Fuel Tech Inc (FTEK) 2018 Q3 法說會逐字稿

Greetings and welcome to Fuel Tech 2018 Third Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Devin Sullivan, SVP of Equity Group.

Thank you, Dana. Good morning, everyone, and thank you for joining us today for Fuel Tech's 2018 Third Quarter Financial Results Conference Call. Yesterday, after the close, we issued a release, a copy of which is available at the company's website, www.ftek.com.

The speakers on today's call will be Vince Arnone, Chairman, President and Chief Executive Officer; and Jim Pach, the company's Principal Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors.

Before turning things over to Vince, I'd like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 as amended, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and reflect Fuel Tech's current expectations regarding future growth, results of operations, cash flows, performance and business prospects and opportunities as well as assumptions made by and information currently available to our company's management.

Fuel Tech has tried to identify forward-looking statements by using words such as anticipate, believe, plan, expect, estimate, intend, will and similar expressions, but these words are not the exclusive means of identifying forward-looking statements.

These statements are based on information currently available to Fuel Tech, and are subject to various risks, uncertainties and other factors, including, but not limited to, those discussed in Fuel Tech's annual report on Form 10-K in Item 1A under the caption Risk Factors and subsequent filings under the Securities Exchange Act of 1934, as amended, which could cause Fuel Tech's actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any forward-looking statements contained herein to reflect future events, developments or changed circumstances or for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the company's filings with the SEC.

With that said, I'd now like to turn the call over to Vince Arnone, Chairman, President and CEO of Fuel Tech. Vince, please go ahead.

Thank you, Devin. Good morning, and I want to thank everyone for joining us on the call today. I'm here today with Jim Pach, our Principal Financial Officer and Controller.

We are very pleased to have returned to operating profitability in the third quarter. Revenues rose nearly 19% from prior year's third quarter, reflecting higher contributions from both our APC and FUEL CHEM business segments.

SG&A declined by approximately $900,000 or greater than 17% from the prior year, reflecting the continued positive impact of the cost-containment initiatives that we have executed over these past 3 years. We reported $1.1 million in operating profit as compared to a loss of just under $200,000 in last year's third quarter and generated adjusted EBITDA of $1.3 million.

Our near-term business activity remains promising. We ended the third quarter with a strong backlog in excess of $21 million and continue to pursue new contract awards of between $15 million to $20 million that we hope can be closed by the end of the current fourth quarter or early in 2019.

Our outlook for the full year 2018 continues to remain positive. The primary business highlights since our last earnings conference call are as follows: First, for our FUEL CHEM business segment. As discussed on last quarter's call, early in the third quarter, we added a new coal-fired unit at an existing customer in the Midwestern U.S. This was the first incremental coal-fired unit that we added to our customer base in about 4 years. We fed chemical at this new unit for almost the entire third quarter and had generated incremental quarterly revenue of approximately $500,000 at our historic FUEL CHEM gross margin of approximately 50%.

We are pleased with this performance. However, just like many of our coal-fired FUEL CHEM accounts, we recognize that our customer only realizes the primary benefits that our program has to offer only when it is running at or near full capacity. If the unit is not running at full capacity due to a lack of demand or not running at all, the customer doesn't require the benefits of our program.

Additionally, in the quarter, our revenue performance was favorably impacted by higher temperatures across some parts of the country that led to improved coal-fired dispatch.

And lastly, as we alluded to on last quarter's call, we added a new commercial account for RECOVERY CHEM during the quarter in Indonesia via our licensee, Amazon Papyrus. We are currently expanding our marketing efforts for RECOVERY CHEM in Asia and other parts of the world.

Next, for our Air Pollution Control business segment. We were very pleased to announce the closing of approximately $16 million in new business since September, covering the U.S. and China. Foremost among these 2 awards was a follow-on order in support of a domestic data center that once again involves utilizing Fuel Tech's selective catalytic reduction in urea reagent technologies to reduce nitrogen oxide emissions where natural gas is used for power generation. We announced our first data center award in December 2017, and this market application remains an area of great promise for future business development.

And finally, for our water treatment initiative. We continue to make good progress with our water treatment pursuits via our previously announced exclusive license agreement with NanO2. The lab scale system that we purchased to better understand and document the capabilities of the technology is successfully running in our warehouse, and all operational parameters are being tested and measured. The demonstration scale system that we purchased will be completed by the last week of November, and this mobile system will then be available to be deployed to a customer site in response to a technology demonstration request.

We are in discussions with multiple potential customers, and we target to have a demonstration up and running prior to the end of this year or early in the first quarter of next year. While we do not expect our water treatment technology venture to have a significant impact on 2018 results, we do look forward to it being a significant contributor in future years.

On an overall basis, we expect good operating performance in the fourth quarter, and we reiterate our 2018 outlook for higher annual revenue when compared to full year 2017 and the generation of operating profit and positive cash flow for the full year.

Now let's review our business segment performance in a little more detail. For APC, as I noted previously, we are pursuing a solid pipeline of contract opportunities on a global basis. Domestically, these APC opportunities will focus primarily on ULTRA and SCRs for industrial applications, and we expect orders for these technology applications to represent the majority of our contract bookings in the near future.

With respect to our wider product portfolio. SNCR technology remains applicable on an as-needed basis for units requiring compliance with the latest round of Casper, regional haze and safe specific requirements for reasonably available control technology, or RACT, while ESP upgrades are being driven primarily by maintenance requirements. Although historically, we have been largely identified as a company that supports power generation via the use of coal, our solutions are applicable across a number of fuel sources, including natural gas, which is the fuel source of choice for much of the current U.S. manufacturing expansion as either a primary or backup source of power generation.

Our ULTRA and SCR technologies are well-suited for use in conjunction with natural gas turbines, and we endeavor to become a preferred supplier for these applications. To that end, we continue to establish strategic business relationships with multinational industrial end-users and to partner with companies that require our technology portfolio to complete a broad bid package.

As stated in the past few conference calls, we do not expect significant impact from specific regulatory drivers for the remainder of this year. And as such, I'll hold off on further regulatory-related commentary until we talk again in the near future.

With respect to China. The project bidding activity for our SNCR and ULTRA technologies continues to be slower than in prior years, and the China market, in general, remains sluggish. We continue to monitor this market closely. We expect that our primary utility market will reach compliance within these next couple of years, and we continue to shift our focus to compliance for industrial units, which includes municipal solid waste, process industries and the petrochemical industry.

Lastly, we still continue to monitor a trend in China towards the elimination of aqueous ammonia as the reagent for use with SCR system applications to reduce NOx. In Europe, we continue to market our technologies in the wake of both the European Union's industrial emissions directive and BREF, which is also known as best available reference technology guidelines. This latter guideline reduces NOx emissions from current levels and includes the regulation of mercury for the first time. Countries such as Poland and the Czech Republic, which rely heavily on coal, will need to upgrade their current DeNOx systems as will neighboring countries in the Balkans and Turkey.

We are currently pursuing bids for our SNCR, SCR and ammonia delivery system technologies in Spain, Italy, Serbia and Romania. We continue to pursue opportunities associated with our various licensing agreements, including our exclusive licensing agreement for our SNCR technology with ISGEC Heavy Engineering Limited. As discussed in prior quarters, the Indian government has backed off of the aggressive compliance targets originally set for the power generation industry due to the high associated costs and are now operating under a phased approach, prioritizing particulate matter first, then SOx, and finally, NOx control.

While the demand for our SNCR systems will build up slower than originally anticipated, this approach presents an opportunity for Fuel Tech to demonstrate our Flue Gas Conditioning technology in the marketplace. Also known as FGC, this technology is a low-cost, highly-effective particulate control technology that can be used, in some cases, to meet particulate emissions requirements when compared with the high capital cost of ESP and bag filter hybrid solutions. We are currently bidding on an opportunity for an FGC system, and we will continue to report on the progress in this market in the future.

For our FUEL CHEM business segment, revenues increased by 9.2% to $5.2 million from $4.8 million in the third quarter of 2017. This was the highest quarterly revenue number for this business segment since the third quarter of 2016. As discussed earlier, this was driven by the impact of incremental business at an existing customer in warmer summer weather in some parts of the country. Barring any unforeseen events and with all other base units remaining operational, we expect FUEL CHEM will produce favorable comparisons in the fourth quarter of 2018 versus the fourth quarter of 2017.

In closing, I want to thank you once again for your ongoing interest in Fuel Tech. Our financial performance in the third quarter met our expectations and is indicative of our capability as we look to our future. The positive results is due to the hard work and dedication of the entire Fuel Tech team, as we have strived to attain operating profitability for these past 3 years. We remain committed to enhancing the value of our company for our shareholders.

And now I'd like to turn the conversation over to Jim. Please, Jim, go ahead.

Thanks, Vince, and good morning, everyone. Revenues for the third quarter of 2018 totaled $16.1 million, reflecting a $2.1 million revenue increase for APC and a $439,000 increase at FUEL CHEM as compared to last year's third quarter.

APC backlog to revenue conversion remained strong through the third quarter. Our September 30, 2018 backlog of $21.3 million rose by $6.9 million from June 30. We announced $18 million of new orders in the third quarter and are pursuing additional opportunities which we hope to close by year-end. Gross margin declined to 33.7% from 37.3% in Q3 2017 due to the revenue mix between APC and FUEL CHEM and the impact of projects in foreign geographies.

APC gross margin was $2.8 million or 25.4% as compared to $2.6 million or 29.7% in the third quarter of 2017. FUEL CHEM's segment gross margin was $2.6 million or 51.1% as compared to $2.4 million or 51.3% for the third quarter of 2017.

For the full year 2018, we expect a blended APC and FUEL CHEM gross margin of between 35% and 40%. Selling, general and administrative expenses continued their downward trend, coming in at $4.1 million or 25.5% of revenues from $5 million or 36.7% of revenues in last year's third quarter.

On a sequential basis, SG&A has declined from $4.8 million in Q2 2018 and $4.9 million in Q1 2018. On a year-to-date basis, SG&A declined by $2.3 million, while revenues have increased by $8.9 million. For the full year 2018, we expect SG&A to range between $17.5 million and $18.5 million.

R&D expenses were $265,000 in third quarter of 2018, up about $50,000 from the prior year's quarter. We continue to expect that R&D spending in 2018 will increase slightly from our 2017 spending levels, driven in large part by investments in the water and wastewater treatment market.

Net income from continuing operations is $1.1 million or $0.04 per diluted share compared to the net loss from continuing operations of $178,000 or $0.01 per diluted share in last year's third quarter.

We used approximately $2.6 million of cash from operating activities during the third quarter, which reflected the overall timing of invoicing and collection of accounts receivable as evidenced by an increase in total accounts receivable from $21.3 million at June 30, 2018 to $26.4 million at September 30, 2018. And operating loss for the 9 months ending September 30, 2018 of $0.9 million, offset by an increase in current liabilities from $14.2 million at June 30, 2018 to $17.1 million at September 30, 2018.

As of September 30, 2018, we have cumulative net operating losses in several geographies in which we currently do business, which allow us to offset future taxable income to reduce our overall income tax exposure. To that end, we have approximately $11.4 million to offset future U.S. taxable income, $5 million to offset future taxable income in Italy and $5.2 million to offset future taxable income in China. As a result, we continue to expect that our income tax expense for the full year 2018 will be at or near 0.

Our balance sheet at September 30, 2018 remained debt-free, and we had cash and cash equivalents of $10.7 million or $0.44 per share, including restricted cash of $6.5 million. Cash is up slightly from June 30, 2018. We are watching our liquidity very closely in all of our geographies. Based on our results for the third quarter and outlook for Q4, we are optimistic for positive operating income and cash flow for the second half of 2018 and for the full year.

Our working capital balance of September 30, 2018 was $23.2 million, which will continue to support our ongoing operating use of the business.

With respect to valuation, our book value per share was $1.38. Our tangible book value per share was $1.29 and our working capital per share was $0.96 at September 30, 2018. In addition, we have approximately $0.49 per share in deferred tax assets, which have been fully reserved and are not included in any of the per share amounts quoted above.

With that, I would like to turn the call back over to Vince.

Thank you, Jim. Operator, I would now like to open up the call for questions. Thank you.

(Operator Instructions) Our first question comes from the line of Pete Enderlin from MAZ Partners.

Congratulations on the solid operating progress.

Thank you very much. It's been a lot of hard work as you well know. We're very pleased to finally come to this operating performance, and we expect more in the future.

Great. The press release says, quote, that you announced $22 million of new orders in the APC segment. But you just mentioned that you did $18 million of new orders in the third quarter, and I think if I remember, $12 million in the first half. So if the arithmetic is correct, does that mean you've actually gotten about $30 million in new orders? And does that also then imply that there are a number of orders that you haven't actually announced yet? Or what am I missing?

Well, so the quote says we have announced $22.3 million in new awards through -- in 2018, so it's not a $30 million number. We have $22 million.

All right. But you just said $18 million in the third quarter, I think, and...

The $18 million is included in the $22 million.

Right. But if you have $18 million in the third quarter, $6 million in the first and $6 million in the second, that's adding 3 quarters to get $30 million.

Hey, Pete, well, let us check the numbers on that while we continue, if you don't mind?

Okay, sure.

Thank you.

But the -- I mean, the basic question is, are there some orders that you've actually included in backlog that you have not actually announced? Or would you -- I mean, is that a -- too fine of a distinction?

That would be, I would say, too fine of a distinction. We will verify the numbers, but typically when we put out a press release on contract awards, it includes everything that we've booked in-house up until the date of that particular press release. And then we wouldn't do another press release until we typically have another $2 million on orders in hand. That's sort of our norm in terms of how we've operated regarding issuing press releases for new business. So yes, the distinction would be a little bit too fine, but we'll verify the numbers.

Okay. And then the gross margin in the APC segment was down more than 4 points. And you mentioned mix and product mix and geographical mix just within the APC segment. So could you elaborate on that a little more? I mean, which one was a more significant impact?

I would say, it's actually both, Pete, and probably about equal. Generally speaking, our margins from our foreign geographies are a little bit less than what we realize in the U.S., so we had the impact of that coming through in the quarter. And then for the U.S. project business, we always have a mix of business that comes through at any given point in time as we execute on a project. In particular, in the third quarter, we executed on some, what I would call, some incremental change order-related work on a specific project that we did for a customer, and we did that incremental work at a little bit of a lower gross margin. So those 2 items really impacted the APC gross margin for the quarter.

And accounts receivable were up quite a bit. You mentioned sort of timing of invoices and all that. But is there any issue with the quality of any of those receivables?

As of right now, no. We do have a little bit of a reserve in China, because those tend to be slow to pay receivables. But in the U.S., we just had a bunch of timing that has happened at the end of the third quarter where we had executed on a bunch of projects and reached several milestones. So I'm not concerned about collectibility. We've kept our reserve at the same level it's been in prior quarters, and that's largely China-related.

Right. And Pete, just to add something additional to that. We have stated that before the end of this year, calendar year 2018, we do expect a nice uptick in our cash balance at the end of the year. And that's going to be specifically related to the increase in AR that you're seeing on the balance sheet today as we expect collections here before where we end the year that relates to specifically milestone billing timing on projects we have in progress.

Understood. Okay. Well, congratulations on the good results.

Pete, one more thing. We -- Jim did take a look at what we've announced thus far and looks as though we had announced $4 million back in February of this year, and we didn't announce any incremental orders in Q2. And then we announced the additional orders in -- the $18 million in Q3 for a total of $22 million for the year. So we just put up all of that.

That's basically the narrative. Yes.

Pardon?

That was basically a sort of a narrative. That didn't necessarily include everything that you had booked at that time that -- is that fair?

We'd have to check back on the narrative, Pete. But we booked $18 million in Q3, and then $4 million prior to that.

Well, that's a great booking in the third quarter.

It sure is.

You're thinking that there's a good chance you book another somewhere between $15 million and $20 million in the fourth quarter, right?

We're following contract awards to that amount. The timing could be end of this year or early in Q1 of next year. And so -- but we have a nice backlog of projects that we're actually following from a contract award perspective and where we're hoping that we get our share.

Our next question comes from the line of [Bill Soak] from [Grayson Lite].

If natural gas is trading up towards $4, if that continues, we've got a cold winter, it trades up in the $4, $5 range. Would you anticipate some fuel switching from some of your customers benefiting the FUEL CHEM segment?

Yes. That could be the case, Bill, but we -- what we'll likely see is, perhaps, a favorable impact on the dispatch of those coal units as they're likely to be a little bit more financially attractive than versus natural gas, which could have a nice impact on our FUEL CHEM business as we move through the winter time. Relative to a unit that would specifically switch from firing coal to natural gas, that's a little bit less likely to happen at this point in time, but where we're hoping to see some favorable dispatch opportunities for coal, which would be a nice favorable impact on our FUEL CHEM revenue generation.

Right. And you've always spoken in the past as that $4 natural gas is being sort of a tipping point where people would start to look at that more seriously and that's still the case, okay.

Right, correct.

Okay, great. And then just maybe if you could just elaborate, I'm just trying to get an answer on this. It's great news, but on the APC, just kind of the sudden strength in the business, I mean, is there any one driver of that? Is it the strength of our economy? Or changing your strategy, your marketing strategy? I'm just trying to get my arms around that while I...

Yes, I mean, I would -- what I would point to, Bill, is the fact that the natural gas sector and the strength in the economy has been a nice boom for us. And so we see that continuing as we move into 2019. Other than that, we've always had a little bit of an ebb and flow with our APC business. We are seeing a lot of consolidation of players in our market space. We've seen it happening over this past year, and we expect that to continue as we move into 2019. So it is giving us, perhaps, some additional opportunity than maybe we've had in the past as well. The overall business segment for Air Pollution Control technologies, particularly as it related to coal-fired utilities, obviously has been hit extremely hard. So a lot of players in that space actually had -- they either had to retract or they were acquired by other parties. And so we see ourselves in a -- just generally a more favorable position on a competitive basis as well, which should help us going forward. So at the high level, I would point to, a, improvement in the economy; b, the fact that it is -- the new power generation is natural gas and our technologies play quite well with that, and then just a little bit of a change in the dynamic of the competitive landscape.

Our next question comes from the line of [George Gaspar], a private investor.

Yes. Congratulations, nice progress in the quarter for sure, Vince. Yes, if you could update a little bit more on the water treatment area. As you are moving forward, it sounds like you, obviously, are targeting the end of the year to get close to being able to go out and do some sampling efforts or demonstration efforts. Can you just cite some possibilities of types of water treatment that you would be looking to try to get involved or could get involved early on with the system?

[George], at the onset here, we believe our first opportunities are going to be in the oil and gas sector. I think that's going to give us our first ability to demonstrate the technology. And we'll start there, and then we'll look to expand further from that particular market segment. But that's where we're going to be starting out at this point in time. And as I noted, we -- we're working our lab scale system with our technology team internally here at Fuel Tech. We're definitely coming up to speed on the capabilities of the technology, and we're going to be ready to go with our demonstration system here before the end of this month. And we have a couple of target opportunities in mind, whereby we'll be able to demonstrate the technology fairly soon here as we look to end this year and move into 2019. Once we're able to do that, George, once we have a demonstration in process whereby we're actually able to get the reference client for success and performance of the system in this particular market space, then our doors are going to be further opened for us, and then we'll move forward from there. But that is our first step, and it's a mandatory first step for us.

Okay. All right. And second one, second question. Related to financing requirements as you're moving forward, now it looks like you've got pretty reasonable financial situation with some cash to draw against. And a -- can you identify your borrowing plan? Or what you're anticipating possibly having to look to do going into -- by the end of the year or into early 2019 in terms of financial requirement that you may have to change out?

As we look towards the end of this year, [George], as I had just mentioned to Pete when he was on the call, we're looking for a nice uptick in our operational cash balance as we look to end this year. Based upon the development plan that we have in place right now currently for the water treatment business, we're not planning on going outside for any external financing at this point in time. If we see something that developed whereby we need to have 15 demonstration systems out in the marketplace fairly rapidly, obviously, that will change our positioning on that subject. But right now, we're not planning on that. We don't see it evolving that way, but we're going to keep our options open and flexible depending on how the market develops.

Okay. All right. And in terms of looking at the international side, between Europe and China, using those particularly, where do you see yourself concentrating more effort in 2019 on?

As we sit here right now, [George], I personally see more opportunity coming out of our European opportunity platform than we see coming out of China today. We're watching China very closely. I've mentioned this on prior calls whereby, with all the modifications that we've gone through, all the restructuring we've gone through in this company, which has been predominantly domestically focused, our objective as a company is to have all of our business segments, all of our geographic office locations generate profit. If we feel as though strategically, we can't make the modifications to enable that to happen in all of those locations, well, we'll look to make changes. So right now, I feel confident about the European operation and their opportunities. China, we're watching very closely.

(Operator Instructions) Our next question comes from the line of [Bill Chapman], a private investor.

Guys, what degree of difficulty is a changeover for oil and gas companies from what they're using now in terms of your water treatment?

From what we see today, most of the oil and gas applications that we're taking a look at do utilize some form of aeration technology. And so initially, as we're looking at doing a demonstration, it would be a substitution effort from the current aeration technology that they'd be using today to what we would be looking to offer, which is a more effective ability to aerate that body of fluid. But that's where we would start.

So this is a more -- a better outcome. What about the cost component to what they're using now?

In all likelihood, our system is going to be a higher expenditure related to what they're using today. But what we believe in terms of what the end result will produce in terms of operational cost savings over a longer period of time and just more effective performance and, perhaps, less utilization of chemical as they also look to treat that body of fluid, we think the investment is more than worthwhile. But that's one of the reasons why we -- we're going to go through this demonstration process just to ensure that we have all the operating parameters hammered out to ensure that we're able to justify the investment in the technology we're going to be providing. It's a necessary first step for us, but we're encouraged with what we see with the technology thus far.

Okay. Let me ask you, too, on the higher-cost part of it. Are you talking 10% or 20% or 100% roughly? Or just kind of a range, if you could, please.

As we sit here today, I'd say somewhere -- and it really depends on the application, because we've studied some applications that we believe are woefully under-aerated, so it ends up not being a fair comparison. So I give you a 10% to 50% number, but it varies widely, depending on the application.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Vincent Arnone for closing remarks.

Thanks, operator. I'd like to thank everyone for taking their time today to participate on the call, and thank you so, so much for your continued interest in Fuel Tech.

We've been on a long dedicated plan to returning to profitability. We're very, very pleased with our third quarter financial performance, and we're looking to deliver more of that type of performance here in the near term. Just as a note to everyone, we are planning on being in New York City in the month of December to visit with some of our investor base. If you're interested in meeting with us, please don't hesitate to reach out to myself, to Jim or to Devin Sullivan with The Equity Group. Thanks very much, everyone. Have a fantastic day. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.