Fuel Tech, Inc. (FTEK) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fuel Tech Incorporated Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference call, Mr. Devin Sullivan, You may begin sir.

Thank you, very much Kevin. Good morning everyone and thank you for joining us for Fuel Tech's 2015 second quarter financial results conference call. Yesterday after the close, we issued a copy of our earnings press release, which is available at the company’s 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 would 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 during the call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed during this call. And as a reminder, the call is being broadcast and can be accessed at www.ftek.com. With that said, I would 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 I want to thank everyone for joining us on the call today. During our first quarter conference call, we noted two primary expectations related to our results for 2015. First, as we entered 2015 we anticipated that many of the same themes that impacted us in 2014 will continue to impact us as we entered into 2015 especially with regard to our APC business. And, second, we expected that we would deliver sequential financial improvement in the second quarter from the first quarter and at the second half of 2015 would show improved financial performance versus the first half. With that said, we did see improvement in Q2 when compared to Q1 as revenues increased by nearly 24% and our operating results were improved. While we are encouraged by the revenue improvement, we are committed to generating positive results even during this period of regulatory uncertainty and we expect our performance to strengthen as the year progresses. We currently expect our full-year results for 2015 to show improvement over 2014. Our optimism is supported by the visibility that we have into our capital projects pipeline for the remainder of 2015, which will further reflect the depth of our product offerings and our ability to capitalize on our geographical diversity. Just last week we announced $4.7 million of new awards for our ESP, SNCR, and ULTRA technology solutions. Matching this diversity of product offering was the very geographies in which they will be installed, including the U.S., the UK, China, Italy and Eastern Europe. These awards came on the heels of $10.5 million in contract awards in the second quarter, the most significant being an award in Europe for Fuel Tech’s Advanced NOxOUT Selective Non-Catalytic Reduction technology for multiple large coal fired units burning both coal and biomass. Fuel Tech received this contract following the demonstration of our new ASNCR technology last year at the same plant location. The ASNCR system utilizes proprietary state-of-the-art injectors and injection controls in combination with advanced temperature measurement techniques to provide NOx, nitrogen oxide reduction efficiency well beyond conventional SNCR in difficult furnace environments. Equipment delivery is expected to occur in Q4 of 2015. Our capital projects backlog in the APC segment was $17.1 million at June 30, 2015. This number excludes our recent order announcement of $4.7 million, which would effectively mean that we have a backlog of approximately $22 million as of our call this morning. Additionally, we are actively pursuing several APC contract awards in a variety of geographies that we believe will add in excess of $20 million in bookings within the next 90 days. It is this activity level that supports our premise that our second half financial performance will be improved over our first. I will now talk a bit about our APC business and each of our geographies beginning with the U.S. Although the U.S. market remains a challenge, we are excited about the ESP orders we recently announced. In our view, these contract support predictions by many industry experts that compliance dates for the Mercury and Air Toxics Standard also known as MATS will remain on schedule despite questions on cost considerations raised by the recent Supreme Court ruling. Fuel Tech acquired PECO FGC’s ESP business in 2014 specifically with an eye towards MATS compliance and we expect this business to contribute strongly to Fuel Tech’s profitability and the near and longer term time horizons. We are very pleased with this acquisition and we are looking at a strong pipeline of opportunities for this product line. The activity in the US Regulatory Environment has been more tumultuous than usual this past of couple of months and I would like to summarize our view of the current regulatory environment. With respect to CSAPR, the stay on this rule was lifted in late October 2014, which paved the way to begin Phase I of implementation on January 1, 2015 with Phase II set to start in 2017. As a reminder, CSAPR whose predecessor regulations were CARE and the NOx SIP Call was written to ensure that the important health benefit from NOx controls are realized in states that are downwind from pollution sources. The Phase I requirements for NOx and SOx are generally believed by experts to be reasonably achievable by emitting sources without requiring significant additional capital, but they are sources that will be affected for Phase II beginning in 2017. The DC Circuit Court remanded CSAPR without [indiscernible] back to EPA last month to address several issues with Phase II budgets being too stringent on several upwind states, based on their potential to impact downwind states. NOx ozone season budgets for 11 states will likely be relaxed, but seven of those states were already expected to be able to comply based on 2013 actual emissions. A number of states still are projected to have Phase II NOx shortages including eight for the ozone season summer months and nine states, which are under the annual program. Fuel Tech will look to assist emitting sources with their compliance requirements utilizing SNCR, Advanced SNCR, SCR or a layer technology approach. The MATS rule was written to address hazardous air pollutants under the guidance of the Clean Air Act amendment and specifically addresses emissions of particular matter, mercury and hydrogen chlorides from electricity generating units. The rule originally had an effective date of April 2015 with an extension allowed under certain circumstances to April 2016. This rule is of importance to Fuel Tech, because generating units will lead 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 overload most existing particulate matter control systems, primarily ESPs and may require these systems be retrofitted to reach compliance and that is where our PECO FTCS acquisition comes into play. Moreover, MATS is very similar to MACT in terms of pollutant covers. However, it is applicable to industrial units as approached to electric generating units and it includes a carbon monoxide limit. Boiler MATS was issued by EPA in 2012, however, the consideration of the rule was announced by EPA in December 2014 and all arguments are scheduled to begin in December 2015. The final timing of compliance remains in question as to whether it will remain January 2016, or if the reconsideration will delay the compliance date as is suggested by industry sources. Fuel Tech has been a solutions provider to industrial unit owners for more than 30 years, and we believe that we are well positioned to provide our particular control technology expertise to industrial unit owners and we need to comply with this rule. Lastly, EPA has finalized its new rule for greenhouse gases from existing power plants know as the clean power plant. A final rule was issued in August and covers CO2, methane pollutants and includes a requirement to improve efficiency at existing sources with compliance states of 2022 and 2013. Fuel Tech through its FUEL CHEM technology is well positioned to address the efficiency improvement needs for many existing power plants with demonstrated boiler efficiency improvements of greater than 1%. EPA concluded that through the application of best practices and equipment upgrades generating unit on average or at least capable of reducing their CO2 emissions by improving heat rate by 2% to 4%, down from the original 6% proposed. States must have their final compliance plans completed by September 2016, which can be extended until September 2018 if required. There are already a number of legal challenges to the plan and many experts believe that the future of the plan will likely be result before the extension dates reached. To summarize, while the domestic regulatory environment is complex, we believe that our technologies will serve both utility and industrial customers well as they look to comply with the regulations discussed as well as with other required sources of compliance including consent degrees, permitting issues with industrial plant expansions and compliance with regional [highest] [Ph] requirements. The timing of compliance and the overall volume of business for us however remains uncertain. In the European market for APC, we are actively addressing opportunities created by the requirements of the European Unions, industrial emissions directive that has effective that commence in January of 2016. 28 European Member States must now 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 that were recently announced our testament to our belief and the future growth of the European market for our products and services. Additionally, we are very pleased we've developed an excellent working relationship with [Neuson Backup] [Ph] an integrated engineering procurement and construction contractor with global presence and we see the other potential for other projects in the near term within the European Union and other parts of the world. In collaborations with Neuson Fuel Tech advance SNCR solution is helping directs the operator of our Britain’s largest power station to reduce emissions at its Yorkshire base plant to meet European standards. Working together, we will install our technical solution on four boilers at this power station reducing NOx levels at the plant by an excessive 30%. In China, we continue to see a strong level of bidding activity for APC solutions, but the market remains the challenging one. Although we continue to win new business, competition is very strong. Fuel Tech’s investment in China has provided a solid return since its inception in 2007 and we expect to capitalize on future opportunities that are driven by increased pressure on compliance with existing regulation, further tightening in regulations and the implementation of a legal mechanism for panelizing non-compliance in a meaningful way. Our near-term focus is on developing product enhancements that improve our competitive position and on generating partnerships with organizations that appreciate our advance technology. In our Fuel CHEM business segment, gross margins remain strong despite a moderate year-on-year decline in revenue. This business continues to face headwinds due to the reductions in coal-fired generation and coal to gas conversions. Currently we are trending toward full-year 2015 revenues for FUEL CHEM that will falls slightly short of the 2014 results. However, while maintaining the same 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 remain on plan to demonstrate this technology in China in the third quarter of this year to help mitigate the impact of low ranked coal burned in that country and to improve boiler efficiencies. We remain committed to research and development as a means to evolve our business. We invested in $1.9 million in R&D to the first six months of 2015 with more than half of that devoted to our fuel conversion development initiative. We continue to execute our technical development plan for this growing business initiative on schedule and have now completed our phase I engineering work to establish a process design. This has been aided by both laboratory scale and field scale R&D studies that have enabled us together significant data to verify and validate that process design. This intern has committed us to create additional intellectual property as we expand our knowhow position. As of the beginning of the third quarter, we have now commenced the phase II engineering work to define our detailed physical design of our process. On the business development front, our use of this engineered approach to convert low cost feedstock and to customize high value carbon products is gaining positives and growing market signals. We have made numerous products in test quantities to permit their valuation by prospective customers who are engaged with us and the further development of those product offerings assessed by their means of larger commercial levels. Simultaneously, we are evaluating alternative strategic actions to enable Fuel Tech to pursue what we anticipate will be multiple recurring revenue opportunities and large changing markets in which we can apply our process technology and product advantages. Having now begun the stage of plant design, we are continuing our product demonstration programs and are actively seeking off-take agreements from potential clients. We are excited about these new opportunities and we’ll advice you of our progress as we advanced these efforts to launch our new fuel conversion business initiative. In addition to our fuel conversion initiative, we will continue to embrace both organic and inorganic business development opportunities in support of growth. If these opportunities can meet our performance goals and our technology or market areas where Fuel Tech’s expertise or reach is additive. Before turning things over to Dave, I do want to mention that we are pleased to have maintained the strong financial position with healthy cash balances and no long-term debt. Although our operating cash flow was negative through the first six months of 2015, we do expect to continue to generate cash from operating activities throughout the remainder of 2015. Our previously announced $1.5 million cost reduction program is now completed and we will realize the full impact of this initiative during the third quarter of 2015. These savings will coincide with what we continue to believe will be a stronger second half of 2015. I want to thank you for your attention and now I’ll turn the discussion over to Dave for look at our financial results. Go ahead, Dave.

Thank you, Vince, and good morning everyone. Consolidated revenues for our second quarter totaled $18.7 million compared to $20.2 million in the prior year. For the first six months of 2015, our consolidated revenues totaled $33.8 million compared to $38.9 million in the prior year. Our gross margin percentage for the current quarter decreased 4% to 38% from 42% in the prior year. For the first six months of 2015, our gross margin percentage has decreased 1% to 41% from 42%. The changes in our gross margin are reflective of both APC and FUEL CHEM shifts. Selling, general and administrative expense for the current quarter totaled $8.4 million down $559,000 or 6% from the prior year amount of $9 million. For the first six months, our SG&A expense totaled $16.6 million down $1.1 million or 6% from the prior year amount of $17.7 million. Our research and development cost for the current quarter and six months totaled $982,000 and $1.9 million respectively reflecting our increases over the prior year amounts of $757,000 and $1.4 million respectively. Given the status of current R&D projects and the outlook for the remainder of 2015, we believe our current quarter expense level for R&D spending will continue for the third and fourth quarters of 2015. Longer term we expect to continue supporting our R&D efforts as we believe this is a critical component for our future growth. Our net loss for the current quarter and year-to-date periods totaled $1.4 million or $0.06 per diluted share and $3 million or $0.13 per diluted share respectively. Our adjusted EBITDA for the first six months of 2015 was a negative $1.8 million. Now let’s move onto a more in-depth discussion of our business segments. The APC segment reported current quarter revenues of $11.1 million down slightly from the prior year total of $11.3 million. For the first six months of 2015, our APC revenues totaled $17.9 million down $4.1 million from the prior year total of $22 million. Our backlog at June 30, 2015 was $17.1 million, up $1.1 million from the end of Q1 and down from $18 million at December 31, 2014. A little bit about our geographies, our China Pacific Rim business was slower in the first half of 2015 due to slower than expected booking activity, we are expecting to see improved bookings in the second half of this year and we remain active in bidding new works. We are however seeing increased competition in our China markets. For the first six months of 2015, our China Pacific Rim bookings totaled $3.3 million, up slightly from $3.2 million in the previous year. Our China Pacific Rim backlog at June 30, 2015 totaled $2.5 million. We finished installation on the last of our six Chilean combustion units in August; the $36.6 million contract was delivered on time and on budget and represents a significant validation of our large project capabilities and combustion expertise. While this project is wrapping up, we are continuing to pursue additional combustion projects in Chile, which are expected to contribute to our 2015 results. These new projects will allow us to continue serving customers in this geographic region into 2016. Our current backlog for the Americas at June 30, 2015 totaled $1.9 million. During the first six months of 2015 we have booked a total of $8.1 million in new project work in our European geography, these bookings are associated with the new European Union’s industrial emissions directive and we are continuing to actively pursue other project opportunities in this geographic region. Our current backlog for Europe at June 30, 2015 totaled $5.7 million. Bookings for our suite of technologies in the U.S. market including the recent order announcements in August have totaled $5.5 million and we expect to see incremental orders that will significantly increase this amount during the next quarter. We remain active in bidding new work in the U.S. and we remain optimistic that we will deliver sizable new awards during the next quarter. Our U.S. backlog at June 30, 2015 totaled $7 million. As highlighted by Vince and discussed above, we are expecting to see an increase in revenue in our APC segment in the second half of 2015 due to our recent order announcements and our expectation that we will close additional orders during the next quarter, which will contribute to our results in 2015. In all we expect to see more than $20 million in new awards before year end, which will contribute to both 2015 and 2016 results. Our APC segment gross margins declined in the current quarter by 2.1% to 29.9% from 32% in the prior year. For the six-month period, our APC segment gross margins have declined slightly to 32.6% from 33.2% in the prior year. We expect to see continued year-over-year declines to the reminder of 2015 as the current project mix is trending toward larger scale particulate control and catalyst technology sales, which typically have both equipment and installation component work which carry a lower overall margin profile. For the full-year 2015, we expect to see our APC segment margin approximately 25% to 28% due to the mix of expected project work. Our FUEL CHEM segment current quarter revenues totaled $7.6 million, which is down $1.3 million from the prior year total of $8.9 million. For the first six months of 2015, our FUEL CHEM segment revenue totaled $15.8 million, down $971,000 from the prior year total of $16.8 million. Our current quarter gross margin for our FUEL CHEM segment of 50.3% was down 4.8% from the prior year amount of 55.1%. Our six month gross margin for our FUEL CHEM segment of 50.2% was also down 3.6% from the prior year of 53.8%. These declines were based on a shift in revenue among our customer base and new customer demonstration period pricing. We expect to see our gross margin for the remainder of 2015 range between 48% to 52%, which is consistent with previous guidance. Our effective tax rate for the quarter in six months varied from 40.5% to 37.4% due to the suite items and mix of geographic income. For the full-year 2015 we expect our effective tax rate to approximate 38.5% but this could change on the mix of income and tax reporting within specific geographies, as well as the level of pre-tax net income compared to permanent add back items. Cash in equivalence inside June 30, 2015 were $15 million and we have fully repaid our short-term debt balance in our China, Pacific Rim operations of $1.6 million as of December 31, 2014. So we are now debt free. Our working capital balance had decreased slightly in the first six months, $38.9 million from $39.7 million at year end. Cash used in operating activities for the first six months was $1.3 million due principally to our six month loss in status of our APC segment contracts and our spending on property equipment totaling $383,000. We do expect to be cash flow positive in the second half of 2015, and we will continue monitoring our balance sheet position and operating profile to ensure we maintain a strong financial position as we work through our market optimization. Now, I would like to turn the call back over to Vince.

Thank you, Dave. I would like to turn the call back to the operator. We can open up the call for questions at this point in time.

[Operator Instructions] Our first question comes from [Steve Coe with Magro] [Ph].

Hi, good morning guys, thanks for the detail. Just wanted to see if I could clarify couple of things on your prepared remarks, if you had a sec. First of all, I think I’ve got this right my apologies, I got cut off the call and I had to come back a couple of times, but $20 million in awards that you expect to book by year end what is geography of APC FUEL CHEM, what does the mix look like, so is this just kind of a statistical funnel approach that you are looking at and or do you have some better granularity on what that mix might look like, and did I hear that right that it is $20 million in awards across the company by the end of the year?

Yes, we have specific visibility to exactly where those orders are coming from and actually it’s a mix between the U.S. and then some of our international geographies at this point in time. But we specifically know where those specific orders are going to coming from.

Okay, and the FUEL CHEM gross margin this 48 to 52 range that you are talking about, how much of that decline is attributed to an increase in new customer demo, so are they higher this year versus last year at this time or what’s happening there?

Yes, there are significantly higher, we had a significant new customer and we’re in the first year of engagement with them so that has dropped our margin this year’s due to that specific account, so. We have also had a bit of a change in our customer mix and there is some varying margin profiles to our existing customers, but the majority of that is related to a demonstration project.

Okay, and I take that the demonstration projects are quite a bit lower than the 52%, is that right for the most part?

That’s correct.

Okay, and last question on the FUEL CHEM side, I know you guys are pursuing other opportunities; I know you talked about China as one area where you would like to get FUEL CHEM and getting a plan up and running. If you look realistically on kind of how that sales cycle would work when would you expect - is this kind of a 2016 phenomenon when we could lock in a couple of new customers there and other parts of world and when would we see some benefits from that do you think?

Yes, I think that’s probably right, Steve, I think that is going to take us a couple of months to work through a demonstration process and then we’ll need to very specifically document the - the positive results from the demonstration and then we will look to market those positive results. So we’ll look towards 2016 as being the year, whereby we look to see some favorable contributions.

Okay, and cash flow from operations is negative 1.3 for the first six month and I know you mentioned a positive for the second half. Should we imply that we've got a shot at being positive for the year or are you are not prepared to say that yet?

Yes, we are expecting to be positive for the full-year, but that’s a prospective commentary, so depends on new award placement and timing of revenues and there is things are go into that, but as we sit here today, we are expecting to be positive for the full-year.

Okay, and last I guess the other point that’s encouraging, I know you give a great detail kind of on the regulatory framework. If I’m reading you correctly, it sounds like you expect a fair amount of activity out of the European Union may be even more so than the U.S. over the balance for the year. Is that right or am I not picking up on that correct.

No, we are excited about the European market opportunity and we do see some awards on the near-term frontier that we are looking at as part of our sales pipeline coming out of Europe, but we are also - we are positive about we see coming out of the U.S. here within this next handful of months as well. So I think you’re going to see a balance relative to those awards without favoring one geography over the other.

Okay. And last question is breakeven level kind of from a cash - kind of from an EBITDA and kind of book basis, where do those stand now Dave, on where - I know you took some cost out, you envisioned needing to do more in the back half or how you guys kind of balancing kind of getting back up to profitability versus the expense structure?

Sure. Our current levels, low 80s right now. We’re just getting into our planning process for 2016 and we’re taking a deep dive through all of our markets and trying to take a look at what we think will come through next year. So until we go through that process, I’m not prepared to have a discussion about what type of adjustments we might make, but we’re encouraged, we’re seeing some positive signs in a number of our different geographies. So we’ll go through that process and then make those decisions.

All right. Thank you very much guys. I appreciate them.

You’re welcome.

Our pleasure. Thank you.

Your next question comes from John Quealy with Canaccord.

Hey good morning folks.

Hi John, how are you?

Hey Vince, how is it going?

Good, well. Thank you.

I'm doing all right. So thanks for the details always. So just a broader question, to your point about the regulatory issues continue to sort of swell around this sector, fossil has been beaten up a little bit from your spark spread and environmental perspective. Talk about some of the plans obviously you get near-term plans to grow the backlog and things like this, but are there any plans afoot to perhaps venture beyond the current fossil footprint or how do you think about that? I mean you are utility experts and station experts, it’s just that a lot of those folks are doing different things other than the fossil now. So how do you think about that statement in the very long-term? Thanks.

No, we will do John, thank you. I mean that is your comment to something that we’re living and breathing everyday within the lives of the Fuel Tech team and obviously we take them to heart. We realize and we know and understand that our markets are facing some headwinds today obviously the coal-fired markets in particular. The regulatory world is generally not in our favor at least the direction that’s going in, but that’s two points, number one, that doesn’t mean that we still can’t be successful with the products that we’re putting in the market today and we will continue to be successful with those products, but what it does mean is that we need to look to expand how and where and with what products we’re going to be doing business with in the future. Okay. Our fuel conversion business development initiative is currently our primary avenue towards generating new business for Fuel Tech as we lifted to further invest in developing that business and I should say that product as well. We are encouraged about some of the end markets that we are investigating for that development. In addition to that, as a team we are going to be looking at how we can take the knowhow that this company has internally and that we’ve generated and developed over the past 30 years and apply that to end markets that aren’t necessarily coal oriented. As a company that’s something we need to do and that’s something that is going to be a very heavy focus for us. So to your point, it’s something that - the end markets are something that we feel very, very strongly about. We’re still committed to coal, however, we are going to open our eyes very significantly towards other opportunities.

Thanks guys.

Thank you. End of Q&A

[Operator Instructions] And I’m not showing any further questions at this time, I would like to turn the call back over to Vince Arnone for remarks.

Thank you very much. I would like to thank everyone for their time today and their participation on the call. And thanks for your continued interest in Fuel Tech. Our current and very intense focus is on a rapid return to profitability and we’re going to take all necessary actions to be successful in meeting this target. We do remain optimistic as the company we remain cautiously optimistic about the balance of 2015 and beyond and we are going to continue to pursue opportunities that drive our growth and enhance the long-term value of your investments. Thanks very much everyone.

Ladies and gentlemen that conclude today’s presentation. You may now disconnect and have a wonderful day.