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Fuel Tech, Inc. (FTEK)

Q2 2016 Earnings Call· Wed, Aug 10, 2016

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Transcript

Operator

Operator

Greetings, and welcome to the Fuel Tech Inc. Reports 2016 Second Quarter Financial Results 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 would now like to turn the conference over to your host Mr. Devin Sullivan. Thank you. Your may begin.

Devin Sullivan

Analyst

Thank you. Good morning, everyone, and thank you for joining us for Fuel Tech’s 2016 second 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 on 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 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 the company's website. 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.

Vincent Arnone

Analyst

Thank you, Devin. Good morning and thank you everyone for joining us on the call today. First, I would like to spend some time discussing the significant activities and developments since our last call in May. With respect to our financial results in the second quarter, revenue for the company as a whole was $15.2 million, versus $18.7 million in the second quarter of 2015. However, our operating results was effectively the same. We're beginning to realize the impact of the cost reduction activities that we first initiated in the second quarter of 2015 and that we have continued since that date. Our SG&A expenses are down $1.6 million and $2.4 million respectively for the second quarter and first half of the year from the comparable periods in 2015. I'll discuss our cost reduction initiatives in more detail in a few minutes. In this past several months, I've stated that our company is focusing on three fundamental initiatives during this near term period in order to reposition ourselves for the future. First in order to ensure that we continue to advance for generating positive cash flow, we're aligning our organizational infrastructure and related cost with the current revenue generation capability of our base business segments, which are Air Pollution Control and FUEL CHEM. Second, we're enhancing the revenue generation capability of our base business segments via partnership opportunities where we bring Fuel Tech's existing suite of products and technologies to market through a partner sales channels or we bring a partner's product and technologies to market through Fuel Tech's existing sales channels. And lastly, we're looking to making measured investments in new products and technologies that will represent the future of Fuel Tech. Our Fuel Conversion business segment is one of these investments and we'll look to be making others…

David Collins

Analyst

Thanks Vince. Good morning, everyone, we remain focused on cash management and are watching our balance sheet movements and working capital closely as we continue to execute on business strategies that Vince mentioned. At the end of June, our balance sheet remains strong with cash of $19.4 million, working capital of $33.1 million and we remain debt free. Consolidated revenues for the first six months of 2016 was consistent with the prior year $33 million versus $33.8 million in 2015, reflecting increases in our Air Pollution Control segment offset by decreases in our FUEL CHEM segment. Our second quarter revenue of $15.2 million was down from $18.7 million in the prior year, reflecting decreases in revenue in both segments. I'll touch on these in more detail during our segment discussion. For the current quarter and six month periods, our foreign revenues decreased while our U.S. revenues increased versus the same period for the prior year. Our gross margin percentage of 37% for the current quarter was down slightly from the prior year. For the first six months of 2016, our gross margin percentage declined to 35% from 41%. The changes in our gross margin are reflective of the mix of APC and FUEL CHEM segment revenues with our higher margin FUEL CHEM revenues declining and our lower margin APC revenues increasing as a percentage of total revenues. Our selling, general and administrative expense for the current quarter totaled $6.8 million, down $1.6 million or 20% from the prior year mark of $8.4 million. For the first six months, our SG&A expense totaled $14.2 million, down $2.4 million or 14% from the prior year mark of $16.6 million. As Vince discussed, we're continuing to evaluate our cost structure and have taken a number of measures to reduce our spending and we'll…

Vincent Arnone

Analyst

Thank you, Dave. I would like to in fact now open the conference call for questions, please operator, let's open the lines.

Operator

Operator

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of John Quealy with Canaccord. Please state your question.

John Quealy

Analyst

Hey, good morning guys. Can you hear me okay?

Vincent Arnone

Analyst

Yes we can, John. Good morning to you as well. How are you?

John Quealy

Analyst

I am doing well. Thanks Vince. So a couple of questions. First, on the new initiatives on the REC selling and things like that, are these the only two third party or strategic relationships you've got going on right now or can you talk about how you narrated down for these? Obviously there seems like there is good overlap on this particular venture with your existing customer base on the coal-fired side and having that expertise in geography on the station level and then also talk about how you evaluated the other reselling agreements on chemical to third parties?

Vincent Arnone

Analyst

Understood, thanks for the question John, are these the only two call it partnering type arrangements that we have in place? The answer of that is, no. We have others that we simply don’t disclose publicly. These two are little more unique in nature, because we are obviously bringing our partner's product to our new marketplace, two markets that we know very well and that we are looking to serve with our existing channels. To your point both of these products are an excellent fit with what we do as a company today and with our capabilities to bring product to market. So we are very, very pleased to be working with Redox and PowerPlus. And strategically John, these are initiatives that we're putting more and more emphasis on as it relates to using what we've created as a brand name for 20 to 30 years as a company and utilizing that brand name and the channels that we have and relations that we've build to bring other folk's products to marketplace. So we’re excited about these two. I expect that we will look to have more in the future as well. Again these are in-licensing examples of us, working with partners externally. Obviously ISGEC and India is one, very specifically targeted that we have been working on for a couple of years. And then we are working with at least two to three to four other companies domestically and internationally, as companies that can bring our suite of technologies into specific market spaces whether they be industry-specific or they be geography specific. So this is the way the future for Fuel Tech as we do look to reposition and as we look to redefine ourselves for the future.

John Quealy

Analyst

And in terms of the exact licensing agreements or commission agreement, is this certain minimum where you would start to receive or pay out commissions or royalties, is this the rev share, how generally from a monitoring perspective these arrangement set up?

Vincent Arnone

Analyst

Right, with the arrangements that we have with both Redox and PowerPlus, these effectively are marketing and product supply. These are reseller agreements whereby we're going to be buying product from those two companies and reselling into markets, okay. So no license or commission or anything along those lines associated with those agreements. With ISGEC in India that is more call it your -- more of your pure licensing type of relationship. However, in addition to receiving a royalty on their sales into targeted markets, we will also be selling some quality smart and/or services to ISGEC as part of that relationship. So we will have call it a dual means of generating income from the relationship.

John Quealy

Analyst

Okay. And then off to FUEL CHEM, if we could for a little bit, so good to see I know pressure on revs and margins, but overall, the margin profile and range staying intact, can you guys talk about when you look at the term FUEL CHEM customer base, who else potentially, is that risk or de-rating volume or shutting down on spark spread? How do you think about the future risk Vince or Dave to the business on some of these macro issues we've been dealing with for quite some time?

Vincent Arnone

Analyst

Right. As the macro issues are there as you just noted and they're not going away here anytime soon. The remaining customer base that we have now, from our perspective at least as we see it today John and obviously the discontinues in the future, as we see things changed rapidly in prior situations. But the remaining customer base we have today we're obviously watching very, very closely and we think the customer -- with regard to the major customers that comprise the majority of the revenues that are generated in FUEL CHEM. We think it's pretty stable as we sit here right now. The first half of the year, the run rate was just $10 million in revenues. We would expect to see something along those lines in the second half of this year and then we’re watching closely as we move in 2017. There are still going to be coal-fired generation in this country for quite some time. However is it going to be little back, sure it is. Is there going to be a need for FUEL CHEM in the future for coal-fired generation in this country, we do believe there is, but in all likelihood to your point, we will probably see a decline in FUEL CHEM revenues domestically as we move into the future, but I don’t know how, how far into the future that’s going to be as I sit here today. So I can't even make an assumption here, but all I can say John, is we're watching that really, really closely. And on the FUEL CHEM side, the technology is great technology. We know that it does work, but it is also applicable to other industrial areas, the pulp and paper industry being one very specific area that we think that we can help and it’s a viable industry. If you look at some of the macroeconomics on paper, demand on a global basis, it's growing and so we can get ourselves aligned with that industry more specifically in this country. And then as I noted in my script, we’re looking at nice relationship with a company that services 350 clients in Asia, that’s the direction we need to go with FUEL CHEM. Its expanding the markets that we're serving with that technology.

John Quealy

Analyst

And just a broader comment around milestones, so with all these initiatives they take time to get the piece of paper in place and they get the people in the field. So are we looking for tangible progress on these initiatives in the beginning of '17, is that a decent timeframe or how are you calibrating to your people and to your alliance partner's results?

Vincent Arnone

Analyst

Right, to be honest, it's going to vary with each of the partners depending on the technology that’s going in the marketplace. As I sit here today, I would make the comment that we're expecting anything material here for the remainder of 2016, but I do expect contribution as we move into '17 without question. Now that doesn’t mean that as we sit here today, we are not making aggressive plans to go ahead and visit our customer base for both the Redox and PowerPlus technologies. In fact those activities are going on as we speak right now. And in fact on the PowerPlus, case we’ve actually had one very nice commercial arrangement that we solidified already for their technology. So that is in process. Material revenues not likely until '17 but we will talk more about that as we work through Q3 and have a Q3 conference call, while we're better prepared to talk about what we've experienced relative to our investigative selling processes in the target markets.

John Quealy

Analyst

Okay. Great, I will leave it there. Thanks guys.

Vincent Arnone

Analyst

Thank you, John.

Operator

Operator

That does conclude our Q&A session. So I will turn it back to Mr. Arnone for closing remarks.

Vincent Arnone

Analyst

Well thank you very much everyone. I appreciate you taking the time for the call today. Thank you for your interest in Fuel Tech. We are working through a repositioning of our company today. I'm very excited about it. Our employee team is excited about it and we are very, very pleased to bring on our new partners in Redox Technologies and also PowerPlus. In fact we issued a more detailed press release about 45 minutes ago about both of those partner relationships. So thank you everyone for your time today and look forward to talking in the future. Thank you.

Operator

Operator

This concludes today's conference. Thank you for participation. You may disconnect your lines at this time.