Fuel Tech, Inc. (NASDAQ:FTEK) Q3 2023 Earnings Call Transcript

Fuel Tech, Inc. (NASDAQ:FTEK) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Greetings, and welcome to the Fuel Tech Third Quarter 2023 Financial Results Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Devin Sullivan.You may begin.

Devin Sullivan: Good morning, everyone. Thank you for joining us today for Fuel Tech’s Third Quarter 2023 Financial Results Conference Call. Yesterday, after the close, we issued a copy of our result release that release is available at the company’s website at 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 and 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 the 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 the 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 of 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 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 like to turn the call over to Vince Arnone, Chairman, President and Chief Executive Officer of Fuel Tech. Vince, please go ahead.

Vincent Arnone: Thank you, Devin. Good morning, and I’d like to thank everyone for joining us on the call today. Our results for the third quarter reflected continued double digit revenue growth for our Air Pollution Control or ATC segment.With sales up 36% from last year’s third quarter and an expected and welcomed rebound in revenue at FUEL CHEM which saw revenue double from the immediately preceding second quarter of 2023.As program activity for this segment normalized following a period of reduced operation driven by unscheduled downtime and temporary maintenance on our installed units. We continued to maintain a conservative cost profile with SG&A expenses trending at or slightly below 2022 levels. Secured new APC contracts and ended the quarter with over $33 million in total cash and investments and no long term debt.

We believe that the future of our company lies not only on capitalizing on the opportunities offered by our existing products and end markets, but also on developing and commercializing new product and market opportunities. To that end, the continuing development of our Dissolve Gas Infusion technology or DGI remains as a high priority. In following up on our discussion from our Q2 earnings conference call regarding DGI, we are very pleased to have completed the on-site deployment and pilot testing of our DGI technology at an aquaculture setting in the Western United States. Over the 100-day demonstration, the DGI technology delivered and consistently controlled the dissolved oxygen levels and demand between 9mg/L 12 mg/L, which is approximately 150% of atmospheric saturation.

Based on an analysis of the results and post study consultation with the client, the DGI technology not only met the pilot study expectations and parameters, but in many cases exceeded them for consistent delivery of high-quality dissolved oxygen on demand. The client reported excellent results from taste tests by local chefs including an absence of trimethylamine within the harvest. Results for this study will be published in the abstract and presented at the Aquaculture America Conference in February of 2024. We are currently in negotiations with this client to deploy our DGI system at their location for both their next grow cycle and their larger scale development plans. In addition to this demonstration, we are continuing our conversations with other potential channel partners as we look to deploy DGI in other end markets, either late this year or early in 2024.

DGI is best described as a technology that involves the efficient transfer of high concentrations of gas into a body of water to drive chemical or biological reactions such as wastewater treatment or for process improvements such as industrial applications or aquaculture. Our DGI system is a two-step technological process, where first a slipstream of process water is pressurized and infused with oxygen using Fuel Tech’s patented saturator and secondly this oxygen laden slipstream is returned to the process basin through a patent pending injection array for optimal distribution and gas residence time. At present, we are utilizing DGI to deploy oxygen into bodies of water. However, we do believe that DGI can be applicable for other gases as well such as ozone.

DGI’s benefits include the precise control of dissolved oxygen levels for all process applications, and ability to extend plant capacity without major expansion or capital outlay, odor reduction, and minimal bubble formation for extended residence time. We believe that DGI is applicable across several end markets, including pulp and paper, food and beverage, chemical or petrochemical, water and wastewater treatment and aquaculture. Now let’s please spend a few minutes discussing our APC and FUEL CHEM business segment. Our FUEL CHEM business segment benefited from the return of our larger scale customer units to more normalized levels of usage after experiencing extended downtime in the second quarter associated with reduced dispatch driven by weather related demand and unscheduled maintenance outages.

We expect FUEL CHEM’s performance in the fourth quarter of this year to be at a reduced level and from the $4.1 million reported in last year’s fourth quarter, due to primarily to a reduction in program utilization levels at our primary accounts from the very high levels experienced in 2022. This will result in lower annual revenues at FUELCHEM when compared to full year 2022. With respect to international opportunities for the FUELCHEM 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.

Earlier this year, we executed a two-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 FUELCHEM 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. For the APC segment, revenue rose by 36% to $3.7 million from last year’s third quarter driven primarily by the timing of project awards and the commencement of work on contracts announced during 2022, and continuing through the first 9 months of 2023. These projects involved our SCR, SNCR and ULTRA emissions control solutions at natural gas and coal fired units in the U.S., Europe and the Pacific Rim.

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As previously announced, we have secured $2.2 million of new project awards during the third quarter and earlier this week, we announced an additional $2.6 million of new awards. Based on our visibility to projects that are in development, we expect a minimum of $3 million to $4 million in additional awards before the end of this year. Last quarter, we discussed the U.S. Environmental Protection Agency’s issuance of a rule finalizing requirements that obligate 23 states to reduce emissions of nitrogen oxides from power plants and certain industrial facilities. According to the EPA, this action was designed to tighten nitrogen oxide emission requirements by updating the Cross-State Air Pollution Control Rule to meet the Good Neighbor requirements of the Clean Air Act.

The Good Neighbor Rule has currently been stayedby several circuit boards covering sources in upwind states. Within the past few weeks, sources in affected downwind states have petitioned the Supreme Court to proceed with the rule. For the near term, upwind sources will likely not be required to reduce their nitrogen oxide emission levels until the requirements and timing of the final rule have been resolved. We continue to believe that this new federal rule will serve as a catalyst for new APC orders over the next several years as utility and industrial customers explore ways to further reduce NOx emissions. In fact, it is important to note that we have received and responded to several requests for budgetary proposals as customers prepare to address the upcoming compliance requirements as part of their capital budgeting requirements for 2024 and beyond.

We will provide further analysis and commentary on this regulation as more information becomes available in the future. Through the first 9 months of 2023, APC revenues have already exceeded the revenue recognized for the entirety of 2022. Based on our effective backlog at quarter end, the business development activities we are pursuing and our previously noted expectations for FUEL CHEM, we expect that total revenues for 2023 will increase modestly to between $27 million to $28 million, up from $26.9 million in 2022. This base case outlet excludes any material contributions from DGI as we are still in the early stages of commercialization and any significant contributions to APC from the EPA earlier this year. In closing, I want to once again thank the Fuel Tech team for their ongoing continued hard work and dedication and our shareholders for their continued support.

As we continue to evolve out operations and expand our presence as a global supplier of technologies that enabled clean air and pure water. With that said, I’m going to turn the discussion over to Ellen. Ellen, please go ahead.

Ellen Albrecht: Thank you, Vince, and good morning, everyone. We are pleased with our third quarter results, reflecting higher net income a significant revenue improvement in our FUEL CHEM segment compared to the immediately preceding second quarter of 2023 and continued strength in our balance sheet. For the quarter, consolidated revenues were flat at $8 million compared to last year’s third quarter, driven by improved results year-over-year in our APC business segment. Consolidated revenues for the 2023 nine-month period rose to $20.8 million from $19.9 million in the same period last year.APC segment revenues for the quarter increased 36% to $3.7 million from $2.7 million in the prior-year period, driven by timing of project execution and the recognition of ancillary APC orders.

This increase was offset by a decline in FUEL CHEM product revenue for the quarter that was the result of lower dispatch electrical generation demand and changes in product and fuel usage at certain accounts. As noted, FEUL CHEM revenue more than doubled from Q2 2023 when this segment was affected by customer driven maintenance outages. Consolidated gross margin for the third quarter was 45% of revenues as compared to 46% of revenues from the prior-year period. Although APC gross margin rose to 40% from 34% in last year’s third quarter due to a change in project and project mix, lower revenues for the FUEL CHEM segment impacted margins on a consolidated basis. Third quarter 2023 gross margin for FUEL CHEM segment returned to historical levels of right around 50%.

Consolidated APC segment backlog as of September 30, 2023 was $5.6 million, down sequentially from $6.6 millionat June 30, 2023, and $8.2 millionas of December 31, 2022. Backlog at quarter end consisted of $2.4 million of domestic-delivered project backlog and $3.4 million of foreign-delivered project backlog. As Vince noted, we have recently announced new contract awards and expect to add this to the backlog balance prior to the end of the year. We continue to maintain an expense discipline across our enterprise. SG&A expenses for the third quarter decreased to $3 million from $3.3 million last year. This decrease was primarily due to timing of certain employee related expenses. For the full year 2023, we expect SG&A expenses to range between $12.8 million and $13.2 million as we strategically invest in resources to support current business initiatives.

Research and development expenses for the third quarter increased to $513,000 from $207,000 in last year’s third quarter. This increase was primarily due to continuing investments in our DGI water treatment technologies and in support of our pilot testing initiatives. We will continue to invest as needed in our R&D efforts in support of our commercialization of our DGI technology and to actively pursue commercial applications for technologies outside of our traditional markets. We continue to take advantage of the favorable interest rate environment and as of September 30, 2023, have invested in excess of $30 million and held to maturity debt securities and money market funds. This generated $322,000 of interest income in the third quarter and nearly a million dollars of interest income for the 2023 nine-month period, up from just $100,000 in the same period last year.

We continue to expect that interest income for 2023, barring any unusual cash deployments to grow the business, will approximate $1.3 million. Net income for the third quarter was $459,000 or $0.02 per share compared to net income of $314,000 or $0.01 per share in the same period one year ago. Adjusted EBITDA was $352,000, compared to an adjusted EBITDA of $421,000 in the prior year period. We continue to maintain a strong financial position. As of September 30, 2023, we had cash and cash equivalents of $13.5 million and short and long term investments of $19.7 million. Working capital was $31.9 million or $1.05 per share. Stockholders’ equity was $44.1 million or $1.45 per share and the company continues to have no outstanding debt. We are confident in our ability to fund our ongoing growth initiatives pursue new product and market opportunities and maintain our strong financial position, which we view as important competitive advantage.

Thank you for your time and I’ll turn the call back over to Vince.

Vincent Arnone: Thanks very much, Ellen. Operator, let’s please now open the line for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question is coming from the line of Sameer Joshi with Amit Dayalwith H.C. Wainwright.

Amit Dayal: Good morning, guys. Hi, Vince. Just with respect to DGI, I mean, it looks like, the pilot is working pretty well, you’re seeing the results, better than expected. With this type of stuff now, like, how quickly, and the balance sheet that you have – how quickly can you move this to just expanded efforts with other pilot stage opportunity that you would, I know you may be a little bit dependent on the customer itself, from commercializing, with this client who has had the pilot, but how should we think about revenues from this, coming through for you guys?How quickly can that happen? You know, now that you seen these, results?

Vincent Arnone: Right. No, thanks for the question, Amit.With respect to this particular customer, our next step here is probably going to be engaging in an equipment lease or rental arrangement with them for their next growth cycle, which will likely start before the end of this year, early next year but with this small system that we’re using there, where we’re not expecting material revenues relative to your – your more broad question on how quickly, we can get perhaps more systems out in a commercial environment. Premature for me to talk about any sort of revenue level for 2024,but what we are going to be doing now that we do have some, call it, pilot or demonstration success in our hands, as I noted in my commentary, we’re going to take this information out publicly via conferences and look to expand knowledge about DGI in marketplaces.

So that, that is going to be our next step. Yes, we have solid balance sheet. As you know, we’ve been, using our funds carefully regarding how we do invest in DGI but with each step, it’s providing us more impetus, if you will, to further invest to pick the pace up a little bit regarding commercialization. So that’s something we’re evaluating right now as we’re looking to end 2023 and move into 2024, but we’re going to be looking at some resource enhancements – human resource enhancements. We’re going to be looking at perhaps adding additional DGI systems to have on hand as inventory for potential sales or demonstration. That’s everything that’s in process right now. When we look to have our first call in 2024, which will be in that early March timeframe, obviously, I’ll have more to talk about regarding the development of DGI at that point in time, but suffice it to say between now and then, we are expecting to have additional demonstrations and we are expecting to have some small level of commercial revenue.

Amit Dayal: Well, thank you for that, Vince. Just looking ahead a little bit, you know, into 2024.Maybe it’s a little early, but how do you feel about sort of, you know, your setup you know, with respect to the visibility you have right now for 2024, could that be another sort of year-over-year period for you or revenue growth period for you? Any color on how you are positioned sort of in the next 12 months, you know, would be helpful and the reason I ask this question, Vince, is, you know, you have cash per-share, $1.45, roughly, and the stock is trading well below that.I’m just trying to understand where the disconnect is and what investors may or may not be thinking about the opportunities in front of you.

Vincent Arnone: Amit, completely understand and I share your sentiment regarding where we’re trading today vis-a-vis our – our cash value per share. Visibility in terms of me sitting here and providing guidance on 2024, it is premature.However, I will tell you that I would be disappointed as COO of the company if we would not be targeting another year of revenue increase in 2024 over 2023. So that’s the statement that I’ll make today. I think that the disconnect on valuation, I think as we are able to provide more positive information to the public and more make more people aware of what Fuel Tech is actually providing, both as an environmental solutions company to the world today and also from a pure value perspective, I think, hopefully, we’ll see that disconnect and valuation change as we move into 2024.