Greetings and welcome to the Fuel Tech 2019 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 would now like to conference over to your host, Devin Sullivan, SVP of Equity Group.

Thank you, Dana, and good morning everyone. Thank you for joining us today for Fuel Tech’s 2019 first quarter financial results conference call. Yesterday after the close, we issued the release, a copy of which is available at the Company’s website, www.ftek.com. The speakers on today’s call will be Vince Arnone, the Chairman, President and CEO; and Jim Pach, the Company’s Principal Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors. 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 as defined in Section 21E of the Securities Act of 1934, as amended which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect Fuel Tech's current expectations regarding future growth results of operations, cash flows, performance and business prospects and opportunities as well as assumptions made by and information currently available to our company’s management. Fuel Tech has tried to identify forward-looking statements by using words such as anticipate, believe, plan, expect, estimate, intend, will and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to Fuel Tech and are subject to various risks and uncertainties and other factors including, but not limited to, those discussed in Fuel Tech’s Annual Report on Form 10-K in Item 1A under the caption Risk Factors and subsequent filings under the Securities Exchange Act of 1934, as amended, which could cause Fuel Tech’s actual growth, results of operations, financial condition, cash flows performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any forward-looking statements contained herein to reflect the future events, developments or changed circumstances or for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company’s filings with the SEC. With that said, I’d now like to turn the call over to Vince Arnone, Chairman, President and CEO 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. I’m here today with Jim Pach, our Principal Financial Officer and Controller. It has only been a short time since we last spoke, so I’ll keep my remarks brief this morning. While our Q1 results were slight below our expectations due to a variety of exploring items, we remain optimistic regarding our outlook for the full year whereby we expect to generate operating income from continuing operations for the second consecutive year excluding the losses and charges associated with the suspension of our China operation. Our first quarter 2019 net loss from continuing operations are $1.3 million included operating losses that are soon to be suspended the Air Pollution Control business in China and other charges totaling $1.2 million as well as the unfavorable impact of the timing of the completion of current APC project under contract. Absent these charges, the financial results from our core operations fell just short of breakeven for Q1, 2019. We continue to pursue a promising pipeline of APC contract opportunities particularly in the U.S. and we are in various stages of negotiation with potential clients that in the aggregate represents $10 million to $15 million of contracts of award opportunities that we expect to close by late Q2 or early Q3 of 2019. Additionally, the outlook for our FUEL CHEM business is promising. We are currently installing our FUEL CHEM program on two incremental coal-fired units in a domestic utility this month and expect to have these new units up and running by the end of Q2 of 2019. Our soon to be suspended APC business in China had an unfavorable impact of $0.9 million on the quarter via the combination of planned employee severance payments…

Thanks, Vince, and good morning everyone. As Vince has noted, our Q1 results were impacted by the following items. A $0.6 million severance related restructuring charges associated with the ongoing suspension of Beijing Fuel Tech operations. A $0.3 million operating loss of Beijing Fuel Tech excluding the restructuring charge previously mentioned. And finally a 0.3 million charge for incremental work for domestic APC project. We expect the operating loss for Beijing Fuel Tech in Q2 to be consistent with Q1 excluding the severance and other charges. As it relates to the $0.3 million charge for the incremental domestic APC work, we are working with our customer to satisfy all of their requirement charge scope of work. As you’ll see we operated just below breakeven for the first quarter exclusive of these items. With respect to the top line, first quarter revenues declined to $10.2 million from $12.8 million, reflecting a $2.8 million revenue declined at APC and a $160,000 revenue increased at FUEL CHEM as compared to last year’s first quarter. Lower APC revenues were the result of the decline in backlog entering the first quarter of this year as compared to last year’s first quarter. As Vince has mentioned, we are actively pursuing several promising contracts in the U.S., which we expect to close in the near term. Consolidated gross margin was 39.5% of revenues compared to 39.3% of revenue in Q1, 2018. Gross margin in Q1 of 2019 included the $0.3 million domestic charge exclusive of this item gross margin in Q1 of 2019 was 42.1%. APC gross margin was 1.9 million or 32.8% as compared to 3 million or 34.8% in Q1 of 2018. Excluding the 0.3 million charge APC gross margin in Q1 of 2019 was 2.2 million or 37.4%. APC results for Q1 of 2019…

Thank you very much, Jim. Operator, we’d like to now open the line for questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

So just going over the backlog relatively flat at the end of 1Q ’19 versus 4Q ’18, how does this impact sort of our expectations for the full 2019 relative to 2018? I know you've mentioned you’re expecting $10 million to $15 million in contract opportunities to potentially close over the next few months, but the current rate is a little bit sort of a year-over-year slower than what we saw in 2018. So just wanted to get some context around how we should expect the next three quarters for 2019 to play out?

Understood, Amit, and you’re right, the pace of bookings in 2019 has been slower than 2018 thus far. As it relates to impact on full year, we’re still focused on obviously to delivering operating profit from continuing ops on the bottom line. That is our target. From a top line perspective without getting call it full year guidance on top line, I can tell you that FUEL CHEM we’re expecting to trend in a similar to slightly favorable fashion in ’19 versus ’18, but just given the timing of contract award thus far, in 2019 on the APC side, I would expect a little bit of reduction on the APC side in ’19 versus ’18 just based on pure timing today. So, we’re focusing on getting the orders under our belts and then timing of execution is going to depend on customer requirements project by project. But just generally speaking right now Amit, your point is accurate. Bookings are a little bit slower than we would like to see, but it’s as you know it’s timing that we can’t control. And from a revenue recognition prospective, we’ll just have to follow all those contracts we're going to be executed throughout the remainder of this year and then going into 2020. We’ll have obviously more this year once we have the opportunity to work through this, call it the full second quarter, and then talk later at that point in time. We’ll have more visibility to more specifically what our result is going to be for the full year.

I apologize, if you touched on this topic, but U.S. revenue declines, any particular reason for the slow pace on the U.S. revenue side?

Really no specific reason on it, other than when, as Jim noted, when we compare going into to 2018 with the $20 million plus backlog versus coming into 2019 with the $12 million, approximately $12 million backlog. We’re just not executing on projects at the same level and as a result it is now recognizing that same level of revenue either. So that’s the primary driver.

And then just related to the China items, are these one-time -- I know Jim gave a little bit more clarity on this, but the $600,000 in restructuring charges probably the one-time thing. The $300,000 in operating losses, I mean, should we expect to model for those levels of losses for the next one or two quarters as well?

Yes, right now, yes. First of all answering the question, the severance charges are indeed one-time. We took that charge in Q2. We actually went through our first round of employee lay-offs on January of this year. And that we reduced the team by about half in China at that point in time. At the end, right here at the end of the second quarter, we’re going to go through a second round of restructuring if you will, but we’re not going to take any incremental restructuring charges we’re taken that already in Q2, okay. But answer to your question more specifically on I’ll call it the running operating cost Q2, we would expect to have approximately a similar level of operating cost that we had in Q1 excluding the severance cost, so approximately $300,000 or thereabout for Q2. As we move throughout the remainder of the year, that number will then decline dramatically. Q3, Q4 will be much slower numbers because we’re just going to be having less a skeleton staff that just going to be on hand to finish up a couple of projects and the work on collecting on accounts receivable. So, we’ll drop from $300,000 level and operating cost to sub $100,000 or even lower in Q3 and Q4 as we do the final wrap up if you will or wind down of the APC business in China. Okay, does that helps?

Yes, yes, yes. Thank you so much for that.

You’re welcome.

Just one last one for me, you're still targeting sort of non-China markets in Asia. Is this primarily through distributors and other partners? Or are you also planning on just creating some presence in some of these other geographies to support sales efforts?

Now, we are not looking at establishing other footholds in some of those geographies, Amit. We’ll do it through other partners whether they’d be OEMs, whether they’d be licensing or implementers of technology, but we’ll use other entities to deliver our technology solutions in those geographies. We're not looking to establish another presence.

Our next question comes from the line of Peter Enderlin with MAZ Partners. Please proceed with your question.

And the two new FUEL CHEM utilities that you're going to be providing for, how will the magnitude of those compare with the one big one that you got last year, when they're seasonally dispatched? I know it's not going to be year around, but in terms of when they're actually running, they're running or not running, so how would the magnitude of those be?

Just I'll give you an approximate answer, Pete, because it's difficult to know how these units are going to be running. Right now, we would expect a summer run but that's going to be weather dependent as well. But just as a, call it a factory use, I would expect the revenue from these two units on a monthly basis to approximate the one call it larger coal-fired unit that we actually brought on board in Q3 of last year. So when these two units are dispatched this summer, anywhere in the range 150,000 to 200,000, 250,000 in total for both of them per month, approximately, approximately. It's you know what we're pleased by the opportunity, if you would have asked me, a year and half ago that, we would have the opportunity to add three incremental coal-fired units to our FUEL CHEM base. I probably would've said that the opportunity or probability was pretty slim. So we're pleased to have these come on board. They are being driven. These last few units are being driven by the need to burn a specific challenging coal. So, it fits very well for the other FUEL CHEM program and we are very pleased to have these units come on line.

And would that likely be for basically the summer quarter?

Predominantly, yes, and then we'll see what happens when winter comes around as well. But during spring and fall, we would not necessarily expect these units to be running.

And you've mentioned a $1 million equipment associated with that. Is that million dollar? Was that in the backlog at the end of first quarter?

No, we don't have a backlog calculation for FUEL CHEM, Pete, because it’s a recurring revenue sale generally. Our sale of equipment and installation services, I would call more of a one-off specific situation for this customer.

On the overall accounting for China, wouldn't it be clearer and simpler just to treat Beijing as a discontinued operation instead of waiting until it's actually completely shut down?

I'll let Jim comment on that, Pete.

Yes, Pete, wish I could do that obviously it'd make the financial presentation a lot cleaner, but unfortunately U.S. GAAP accounting rules require that, the entity be completely closed down or suspension of the activities was finalized before you can get to that. So, unfortunately, that's an accounting literature item that we don't really have flexibility on unfortunately.

I thought so, but I just wanted to check. Is there any potential for legal redress in China? I mean I know you guys have some sense that you got sort of, what would you say screwed. So is legal action possible?

It is not at this point in time, Pete, and you’re referring to IT issues that we had historically in China with our Beijing Fuel Tech operation. We actually did, Pete, some years ago and engaged in a legal activity, if you will to see if we can find remedy for what transpire in, and this was actually four to five years ago. At this point in time, there’s no remedy. We’re taking our action in China because of obvious operational concerns, and it’s for the better Fuel Tech's future. And we’ll move forward from here and we’ll be a better structured more focused company absent Beijing Fuel Tech.

Is the 60% natural gas statistic for APC that you mentioned? Is that a U.S. number or worldwide?

Worldwide.

Worldwide.

Yes, and of course, the former part of that is in very substantial at this point anyway, but I'm just curious.

Correct.

On the DGI outlook, it sounds like there really is a lot of pretty major potential. Could that become significant as a percentage of revenues as early as 2020? Or is it going to be a longer term wrap up?

I’d say it’s going to be a longer term opportunity for us, Pete, at this point in time. You’re correct, what we’re seeing in terms of activity. Again particularly on oil and gas side can possibly provide some very, very large opportunity for us, but we’re progressing on a step by step basis we’re methodical about our approach. And ultimately, it’s going to be best for us and in terms of us establishing ourselves as potential player with the good technology solution in that market place but before we have material revenues it will likely be post 2020.

And for the potential of those -- that technology in bunch of different markets, is it really sort of a breakthrough technology or would it be incremental and done in cooperation with other things that the customer would need to do at the same time? I mean that’s sort of a general question, but I don’t quiet get the scale of the impact of what you’re talking about?

Well, I understood. Two things, so first of all, we consider our technology application to be an improvement over other oxygenation technology that had been deployed in all of the industries that have water treatment issues. Okay, so, we consider our technology to be a material improvement, okay, so it's answering one question. And then secondarily, in almost all cases, oxygenation solutions are not the sole solution for treating that water. It’s used to conjunction with other technology applications, other chemical applications and the like. So, it ends being part the solutions package for that user at the end of the day.

[Operator Instructions] Our next question comes from the line of Sameer Joshi with H.C. Wainwright. Please proceed with your question.

The gross margin outlook for the rest of the year, 35% to 40%, isn’t it a little bit conservative given that you already have 34.4 rather 37.4 on the APC and 48.4% on FUEL CHEM?

Generally speaking, Sameer, 35% to 40% is, it’s a range that we use as a rule of thumb because it will be impacted by call it projects mix on the APC side, and then as you point out, also just the relative percentage of revenues that comes from APC versus FUEL CHEM, okay. So, as we look at a full year landscape, we typically quote to 35% to 40% as call it our general range. As we have a better picture to A, the project mix on APC; and then to B, the revenue mix between APC and FUEL CHEM, we were able to then get a little bit more granular, but as of today premature to make that a more specific number.

Understood.

Okay.

Clarification on the APC incremental work that you did on one or two projects during this quarter?

Yes.

What was the nature of that work? Why was it necessitated and if it likely to be incurred on another projects that you’re working on?

The answer would be, no, on your second part question. On the first part, as we -- for a particular customer, as we delivered our system to, to the customer site location, we actually found that there was a little bit more work we needed to do on our delivery system to meet customer’s requirements, okay. And as Fuel Tech, our priority is our customers and we’re doing right by them. And as a result of ultimately meeting their, all of their requirements, we had to do a little bit of work on our delivery system at that site. So, that’s the driver for the incremental cost. It’s not -- it’s a little more expensive than what I would call a normal scope of work for doing something incremental which is why we called it out, and we’re not expecting it to be recurring.

Okay. Thanks for that clarification.

You’re welcome.

One last one from me, the previous question you did give color on the coal-fired units that you’re bringing online. But as you look out to into the next few quarters, do you expect additional incremental coal-fired units to be under the FUEL CHEM program or inside?

Yes, if it was going to happen domestically, I have to say I’ll be a little bit surprised, Sameer. I’ll tell you right now, the two that we just brought on board were a little bit of surprised us. We did necessarily expect it to happen. Here domestically, we are pursuing coal-fired opportunities I had mentioned in my comments in actually in the Philippines at two different stations out there, whereby they’re having some great difficulty in burning fuel at boilers, at our base loaded boilers, with a market that has a very high demand for power and power pricing is extremely high. So, we think the return on investment is going to be there for the end customers. So, if I was going to say, we’re next source of a FUEL CHEM coal-fired unit would be, it would probably be outside of the U.S.

Understood. Is Germany part of that equation as well given that they have extended the usage of coal?

We tried to pursue FUEL CHEM in Germany some years ago, but given their experience in running their coal-fired utilities with lignite as their fuel and how they design their boilers to burn lignite very specifically. They haven't had what I would call critical slagging and fouling issues that we would be able to address. Just because of how they engineered the boilers very specifically to the local coal that they used in Germany. So, I would not necessarily expect anything incremental in Germany from FUEL CHEM.

Thanks once again for taking my questions.

My pleasure, anytime.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Vince Arnone for closing remarks.

Thanks, operator. Once again, I want to say, thank you to everyone for joining the call today and thanks for your interest in Fuel Tech. We're going through a multiyear planned reorganization, restructuring, redevelopment of our company. These past three to four years, we've gone through significant restructuring to the point whereby 2018, we generated an operating profit and positive cash flow for the first time in five years. We expect additional improvement to continue and as I mentioned previously, the entire Fuel Tech team is dedicated to continued success and to providing value to our shareholders. You have that as my commitment to the shareholder base. Thanks everyone. Have a great day.

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