Fuel Tech, Inc. (FTEK) Q1 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Fuel Tech Reports 2016 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to Mr. Devin Sullivan of The Equity Group. Devin Sullivan, you may begin.

Thank you, Manny. Good morning, everyone, and thank you for joining us for Fuel Tech’s 2016 first quarter financial results conference call. Yesterday after the close, we issued a copy of the release, which is available on our website 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 from our analysts and investors. 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 is accurate only as of the date discussed, and investors should not assume that statements made 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 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. It’s been about six weeks since our last conference call, so my remarks today will focus primarily on the most significant activities in our business segment since that date. Our financial results for the first quarter of 2016 came in as expected. First quarter APC revenues nearly doubled from last year’s first quarter and were modestly improved over revenues in the fourth quarter of 2015. We’re currently executing on project work related to the backlog of $22 million that we reported at the end of 2015. APC gross margin of 28% was lower when compared to the gross margin levels in both the first quarter of 2015 and the fourth quarter of 2015, due primarily to the current project mix. Our industry is continuing to evolve as it looks to address lingering domestic regulatory uncertainty and a changing global energy profile. As I noted on our prior calls, 2015 was a year in which we specifically addressed this fundamental structural shift in the power generation industry by modifying our approach towards business development activities, our cost structure, and our overall corporate strategy. It is also important to note that our delivery, geographic and product line expansion efforts for the APC segment over the last several years have allowed us to weather a still challenging environment for our solutions by ensuring that we would not be dependent on any one market or in any one product at any given time. Year-to-date here in 2016, we have announced $14 million in new APC project awards, including the orders that we announced in China just this morning. The $14 million in new awards are from customers in the U.S., China, and Europe for our ESP, SNCR, ASNCR, SCR, Combustion and ULTRA technology solutions. Of the $14 million in new project awards, approximately half were from customers outside of the U.S. At March 31, 2016, the capital projects backlog in the APC segment was approximately $17.5 million. When including approximately $4.8 million of new orders announced thus far in Q2, our pro forma backlog as of today is $22.3 million. In terms of our sales pipeline, we are pursuing a number of promising new projects in all geographies and are encouraged about our prospects for additional project bookings as nimble through out the year. Also, we do not provide specific guidance based on our existing project backlog and our current sales pipeline, we continue to believe that worldwide APC revenue will be greater in 2016 versus 2015 for contributions coming from all of our targeted geographies. Now first in the U.S. We continued to position ourselves to take advantage of the evolving regulatory landscape, which remains quite fluid, over both in near and longer-term. Our focus is on MATS – boiler MATS and maintenance drivers for ESP upgrade, ULTRA and SCRs or industrial applications and SNCR for units requiring compliance with CSAPR. For utility MATS and industrial boiler MATS rules, we continue to see bidding opportunities to address particularly – particular matter control. Our near-term efforts include establishing business relationships of multinational industrial entities that will require compliance with regulatory standards and partnering with companies that require our technology portfolio to complete a more broad bid package. Now in Europe, after a record sales here in 2015, we are optimistic about the business environment in 2016, driven by increasing customer interest for our internally developed advanced SNCR technology, as power generation facilities seek to comply with the European Union’s industrial emissions directive, which requires implementation dates beginning this year. Moreover in the UK, we are continuing to pursue coal-fired units that are converting to biomass in order to benefit from government subsidies. Through the use of strategic partners, we have both local presence and project execution capability. We are also continuing to strengthen business ties with local entities in Spain, Turkey, Poland, and the Czech Republic to take advantage of project opportunities in these geographies. We continued to believe that China will experience a modest sales revival in 2016, driven in large part by the introduction of more stringent and NOx reduction standards for select to high population areas in that country. Today, there’s a large installed base of current SCR systems that will not be able to meet this new target as presently configured. Upgrading the existing SCR systems will require a parallel upgrade for the ammonia production and delivery technology tied to those SCRs. For Fuel Tech, this presents an opportunity to convert our large installed base of ULTRA systems to higher capacity systems. Additionally, we are finding that SNCR will be an accepted technology to assist and meeting the more stringent emissions requirements working in tandem with SCR. SNCR will reduce the inlet NOx emission level through the SCR, which will then enable the SCR to meet the tighter emission standards. Our announcement of awards in China this morning and in the month of April included SNCR systems designed to achieve their very specific goal. As I noted in our fourth quarter conference call, we have recently invested valuable time to better understand the opportunity in India for our suite of technologies. Late in 2015, the Indian central government issued regulations governing emissions requirements for thermal power plants. With these targets now established, India is now developing its understanding of the various technologies that can be used for emissions reductions. To capitalize on this market opportunity, we are currently discussing our technology licensing arrangement with a large engineering and construction company in India that we believe has the presence to be successful in the Indian environmental market. We will report on our progress in this market on a recurring basis, as we see further development. In contrast to APC, revenue at FUEL CHEM declined in the quarter, continuing the trend that began in 2015. FUEL CHEM continues to face headwinds due to reductions in coal-fired generation, driven by the abundance of low-priced natural gas and resulting coal to gas conversion. On the first quarter of this year, we also had a relatively mild winter, which services further surplus energy demand in key markets. In combination these factors have created the environment whether is less demand for our product and traditional end market. We are pleased, however, that margins remain consistent with historical performance. Now with our traditional market challenge, we are focusing our efforts on meeting evolving customer end market needs that can be address by our FUEL CHEM program. In the U.S., we are currently in discussions with the operator of two large coal-fired utility units that are considering switching the units’ fuel source from higher grade of coal to a less expensive lower grade. Additionally, as coal units are required to reduce their load profiles, many of them are having difficulty running at these load levels due to minimum operating temperature requirements. More specifically, there is equipment on boiler that will impede unit from running a lower outlet levels without a specific change in operation. In the FUEL CHEM can provide benefit in this instance. In Europe, we are excited about the opportunities to offer our FUEL CHEM program to the operators of biomass fired units, which are known to have severe and costly slagging and fouling issues and we are targeting to demonstrate our capabilities in 2016. Lastly, we are expanding our industrial reach into the pulp and paper industry on a worldwide basis, were FUEL CHEM can address the issue of slagging and fouling, black liquor recovery boilers. In the U.S. and Europe, we are working with large multinational companies to solidify technology demonstration and we’ll expect to do so in 2016. In Asia, we’ve identified the partner that currently services greater than 350 pulp and paper units on their continent. And we will work with this entity to solidify technology demonstrations. It is our goal to have successful technology demonstrations in the U.S. and in Asia in 2016 as a springboard towards accelerating business activity thereafter. With respect to Fuel Conversion, as we reported previously, we created a business segment for this new initiative and the fourth quarter of 2015 for financial reporting purposes and order to be able to provide greater transparency regarding our actions and results. We continue to advance this initiative, which converts low-cost carbon-based feedstocks into high-value engineered carbon products. During the fourth quarter of 2015, we completed the primary engineering efforts as planned and began to focus on specific commercial development activities. While engineering refinement will continue to all aspects of project development and planned operations, we have turned much of our attention to evaluate build-out strategies and potential site selection opportunities. We have now identify potential sites for the initial build-out and are beginning to require due diligence to determine their suitability. We remain in contact with several end-users, where interest in high to engineer products and test them on a larger scale. The testing is often done in a collaborative effort to improve product performance. We continue to gain insights into the target market and refine the engineering aspects of both the process and plant design. As we progress through 2016, our attention is on commercial development and expansion and we look forward to reporting our progress throughout the year. In closing, over the past 12 months in the company, our primary goals have been following. First, to better match our operational and administrative infrastructure to align with our current revenue generation potential and our APC and FUEL CHEM businesses. And second, to better position the company for future growth with significant effort dedicated towards the commercial development of fuel conversion and reenergize focus on new product development activities. Thus far, I’m very proud of the Fuel Tech team and the accomplishments that we have made. For the full year 2015, we reduced our SG&A by $4.3 million from 2017. In Q1 of 2016, SG&A declined by over $700,000 from Q1 of 2015. We’ve remain on plan to realize annualized savings in 2016 between $3 million and $3.5 million from 2015, based on the cost reduction initiatives that we have implemented in the second quarter of 2015 and the first quarter of 2016. Regarding new product initiatives, in addition to developing our fuel conversion business, we are using all reasonable means to in license technologies that we can sell through our established market channel or out license our existing technologies, few other markets for geographies. We are committed to the further growth and development of our company and we’ve realized that we need to expand our reach into market that are adjacent to our current customer base or to new markets all together. Finally, with respect to our balance sheet, total cash and cash equivalents at March 31, 2016 were $16.4 million or $0.71 per share and we had no debt. We continue to maintain a very strong balance sheet. And with that, I will turn the call over to Dave for his comments. Thanks Dave.

Thank you Vince and good morning everyone. Thank you for participation in today’s call. Consolidated revenues for the first quarter totaled $17.8 million an increase of $2.7 million or 18% from the prior year. Higher consolidated revenues were driven by 89% increase in APC technology segment revenue, which more than offset a 41% decline in our FUEL CHEM segment revenue. Consolidated gross margin percentage for the first quarter was 34%, down 10% from the prior year of 44%. This decline resulted from a decrease in our APC segment gross margin and lower FUEL CHEM segment revenue, which generally carries a higher gross margin percentage. We’ll talk more about our segment results in just a minute. As Vince noted, our first quarter SG&A expenses decreased to $7.5 million from $8.2 million in the prior year. This decrease resulted from cost reduction activities in all geographies with particular focus in U.S. domestic cost reductions. Although SG&A will be significantly lower in 2016 when compared to last year, we will continue to review our cost structure and make any additional adjustment as needed. Our research and development spending in the first quarter totaled $1.2 million, an increase of $286,000 over the prior year. This incremental spending is related to the Fuel Conversion business development efforts, which include product development and testing, equipment design and configuration, and market and customer development initiatives. New product development remains essential component of our future growth and we expect our R&D spending in 2016 to approximate 5% to 7% in consolidated revenues. We reported an income tax benefit in the first quarter of 205,000, as compared to a tax benefit of 871,000 in the prior year. During the fourth quarter of 2015, we established a full valuation allowance against our deferred tax assets, which will reduce our tax rate for 2016 through a nominal amount. The tax benefit reported in our first quarter of 2016 reflects activity in our China/Pacific Rim region. Consolidated net loss for the first quarter was $2.6 million, or $0.11 per diluted share, and our adjusted EBITDA loss for the first quarter is $1.5 million. Now, let’s move on to a more in-depth discussion of our APC and FUEL CHEM business segments. Our APC segment reported first quarter revenues of $13 million, up $6.1 million, or 90% from the prior year. As reflected in our lower backlog at March 31, 2016, we continue to experience a sluggish U.S. domestic market for APC technology, while we’re seeing some renewed prospects in foreign countries, including our Europe, Western Asia, and China/Pacific Rim businesses. We will remain active in exploring opportunities in all geographies, as we continue to focus on our core strengths across our suite of APC technologies. Gross margin for the APC segment in the first quarter was 28%, down 9% from the prior year. This reduction is due to the mix of project work and specific customer contracts with lower margins due to a full scope of work, including installation. While our gross margins will be impacted by the scope of new projects booked, we expect to see an increase in our APC segment gross margins in the second-half of 2016. Our FUEL CHEM segment reported first quarter revenues of $4.8 million, which is down $3.4 million from the prior year. This decrease is associated with a specific customer that has reduced its consumption of our FUEL CHEM products due to changing business conditions. We expect to see this trend continue in the remaining quarters in 2016 at roughly similar levels as experienced in our first quarter. As Vince noted, we’re pursuing a number of new opportunities, although the timing and amount of those opportunities are uncertain. Gross margin for our FUEL CHEM segment in Q1 was 49% consistent with gross margin of 50% in the first quarter of 2015. We expect FUEL CHEM’s gross margins for the full-year to remain consistent with 2015. While cash and equivalents at March 31, totaled $16.4 million, we’re debt free. Our restricted cash balance reflect support for our outstanding letters of credit, it was established in conjunction with our amended debt agreement. The balance of restricted cash is tied to our line of credit commitment balance and would change to reflect amendments to increase or decrease our borrowing capacity under our line of credit. We feel our current facility is efficient to provide the necessary working capital funds to fully support our operations in 2016. Our working capital balance at March 31, was $31 million, which reflect a slight decrease of approximately $4 million due to the establishment of our restricted cash account. Cash used in operating activities was $5.6 million, while our spending on property and equipment and purchases of other intangible assets was minimal totaled 91,000 for the first quarter. With that said, I’d like to turn the call back over to Vince.

Thanks very much, Dave. Operator, let’s go ahead and open the line for questions. Thank you.

Thank you. Ladies and gentlemen, we’ll now be conducting a question-and-answer session [Operator Instructions] Our first question is from Chip Moore of Canaccord. Please go ahead.

Good morning. Thanks, guys.

Good morning, chip.

Good morning, chip.

Can you talk a little bit the cadence of that current backlog – project backlog, I expect that to roll off, and then margin mix on that business?

So, we’ll do. Right now I – we had stated that our pro forma backlog is approximately $22 million at this point in time. And at this point in time, we would say a great majority of that that $22 million is going to come into 2016 as revenue. Margins profile, Dave, would you like to comment on margin profile and mix?

Our blended margin is running about 25% for the APC between 25% and 30% for the APC segment.

Okay, that’s helpful. And then maybe talk a little bit more about your near-term what you’ve seen out there? Thanks, guys.

Okay, Chip, thank you. As I noted in my commentary, we’re seeing the mix of opportunities in all of our geographies at this point in time. Our pipeline – I’ll start with China. Our pipeline in China is active and robust as I’ve seen it in a long time. And there’s a great activity with regard to many of the power generation entities looking to comply with the new requirements for NOx reduction. And as I noted, the interest in our SNCR technology to help with that compliance requirement is very, very strong as we sit here today. And as I noted, we’re expecting to see a little bit of an uptick in revenue from timing here in 2016. In the United States, our pipeline looks strong as well. A lot of project activity, but predominantly focused more on the industrial side than on the utility side today. There’s not to say that there are some utility opportunities in the pipeline because of our but just national levels that we would have seen in prior years. So activity in the U.S. remain strong, but with a heavier focus on the industrial marketplace. And as I noted in Europe after the record year that we had in 2015 here in 2016, we’re seeing good interest in our advanced SNCR technology in Europe as well. And the pipeline is very active there also. So – but as we deal with our APC business relative to the revenue recognition, timing is always a great consideration to us, so we watch that very, very closely.

Okay, thanks. I appreciate it.

Thank you. [Operator Instructions] And the next question is from – we’ll see for a moment, if we have any questions, again one more call. At this time I would like to turn the conference back over to Mr. Arnone for any closing remarks.

Okay. Well, I would like to thank everyone for joining on the call today and we appreciate your interest in Fuel Tech. I would like to note that Dave and I will actually be presenting at the Drexel Conference in New York City tomorrow morning at 10:00 AM Eastern time, and hopefully, we’ll have a chance to meet some of you there. Have a good day, everybody, and we’ll be talking with you again soon. Thank you.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.