Fuel Tech, Inc. (NASDAQ:FTEK) Q1 2023 Earnings Call Transcript May 10, 2023

Fuel Tech, Inc. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.02.

Operator: Greetings, and welcome to Fuel Tech’s First Quarter 2023 Financial Results Conference Call. At this time, all participant are in listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Devin Sullivan. Please go ahead.

Devin Sullivan: Thank you, Stacy. Good morning, everyone. Thank you for joining us today for Fuel Tech’s First Quarter 2023 Financial Results Conference Call. Yesterday, after the close we issued a copy of the release, which is available at the company’s website www.ftek.com. Our speakers for today will be Vince Arnone, Chairman, President and Chief Executive Officer; and Ellen Albrecht, company’s Chief 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 of 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. Vince, please go ahead.

Vince Arnone: Thank you, Devin. Good morning, and I want to thank everyone for joining us on the call today. Following an improved year of financial performance in 2022, we started off the New Year on very solid ground. Both the APC and FUEL CHEM business segments reported higher revenues, which resulted in a 32% increase in consolidated revenue from the prior year to $7.3 million. We maintain a conservative cost profile, narrowed our losses and ended the quarter with total cash and investments of nearly $34 million, with no long-term debt. Our backlog was $7.6 million, down slightly from $8.2 million at year-end, and including the $5.2 million of new 2023 orders announced in February. We continue to pursue a global sales pipeline of $50 million to $75 million, consisting of a variety of projects and end markets.

To that end, during the quarter, there was a promising development with respect to new US government emissions control legislation that we have been discussing with you for quite some time. We believe that, this ruling can provide a long-term uplift for our APC product line, and I’ll discuss this development shortly. Bill Decker, our recently appointed Vice President of Water and Wastewater treatment technologies, has been very active in getting up to speed on the business leveraging his industry network, and helping to drive this segment towards commercialization. To that end, we expect to commence our first on-site demonstration using our small-scale dissolved oxygen infusion system, at an aquaculture setting in the United States late in the second quarter, or early in the third.

The deployment is scheduled to last approximately 3 months, with the objective of improving the productivity and efficiency of the customers’ operation through the use of optimized, high levels of dissolved oxygen. In addition to this opportunity, we are also pursuing additional demo opportunities across various end markets preparing end market-specific marketing materials and continuing the development of our engineering design standards for DGI delivery systems of different capabilities. Our FUEL CHEM business segment had a strong first quarter, with revenue increasing to $3.7 million from $3.3 million in the same period last year. An overall increase in energy demand year-on-year positively impacted coal-fired dispatch, in regional areas where we have our programs installed.

We continue to develop new marketing strategies to reach key decision-makers at all domestic coal-fired utilities to reintroduce our FUEL CHEM program benefits, including lowering the cost of dispatch by offering fuel flexibility, extending facility life, and improving overall facility profitability, and structuring a program that is active only when the unit owner wants to capitalize on high energy demand and related high unit capacity factor opportunities. With respect to international opportunities for the FUEL CHEM segment, we are continuing to follow the opportunity to expand the provision of our chemical technology in Mexico via our partner in that country to address the emissions created by the burning of high sulfur fuel oil, which is being undertaken without the necessary environmental remediation and at the expense of the health of surrounding communities.

We recently executed a one-year extension to the program that we currently have in place at one facility. And we do believe that political pressure is building in favor of the implementation of our FUEL CHEM program at additional facilities in this country. Our partner is currently in discussions with the state-owned utility, CFE, regarding the application of our technology at several units. As we look out to 2023, we currently expect that FUEL CHEM revenues will decline modestly from 2022 levels, due primarily to a reduction in program utilization levels at our primary accounts from the high levels experienced in 2022 and to the elimination of one account due to plant closure. For the APC segment, revenue rose $3.6 million from $2.2 million in last year’s first quarter, due largely to the timing of project bookings and project execution against our backlog.

During the quarter, we either commenced or continued emissions control projects that included our SCR, SNCR, and our Ultra technologies. Based on our first quarter performance, the effective backlog that we have in place today and the visibility that we have into potential new orders, we are confident that our APC revenues for 2023 will well exceed 2022 APC revenues of $10.6 million. A potential source of new business for the APC segment for 2023 and years beyond was further clarified in March of this year when the US EPA issued a rule finalizing requirements that obligate 23 states to reduce emissions of nitrogen oxides from power plants and certain industrial facilities. This updates the cross-state air pollution control rule, while meeting the good neighbor requirements of the Clean Air Act.

These Casper revisions could impact utility industrial resources requiring additional NOx control starting as early as 2023 for utility units and 2026 for industrial units. We believe that this new legislation could drive new orders over the next several years for our selective catalytic reduction systems, for higher reductions of NOx, selective non-catalytic reduction systems or SNCR technology for units that require incremental NOx control, and for our Ultra systems which provide a safe reagent for SCR installations. Although it is difficult to quantify the impact at this time, I can definitively say that we are having more meaningful and directed conversations with potential customers since the ruling was passed in March. Given the respective outlooks for both the APC and FUEL CHEM segments, we continue to expect that total revenues for 2023 will improve to between $27 million and $32 million, up from $26.9 million in 2022.

This base case outlook excludes any material contributions from DGI as we are still in the early stages of commercialization and any significant contributions to APC from the recent EPA ruling in March. In closing, I want to again thank the Fuel Tech team for their continued hard work and dedication as we work diligently each day to satisfy our customers’ requirements and plan for the development and expansion of our water technology initiative. I also want to thank our shareholders and other stakeholders for their continued support as we strive to grow our business as a global supplier of technologies for clean air and pure water. With that said, I’d like to turn the discussion over to Ellen. Ellen, please go ahead.

Ellen Albrecht: Thank you, Vince and good morning everyone. For the quarter, consolidated revenues rose 31.7% to $7.3 million from $5.5 million in last year’s first quarter with both our primary business segments recognizing higher revenues. APC segment revenue increased to $3.6 million from $2.2 million in last year’s first quarter, reflecting the execution of orders reflected in our year-end backlog and bookings received during the first quarter of 2023. FUEL CHEM product line revenue rose to $3.7 million from $3.3 million, due primarily to improved dispatch levels for power generation facilities that use our program. Consolidated gross margin for 2023 first quarter dropped slightly to 38.5% of revenues from 41.4% of revenues in last year’s first quarter.

This decline can be attributed to lower APC segment gross margins, which were 27.1% in Q1 of 2023 as compared to 35.2% in Q1 of 2022, the reduction being driven by project and product mix. FUEL CHEM margins remained strong improving to 49.4% from 45.5% in the prior year first quarter due to increased topline performance. Consolidated APC segment backlog at March 31, 2023, was $7.6 million, down from $8.2 million at December 31, 2022. Backlog at quarter end included $6.1 million of domestic delivered project backlog and $1.5 million of foreign deliver project backlog, as compared to $6.3 million of domestic project backlog and $1.9 million of international project backlog as of December 31, 2022. We expect that $7.3 million of current consolidated backlog will be recognized in the next 12 months.

SG&A expenses rose slightly to $3.2 million from $3.1 million in last year’s first quarter. However, as a percentage of revenue, SG&A in the 2023 first quarter declined to 45% from 55% in 2022 first quarter reflecting significantly higher consolidated revenue. For full year 2023, we expect SG&A expenses to range between $13 million and $14 million as we invest in resources to support current business initiatives and in the development of our DGI technology operations. Research and development expenses for the first quarter were steady at approximately $220,000, primarily attributable to timing of execution on current project initiatives. As Vince indicated, we are preparing to participate in our first on-site demonstration using our small-scale devolved oxygen infusion system and are pursuing several other opportunities and we’ll adjust R&D spending as needed for the commercialization and development of our DGI technology.

Our operating loss declined to $658,000 from $984,000 in last year’s first quarter, primarily driven by higher total revenues and a relatively stable year-on-year expense profile. As we discussed last quarter, we continue to take advantage of the favorable interest rate environment. And as of March 31, 2023 have invested approximately $30 million in held-to-maturity debt securities and money market funds. This generated $339,000 of interest income in the first quarter compared to virtually no return in the same period last year. We estimate that interest income for 2023 barring any unusual cash deployments to grow the business will be approximately $1.2 million. Our net loss for the quarter narrowed to $414,000 or $0.01 per share compared to a net loss of nearly $1 million or $0.03 per share in the same period one year ago.

Adjusted EBITDA loss was $569,000 compared to an adjusted EBITDA loss of $868,000 in the same period last year. Our financial position is amongst the strongest in our history. As of March 31, we had cash and cash equivalents of $15.7 million and short- and long-term investments totaling $18.1 million. Working capital was $30.2 million or $1 per share. Stockholders’ equity was $44.6 million or $1.47 per share and the company had no debt. Cash provided by operating activities at March 31 was $1 million driven primarily by the timing of AR collections compared to cash used in operating activities of $1.7 million at March 31, 2022. I share Vince’s optimism about our future and look forward to keeping you all apprised of our progress and development.

Vince Arnone: Ellen, thank you very much. Operator, I would now like to go ahead and open the line for questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Sameer Joshi with H.C. Wainwright. Please go ahead.

Operator: [Operator Instructions] There are no further questions at this time I would like to turn the floor over to Vincent for closing remarks.

Vince Arnone: Thank you very much. As I have noted, we are pleased with our start to 2023 with a good first quarter of performance for us. Our objective obviously is to generate operating profit as a company as a whole and we are moving positively in that direction. I want to, again, thank the Fuel Tech team and thank all of our shareholders and stakeholders for their support of our company. Thanks to everyone and have a great day.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.