. On behalf of all of our employees around the world, I thank you for your participation and continued support. Thanks, everybody. Have a good day.

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