Fuel Tech, Inc. (FTEK) Q3 2014 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Third Quarter 2014 Fuel Tech, Inc. 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. We will conduct a question-and-answer session towards the end of this conference. [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 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, the 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. The factors that could cause results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed, and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call. And as a reminder, the call is being broadcast over the Internet and can be accessed at www.ftek.com. With that said I'd 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 revues 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 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 months 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 a net loss of 614,000 or $0.03 per diluted share for the nine months period. Our favorable results in the third quarter reflects seasonally higher FUEL CHEM sale and associated gross margin which offset declines in our APC segment revenues and associated gross margins. 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 with 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 cost and commission expense. Our research and development cost 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 months period respectively. Now, let’s move to our more in-depth discussion of our business segments. Our APC segment reported third quarter and nine months revenues of $11.1 million and $33.2 million, respectively and represent declines in revenue from the prior year period $12.3 million for the third quarter and $23.4 million for the nine months. Our backlog at 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 of 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. Over the nine months period, these same two items contributed to the decline in APC segment revenue as follows: progress towards completion of our Chile contract $9.9 million and the decline in U.S. revenue $14.8 million. Lastly, we are seeing a high level of interest from our recent acquisition of particle control technologies and we expect to see incremental order flow and revenue next year which will provide additional momentum for return to growth in our APC segment of business. The day we have announced $5.8 million a new particle control orders, we expect to announce additional orders as we continue to work with perspective costumers. Our APC segment gross margin for the third quarter and nine months period ranged between 35% and 41% for the current and prior year periods which is reflective of the gross margin profiles of Chile projects and is consistent with prior discussions. We do expect to see some marginal improvement in the APC segment as the Chile project revenue was 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 months revenues of $10.3 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 remain 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 lost geographies and the tax reporting was in each of those jurisdictions as well as the level of pre-tax net income compared to permanent add-back items. We continue to expect to see a long-term effective tax rate between 30% and 43%, but we'll look for the remainder of 2014 to be low due to projected income levels. Cash and 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 operations. 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 tangible asset purchases. Cash provided by operating activities for the first six months were $1.4 million, and our spending on investment activities for the 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 segments in our FUEL CHEM segment revenue was expected to grow modestly. We will continue to monitor SG&A spending and expect the current expense level to continue into 2015. Finally, our spending as a carbonate business is expected to increase in 2015 around the development to a various technology applications and we will continue to provide directional update from 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 quarters respectively. We have achieved an operating profit of $1.4 million in 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 opportunity to foresee in the quarters ahead. First of all, our FUEL CHEM segment remains a consistent and profitable performer in the phase of persistent macro-economic headwinds such as decrease in load capacity, fuel switching and overall national decline in energy used. 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 [RTP] technology into the profile of utility industrial boarders across the country and as we look to expand internationally around the world. By targeting the problem areas of furnace, [RTP] program to improve heat rate and boiler efficiency, reduced slagging and other impurities inside the furnace and allow operators to burn more economical fuel. One (inaudible) growth is RTP on demand solution that will allow customers to apply the technology only when needed, only during periods of increased boiler usage. This program has been well received with third quarter results benefiting modestly from its implementation in new accounts. We should see more in a way of contribution to getting into fourth quarter along with some gain from additional new account activity at the 50% plus 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 accustom to periods of cyclicality, it’s witnessed to sustain challenge this year with differed purchases steaming from protracted regulatory delay. Our successful diversification in jobs and international markets has helped offset this softness however, it is not unreasonable to expect that our full-year 2014 APC revenues on a consolidated basis may likely be about 30 million below that of 2013. We do realize respectable gross margins for this business but this year-over-year volumes 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 a combination of FUEL-TECH’s internal initiatives as well as some exciting and still performing industry trends. U.S. power 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 there in code activity is expanding and we anticipate and improve 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 while we have a large legacy base and a well-known and a respected emissions control partner. Recent drivers for NOx reduction requirements have included permitting issues with industrial plant expansions, consent decrease in compliance with regional haze requirements. With respect to Cross State Air Pollution Rule, the U.S. District Court of Appeal lifted its stay in late October paving the way to begin Phase I of the renewed implementation of CSAPR on January 1, 2015 with bench to set the start in 2017. The lifting on the stay will allow EPA to replace the care role and move forward with planned reductions in NOx and SO2. CSAPR will help ensure that important health benefits are not delayed and the [downward] state can achieve required emission levels. In addition, CSAPR also helps state maintain a national ambient air quality standard requirements for ozone since NOx emissions precursor to ozone emissions. Our new particular control offerings required 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 activities, much of this has been driven by the Utility MATS and Boiler MACT Rules which have compliance deadlines of 2015 and 2016 for particular control. EPA has proposed a new rule for greenhouse gas as to an existing power plant known as the [clean] power plants, this proposed plant includes proving efficiency at existing sources, FUEL TECH through (inaudible) business segment is well positioned to address 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 and near greenhouse gases in the world, China operates over a 1 million boilers, 80% of which are fuelled by coal. China continues to advance the policy to reduce harmful emissions and join the risk 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 operations in Beijing which opened in 2007 and is now in new larger offices continues to address our market for air pollution control system that is more than twice as large as the U.S. market was at its peak. We are continuing to explore way to strengthen our local presence and our competitive position in China, we are confident that our efforts will produce a more significant return on investments in this region. In particular, we are striving to build an effective platform for expanding sales in the market for other technologies such as fuel gas conditioning in FUEL CHEM. Finally, I would like to comment on an accomplishment in the third quarter that reflect over a year of technology assessment and market planning, this initiative underscores the strategic priorities to build a larger base of recurring revenues and a whole new vision for FUEL TECH. I am referring to the September 2014 acquisitions of the intellectual property rights and now have associated with the CARBONATE process that leverages our total compensates to create a business that we call fuel conversion, this will over the time enable new opportunities for FUEL TECH to diversify into adjacent markets, generate recurring revenue with margins and return on invested capital that are expected to be quite attractive. This technology platform will allow us to expand our delivery of innovative solutions in this industry, utilizing carbonaceous fuels. This acquisition is an important step in the development process that we expect will culminate in the launch of new generation of products that can covert coals of various rank in the higher value engineered carbon products. We understand the CARBONATE technology and intend to apply our knowledge or know how in our industry networks to refine the acquired (inaudible) and launch strategies to serve them. We can leverage our knowledge of coal chemistry, combustion dynamics, system design and process optimization, develop and commercialized products that are cleaner, both bearing their production and their end-use as compared to conventional products and their associated processes. CARBONTE derive products can be created by first converting coal into coal liquids and high (inaudible) char. Internal examples are products derived from carbonate char include substitute for (inaudible) reluctant for steel production, (inaudible) alloy heat stock, absorbance, foamed coke and carbon stock is virtually more (inaudible). In certain market such as (inaudible) we have been in a position to improve the supply chain, currently disarranged by an aged infrastructure, it is challenged by nation’s control. We intend to create a next generation process that is flexible and lower in overall cost as compare to existing batch process methods. This in turn will enable us to deliver products with the inherent quality, economics and efficiency advantages of the faster continuous processing, coupled with dramatically improved emission controls. Dev mentioned our 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. The recognized in the acquisition with CARBONTE intellectual property is much account 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 the CARBONATE technology will allow us to expand our business into a third dimension, making better use of our country’s abundant national coal resources while hearing to our vision to help create a cleaner more energy efficient and sustainable environment. So I would now like to ask the operator if you would please 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. Please proceed.

Good morning, everybody.

Good morning, Lucas.

There is recent very interesting comments you just made here on regards to these new business opportunities service of coke exposure, I think for most of the investors, it is going to be kind of a new market that it is probably not very well and so could you may be just explain in a little bit more detail of what market exactly you are having in mind and what opportunity do you see and what you think your value in mix shift in this going to be in that...

You are referring to fuel conversion, Lucas?

Yes.

Sure. While these are established markets with the age 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 in marketing by those companies and we are in strategic discussion for those opportunities. There is a solid substance is 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 BT value that in turn going to be sold into a number of markets in that form which is pollution reduced or it can be further refined, formed using custom recipes to make other products a form of coke being a good example. This is an industry that served by very aged and polluting infrastructure, and it is right for a new generation or technology based on continuous versus batch processing, it’s one where by reducing the cycle time for manufacture you achieve a better quality of lower cost and there are a number of different business model by which you can enter this market but we have seen strong interest from our market planning by existing customers for large opportunities to buy on a recurring revenue basis or annual basis, product that are much better suited for today's industrial needs. I am afraid 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 it’s combined knowhow to create products that are made of a solid matter as oppose to a liquid matter as we do in chemicals but create an end result that is highly beneficial. And obviously it will take time for us to further develop and elaborate our specific marketing strategies but I think I have 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 are alluding towards CNF, your comments that it might be a little bit too early to comment on CapEx profitability, potential and things like but may be do you have an idea where this could go and how quickly that would be helpful.

Sure. First of all, in all of our analysis, we know that this process wins itself to excellent return on capital and you are talking about plans of smaller footprint that have lower—minimal threshold level of capital cost to be productive to operate, synthetic minor sources on omission, flexible relative to location, your feedstock location, your customers and that offers a multiple choices as to how you create and finance each of those plans. Our business is quite truthfully range from drive licensing strategies all the way to pure ownership; whereas the optimal return on investment is probably hybrid ownership with the strategic partners. So these opportunities are existing markets needing new technology is a great example of how the coal industry is looking to innovated companies like FUEL-TECH to bring technologies that allow a very viable 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 are in a great position to help achieve that, but the details of how we will roll that out, you will have to be patient with as we develop those and take in the market but we will be sure to announce them.

Great time, both is already very helpful. I appreciate that and then maybe just on the kind of current business outlook, how should we think about your backlog--you are working through backlog, what sort of lumpiness can we expect over the next couple of quarters, I leave it that for now.

In particular, as Dave mentioned, we have one unit to complete in Chile out of the six unit programs at the request of the customer they have reschedule their outage with that final unit will move from 2014 to 2015, so look for some revenue recognition to move out within the time there. We are seeing increasing interest of technology that we call advance SNCR that we developed through our R&D program. We closed some large projects that if we were to win them, I guess you would characterize those as large lumpy wins but they represents – in fact in my mind, to particularly excellent opportunities one in the U.S., one in the Europe, that would add substantially to our backlog. That would be also work that would predominantly play out over 2015-2016. It’s too early to say if we won that, our bids were in. I think that we are 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's back to stay we are seeing plans being reorganized to address to compliance needs and therefore our pipeline of quotation activity is still strong. So I think we are seeing a steady up-ramping back in our APC market here in the U.S. In China, we are seeing as the market is developed and attributable bit in certainly increased competition, we have also seen bids tender that are very-very low, that has resulted in a less win rate that probably therefore has softened our bookings order rate, giving rise to lesser year-on-year growth but I will tell you that we are looking for strategies to strength our competitive position. We know our technologies have good application in certain segments of that large market over there and we are not going to miss the opportunity to capitalize on what we can do from the market size to enhance what we think we have from the technology side. Good technologies do get copied over there and certainly you see the competitive environment much keener, we will look for ways to lower our cost because it has most important and it enhance our market position primarily through corporative strategies that we can sale our solutions as part of bigger solutions.

Great, I will jump back in queue but I appreciate all the detail.

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

[Operator Instructions] your next question comes from the line of Doug Dyer of Parkland Advisors, please proceed.

Hello Doug.

Hello gentlemen. You have 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 reprise a contract based on any pricing changes or any equipment changes?

We are going back through and refreshing proposals, so we are working through that process with customers.

And what you are seeing, are there any major changes in terms of either competitive pricing or just kind of minimal changes?

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 that are needed to be change in the technology that fits well, that's the biggest question. Right now, many of them are status quo but what they have to fine understand of regulation and timeline and they will the determination on what type of technology.

Alright, thank you.

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

We thank you for the questions that you did ask and we are certainly available for one on one questions in calls later. So thank you for your time, I do assure you that FUEL-TECH remains fully committed to enhancing the value of its shareholder investment and 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.