Fuel Tech, Inc. (FTEK) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the Quarter One 2015 Fuel Tech Incorporated Financial Results Conference Call. My name is Karen and I'm your operator for today. [Operator Instructions]. And now I would like to turn the call over to Mr. Devin Sullivan, Senior Vice President of the Equity Group. Please go ahead.

Thank you, Karen. Good morning everyone and thank you for joining us for Fuel Tech's 2015 first quarter financial results conference call. Yesterday after the close, the company issued a copy of first quarter press release and that is available at our website at www.ftek.com. The speakers on today's call will be Vince Arnone, President and Chief Executive Officer and Dave Collins, Senior Vice President and Chief Financial Officer. After prepared remarks, we will open the call for questions. 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 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 was 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 during the call. And as a reminder, the call is being broadcast over the Internet and can be accessed at our website www.ftek.com. With that said, I'd now like to turn the call over to Vince Arnone, President and Chief Executive Officer of Fuel Tech. Vince, please go ahead.

Thank you, Devin. Good morning and thank you everyone for joining us on the call today. when we finalized our budget for 2015 we anticipated that many of the same themes that impacted us in 2014 would continue to impact us as we entered in 2015 especially with regard to our APC business as we have discussed conversion times from bid to signed contract in the U.S. have extended fair beyond historical norms, domestic regulatory uncertainty remains and the increased use of natural gas over the coal in the U.S. persists. I will make some comments regarding the U.S. regulatory market in a moment. With that said however, we do not believe that our results for the first quarter are indicative of our outlook for the balance of 2015. We are committed to generating positive results even during this period of regulatory uncertainty and we expect our performance to strength as the year progresses. We expect full year results for 2015 to show improvement ove4 2014. Our optimism is supported by our continued success with geographical diversity as evidenced by yesterday's announcement of a commercial contract for our advanced NOxOUT Selective Non-Catalytic Reduction Technology also known as Advanced SNCR for multiple larger coal fire units burning both coal and biomass located in the United Kingdom. This project represents the majority of the $8.3 million in new orders that we announced yesterday which also included the orders in China and Italy. We have now announced ATC orders of $15.3 million thus far in 2015 and we believe that this is the beginning of an increased level of new business activity for 2015. Beyond this obvious impact to our 2015 financial results, this new UK contract is significant for several reasons. First, the Advanced SNCR technology represents a return on our investment in new product development initiatives. It is a next generation technology based on our world class highly effective SNCR solution. We believe that combustion units in a variety of market segments that benefit from Advanced SNCR which can reduce NOx by upto 80% and reduce reagent cost and improved reagent utilization by upto 20% on certain [indiscernible] applications. Advanced SNCR can also be an upgrade solution for our existing install base of SNCR customers providing additional NOx reduction to meet more stringent regulatory requirements or lower reagent operating cost. Fuel Tech has the largest install base of SNCR applications on large power generation units and we look to provide our customers with the ability to attain deeper NOx reduction and markets where it's required. The geographies associated with these new awards reflect the fact that geographic diversity remains the high priority for Fuel Tech as we continue to pursue opportunities in the U.S., China, Europe, Latin America and other regions. As I had stated in our fourth quarter 2014 conference call in March, we’re optimistic about our business development activities in Europe where we have recently actively demonstrated our technology to assist utilities and other facilities as they prepare for compliance with the requirements of the European's Industrial Emissions Directive, also known as IED that has effective dates that commence in January of 2016. 28 European Union Member States will need to meet certain emissions requirements under this directive. We have been cultivating business relationships for many years in this part of the world and these contracts in the UK and Italy are a testament to our belief and the future growth of our European market for our products and services. Turning to the APC regulatory environment in the U.S., we have previously provided some color on the status and potential impact of Fuel Tech of the Cross-State Air Pollution Rule, also known as CASPR. The mercury and air toxic standard also known as MATS and the boiler [indiscernible], I would like to provide an update on these regulations as we understand them today. With respect to CASPR the stay on this rule was lifted in late October 2014 which paves the way to begin Phase I of implementation on January 1, 2015 with Phase 2 set to start in 2017. As a reminder CASPR whose predecessor regulations were care and the NOx call [ph] was written to ensure that the important health benefits from NOx controls are realized in states that are down win from population sources. The Phase 1 requirements for NOx and SOx are generally believed by our experts to be reasonably achievable by a meeting sources without requiring significant additional capital. Phase 2 of CASPR however sets more stringent requirements for compliance with implementation dates beginning in 2017 and we will look to assist and meeting sources with their compliance requirements utilizing SNCR, Advanced SNCR, SCR or a layered technology approach. The MATS rule was written to address hazardous air pollutants under the guidance of the Clean Air Act Amendments and specifically addresses emissions of particulate matter, mercury and hydrogen chloride from an electricity generating units. The rule originally had an effective date of April 2015 with an extension allowed under certain circumstances to April 2016. The supreme court is currently reviewing this rule on the basis that EPA did not give adequate consideration to the cost of the required compliance solutions. This rule is of importance to Fuel Tech because generating units will need to add mercury and hydrogen chloride abatement technologies to their operating environments in order to comply with this rule. The addition of these technologies can potentially overload both existing particulate control systems, primarily electrostatic precipitator and maybe require that these systems be retrofitted to reach compliance. Fuel Tech acquired PECO FTCS electrostatic precipitator business in 2014 specifically with an eye towards MATS compliance and we expect to see business generated in 2015 and beyond resulting from required compliance with this rule. Boiler MACT is very similar to MATS in terms of the pollutants covered. However it's applicable to industrial units as opposed to electric generating units and it includes the carbon monoxide limit. Boiler MACT was issued by EPA in 2012 however reconsideration of the rule was announced by EPA in December 2014 and a final outcome is expected later in 2015. A final timing of compliance remains in question as to whether it will remain January 2016 or if the reconsideration will delay the compliance phase as suggested by industry sources. Fuel Tech has been a solutions provider to industrial [indiscernible] for more than 30 years and we believe that we’re well-positioned to provide our particular control technology expertise to industrial unit owners that will need to comply with this rule. Lastly EPA has proposed a new rule for greenhouse gases from existing power plants known as the Clean Power Plant. The proposed rule covers CO2 and methane pollutants and includes a requirement to improve efficiency at existing sources. A final rule is expected by the end of this year with compliance dates of 2020 and 2030. Fuel Tech through its Fuel CHEM technology is well-positioned to address the efficiencies improvement needs of many existing power plants should this regulation be finalized as currently written. With demonstrate and boiler efficiency improvements of greater 1% on many applications. In summary while the domestic regulatory environment is complex we believe that our technologies that will serve both utility and industrial customer as well as they look to comply with the regulations discussed as well as with other required sources of compliance which can include consent decrease, permitting issues with industrial plant expansions and compliance with regional haze requirements. The timing of filing of compliance and the overall volume of business for us still remained as uncertainties today. To finalize our discussion on APC, we continue to focus on our opportunities in China as that country continues to advance the policy to reduce harmful emissions. Fuel Tech's investment in China has provided a solid return inception in 2007 and we expect to capitalize on future opportunities that are driven by increased pressure on compliance with existing regulations further tightening in regulation and the implementation of a legal mechanism for penalizing non-compliance in a meaningful way. Basically China needs to ensure that the capital investment that has been spent thus far and that will spent prospectively on solution control remedies has been allocated wisely and effective. Control technologies need to be operational continuously, and strong penalties need to be put in place for non-compliance. We still expect to capitalize on near-term business opportunities in China with a renewed focus on improved product positioning and on generating partnerships with organizations that appreciate our advanced technology. For the APC business as a whole, we have a strong pipeline of opportunities in countries around the world and we believe that our APC revenues in 2015 will improve over 2014. Moving over to Fuel CHEM, this segment produced a strong quarter with higher revenues in Q1 of 2014 and strong gross margin contribution. Our Fuel CHEM business continues to face headwinds due to the reductions in coal fire generation and coal to gas conversions and our target is to achieve parity in 2014 versus 2015 while maintaining the gross margin level that this business segment has traditionally delivered. We’re excited about pursuing Fuel CHEM opportunities in other markets, both geographical and industrial and we’re planning later this year to demonstrate this technology in China to help mitigate the impact of low rank coal burned in that country through boiler efficiencies. Turning to our fuel conversion initiative, this technology platform expands our ability to deliver innovative solutions to adjacent markets and industries already utilizing our carbonaceous fuels. In particular we’re developing a next generation process that can convert coal to various ranks into higher value engineered carbon products. This in turn would enable Fuel Tech to advance its strategic priority of building a large base of recurring revenues. Since the acquisition of the CARBONITE intellectual property in September of 2014, Fuel Tech has been executing it's early development plan for this initiative. This first began by assembling a core team of people who possess the engineering, operations, management talent needed to evaluate engineer and manufacture and market fuel conversion products. This team is chartered to validate and build a business around this technology. Simultaneously we are advancing the scope of Fuel Tech's intellectual property and know-hows arriving this technology. The technical development path includes several phased research and engineering studies. The research includes both laboratory scale pilot studies, as well as full scale field studies to collect empirical process data related recreation of fuel conversion products. Engineering studies are broken into phases that first validate and [Technical Difficulty] engineering aspects of a carbonite to concept plan which were initiated in the first quarter of this year. This will be followed later in the year by physical plant engineering and design studies. Concurrently Fuel Tech is engaged in an initial market development activities, possibly customers, this involves the development of specifications and early pre-commercial trials of sample product to determine that we can satisfy market beliefs. Although Fuel Tech has necessarily in the early stages have designed, we’re actively seeking interest demonstrations and future off-take commitments from potential clients. In addition to our fuel conversion initiatives we will continue to embrace organic and the in-organic business development opportunities and supportive growth. If these opportunities can meet our performance goals and in technology or market areas where Fuel Tech's expertise or reach is additive. Before turning things over to Dave for commentary on the financials, I do want to mention that we’re pleased to have maintained a strong financial position. A healthy cash balances and no long term debt. We generated cash from operations in the first quarter and we expect to continue to generate cash from operating activities throughout 2015. Although we’re optimistic about our future we’re also practical in our knowledge that we have to continually align our operational infrastructure with current market conditions. In that regard we initiated the cost reduction program in the second quarter of this year that is expected to generate annualized savings of approximately $1.5 million the impact of which will begin to be realized during the third quarter of 2015. This initiative has been undertaken without impeding our ability to serve our current clients or continue executing on our business development activities. Thanks for your attention. And now I will turn things over to Dave for a review of our financials. Here you go Dave.

Thank you, Vince and good morning everyone. Our first quarter revenue was 15.1 million which represent a decrease of 3.6 million from the prior year, the decrease was the result of lower APC technology segment revenues, at the end of the first quarter our working capital totaled 38.9 million a slight decrease of 800,000 from year-end. We also maintained our cash balance of more than 18 million and we remain essentially debt free. Consolidated gross margin dollars for the first quarter was 6.7 million down from 7.9 million in the prior year. Our consolidated gross margin percentage increased 2% to 44% from the prior year percentage of 42%. Our selling general and administrative expenses totaled 8.2 million for the first quarter of 2015 and were down 500,000 from the prior year. This decrease reflects reductions in personnel administrative cost and foreign locations and consulting related cost associated with our strategic planning initiatives. Our research and development cost for the first quarter of 2015 were up 628,000 from the prior year due to planned spending on product initiatives in particular our fuel conversion initiative. As previously stated we remain committed to new product development initiatives and will commit appropriately funds to support our continuing development efforts. The Advanced SNCR project will be announced yesterday reflects our success in this regard. As previously stated we expect our new product development initiatives to be around 2% to 3% of consolidated revenues. We booked a tax benefit in the first quarter of 2015 through the consolidated losses, we currently expect our full year effective tax rate to be 37% but our tax rate may change significantly due to the geographic mix of our income and the impact of permanent items of our overall effective tax rate. Our consolidated loss for the first quarter of 2015 were 1.7 million or $0.07 per diluted share compared with a loss of 1.1 million or $0.05 in the prior year. Adjusted EBITDA loss for the first quarter was 1.3 million, these results are reflective of the lower top line revenues discussed previously. Now for a more in-depth discussion of our business segments. Our APC segment reported first quarter revenue of 6.9 million which was down 3.9 million from the prior year, the majority of this decline was associated with our Chile project, through today's call our 2015 APC segment bookings which include the most recent announcement of 8.3 million totaled 15.3 million. This represents an increase of 6.8 million or 180% from the prior year, additionally our backlog has increased from 18 million at year-end to more than 26 million currently. We fully expect the new orders received to-date will provide increased revenue in the second half of 2015. In addition to these recent announcements we have a number of other opportunities for additional projects which we optimistically feel will increase our 2015 bookings and provide additional revenue and earnings in 2015. Our foreign APC revenues were down collectively here in the first quarter however we expect this trend to improve as the majority of our recent order announcements or for work to be completed in Europe and China. Through the first quarter we have experienced lower bookings in China but remain optimistic that this market offers significant opportunities and will improve in the second half of 2015. Lastly our Latin America business during the first quarter was down 3.2 million from the prior year due to the timing on completion of our Chile contract. We currently have approximately 2.7 million of backlog in Latin America which will be recognized as revenue during the second and third quarter of this year. Our consolidated backlog at March 31, was 16 million and including the recent order announcements of 8.2 million now totals 26.5 million. This backlog figure is broken down as follows, U.S. 10.8 million, Europe and Latin America including Chile 11.2 million and China Pacific Rim 4.5 million. Our consolidated gross margin for these segments was up slightly to 37% from 34.5% in the prior year. Our Fuel CHEM segment reported first quarter 2015 revenues of 8.2 million which represents a slight increase of 300,000 from the prior year, gross margin for our Fuel CHEM segment is up 50% which was down slightly from 52% in the prior year. We continue to anticipate our Fuel CHEM gross margins to be in the 48% to 52% range. Now I would like to provide some brief comments regarding the remainder of 2015. For our APC business we expect to see some new order flow in our domestic APC business for both SNCR and Particulate Control driven by MATS and local regulations. We currently have outstanding bids which will more than double our current backlog figure. Internationally we booked a very nice order in Europe which was detailed in the recent press release and this control will provide good margin and cash flow for our business in 2015. Overall we expect our APC segment revenue to increase in 2015 but with some guarded caution given the timing of new orders and associated revenue increases. We expect the gross margin profile for APC segment to approximate 30% to 35% due to the mix of technology sales. We continue to believe there are significant opportunities for us in the U.S. domestic marketplace to fully leverage our infrastructure. Internationally we expect to see our APC segment business pick-up due to the recent order announcements and our expected rate of bookings through the remainder of 2015. Our Fuel CHEM business faces continued headwind as previously noted by Vince due to fleet wide reductions in coal fire generation and for the full year we expect this business to be flat versus our 2014 revenue level. Our selling, general and administrative expenses on a gross basis are expected to be down 5% from the prior year due to a number of cost saving initiatives and the level of current business activity. Now I would like to turn the call back to the operator for questions.

[Operator Instructions]. Your first question comes from the line of Chip Moore from Canaccord. Please go ahead.

Can you talk a bit about the margin profile for that Advanced SNCR product and then maybe expand on the install base opportunity, you know where you see the biggest opportunity for upgrades, what markets have some regulatory drivers etcetera?

The UK contract obviously the first sizeable contract that we have had in Europe just as a whole company as a whole we’re very pleased with that, the Advanced SNCR technology we are excited about having the opportunity to actually develop markets for utilization of that actually on a global basis. And answering your question on margin it's going to be, I would call it a little bit lower than our traditional SNCR margin for this first project in the UK. We arrange in the lower 30s as a target for margin on that particular project. But generally speaking as we look at Advanced SNCR we think there are going to be opportunities for that technology domestically in the U.S. you know we have a very sizeable install base of SNCR already in this country. Many of the regs I made reference to are going to require some additional NOx reduction. So with that in mind we’re going to look to deploy Advanced SNCR wherever it's going to be applicable for our customers to be able to meet their needs. Globally European marketplace I think is poised for some improvement relative to contributing to our profitability and so Advanced SNCR is going to play with many opportunities not just in the UK but throughout the remainder of Europe as well particularly the Eastern European countries when we talk Poland and Czech Republic and countries along those lines that do have more coal fired generated that’s going to require compliance. China, I will - just to follow-up lastly on China for Advanced SNCR as we have discussed previously the great majority of the China marketplace when to FCR already because of the very stringent requirements for our NOx reduction in that marketplace so advanced SNCR is likely not to have as large of a play there as it could have another market areas.

And sticking back to Europe I guess with EU directives coming out, can you talk about the progress you’ve made and if you have talked about demo and some technology there, as we get closer to that getting implemented how are the inbounds and how are the efforts going?

Yes the demonstration that we made reference to was specifically for Advanced SNCR and the demonstrations have gone well. The actual European directive itself has phased in requirements, 2016 being the beginning. We know that there are several facilities in the UK that are also looking at doing demonstrations as well before they commit to the formal capital project and so we’re watching and following that very closely in the UK and we’re also looking at our opportunities in some of the call the Eastern European countries as well has possible entrance for the technology also. So that’s something that we’re still doing a little bit of development at this point of time as it relates to those Eastern European countries but we believe we’re going to have success there.

And with regards to the outlook, year-over-year for APC at least, talk about visibility, I assume that’s more back half weighted just help to calibrate expectations there.

Definitely, it will be more and more back half weighted, obviously the first quarter was slower than we would have liked it to be but as I had mentioned it's not a complete surprise to us. As we look at this new booking in the UK we’re going to look at obviously starting to recognize revenue on that project here in Q2 we have other projects in backlog that we’re going to be working off in Q3 and Q4 as well and obviously we have a pipeline that we follow very, very closely and there are 2 to 3 sizeable projects that we’re targeting here to look to book here in the near term that will have significant impact on 2015 and you will have exposure to those as we announced contracts in the future. But we’re attracting some high level projects that we expect to contribute in 2015.

And then lastly for me, bigger picture or longer term I guess on the fuel conversion initiative with the CARBONITE acquisition and it sounds like you’ve got a core team in place there to commercialize that. This way R&D versus potential in-organic activities, what you’re thinking in terms of longer term growth? Thanks guys.

Relative to the fuel conversion initiative, right now that is I call it the majority of our development spending and as we look at what's running through our profit and loss right now and that will continue throughout 2015. The development process is going to take time but we see great value in this opportunity and great potential business development and customer development opportunities for use of this technology. As it relates to other opportunities we’re, as we always do, we’re always looking at both inorganic and organic developments that we can bring to marketplace that will improve our financial position. So that will be continuing and ongoing and we will invest in those as they come to us and as we feel as though investment is justified.

Thank you. Your next question comes from the line of Lucas Pipes of Brean Capital. Please go ahead.

[Indiscernible] for Lucas this morning. Few of the topics we’re looking to touch on obviously just kind of went over but wanted to also ask on the Fuel CHEM side your revenues into 2015 do you continue to believe that the business will more or less grow modestly this year or do we have any better directional outlook into the year?

Yes I would basically make the statement that we’re targeting Fuel CHEM to remain at a similar level in 2015 as 2014. [Technical Difficulty] that could impact us as well. Fuel CHEM obviously is a very profitable business for us, so we’re always looking to grow this business in any way or form that we can but our marketplace environment here, it just favorable for the Fuel CHEM technology as we would like it to be. So to be conservative we’re targeting Fuel CHEM to be flat in '15 versus '14 but as I said there is some upside potential there that could help us as we look at some opportunities that are sitting in front of us today to demonstrate the technology.

And then kind of touching back on the PECO-FGC contribution to FGC [ph], could you provide any additional color on that did in Q1 and maybe a little bit on the backlog into 2015?

Yes, sure. So, Q1 contribution I wanted to pick it at around 2 million in Q1. We have backlog of about seven that rolled over from year-end there is two projects that make that up, one we announced late in 2014 for about 5 million and then we had carry over backlog from the acquisition that’s going to run-off. So the 7 million will be spread a little bit was recognized in Q1, the rest of the balance it will be done in Q2 and Q3. We do have some other opportunities that we’re looking at as well for that particular business that we feel optimistic about and so that will be part of the 2015 numbers as well.

Right, as I mentioned in my commentary we see the MATS rule has being a very significant and material driver for our PECO-ESP related business. MATS is going to require many power generating units today that are going to be forced to utilize Sorbent Injection to meet the requirements for mercury and hydrogen chlorides that they are going to be creating particulate issues with your existing ESPs. Many entities have done demonstrations already with call it the Sorbent Injection processes and these entities are finding out that in many cases they are going to have to redesign and/or retrofit their ESP and so we’re looking very closely at opportunities for our ESP, we build business through PECO to go ahead and bring us revenue here in the near future.

Thank you. I would now like to turn the call over to Mr. Arnone. Please go ahead.

I would like to thank everyone for being on the phone call today. I appreciate everyone's participation. We’re expecting a nice upturn in business opportunity for 2015 versus 2014. Our team is committed to delivering good positive results for our shareholders and we look forward to speaking with everyone again here in the next quarter. Thank you very much everyone.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a very good day.