Greetings, and welcome to the Fuel Tech Incorporated Third Quarter 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Now my pleasure to introduce Devin Sullivan, Managing Director of the Equity Group. Thank you. Devin, you may begin.

Thank you, Rob. Good morning, everyone, and thank you for joining us today for Fuel Tech's 2024 Third Quarter Financial Results Conference Call. Yesterday, after the close, we issued a press release, a copy of which is available at the company's website, www.ftek.com. Our speakers for today will be Vince Arnone, Chairman, President and Chief Executive Officer; and Ellen Albrecht, the company's 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'd like to remind everyone that matters discussed on this call, except for historical information, are forward-looking statements as defined in Section 21E of the Securities Exchange 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, uncertainties and other factors including, but not limited to, those discussed in the company'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 conditions, cash flows, performance, 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 future events, developments or circumstances or for any other reason, and investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the company's filings with the SEC. So with that said, I would now like to turn the call over to Vince Arnone, Chairman, President and Chief Executive Officer of Fuel Tech. Vince, please go ahead.

Thank you, Devin. Good morning, and I'd like to thank everyone for joining us on the call today. I'm pleased to report that we returned to profitability in the third quarter of 2024, due largely to continued strength in our Chemical Technologies business segment, where we are seeing an increase in interest from coal-fired utilities and other fossil fuel-based operators, resulting from our ability to assist them in reducing downtime, improving plant operations and providing the ability to maximize revenue generation during periods of high electricity demand. Revenues at our APC business declined quarter-over-quarter due primarily to customer-driven delays on existing projects and to the timing of new project awards. With that said, we are very pleased to have announced $2 million in new ATC orders yesterday, and we expect to close $2 million to $4 million in additional ATC orders by the end of 2024 or early 2025. We remain encouraged by the progress made toward commercialization with our Dissolved Gas Infusion or DGI business initiative. Earlier this week, we announced the execution of a demonstration agreement for an aquaculture application, and we are currently in discussions for demonstrations with operators in 2 additional distinct end markets and expect to have clarity on these opportunities as we move throughout the remainder of this year and into early 2025. We believe the diversity of these end markets highlights the versatility of DGI to address a wide range of water and wastewater treatment process issues. We ended the quarter in a strong financial position with cash, cash equivalents and investments of over $31 million and no debt. Now let's discuss our results for the third quarter in more detail, starting with FUEL CHEM. Revenues at FUEL CHEM rose by 8% from the same quarter of the prior year, reflecting contributions from…

Thank you, Vince, and good morning, everyone. For the quarter, consolidated revenues decreased slightly to $7.9 million from $8 million in last year's third quarter, reflecting growth in our FUEL CHEM segment, offset by a slight decrease in APC segment revenue compared to the prior year period. APC segment revenue declined to $3.2 million from $3.7 million in last year's third quarter, primarily related to timing of project execution on existing contracts. FUEL CHEM segment revenue increased to $4.6 million from $4.3 million in the third quarter of 2023 due to customer accounts returning to service as a result of outage completions, increased dispatch and to contributions from a new coal-fired account. Consolidated gross margin for the third quarter was 43% of revenues, down from 45% in last year's third quarter. This decrease primarily reflected a decline in the APC segment gross margin compared to last year. APC segment gross margin decreased to 35% of segment revenues from 40% in the prior year period due to changes in product and project mix. As a reminder, the APC segment contains revenues from capital projects and ancillary revenues for items such as post-contractual parts and services. Ancillary revenues maintain a higher margin profile and will offset project margin revenues -- project margins, which are recognized over time on a percentage of completion basis. FUEL CHEM segment gross margin was flat at 49% compared to last year. FUEL CHEM's third quarter gross margin increased from first and second quarter revenue levels, validating our expectation that FUEL CHEM segment gross margin will return to historic levels in the second half of the year. Consolidated APC segment backlog on September 30, 2024, was $6.4 million, down from backlog of $7.5 million at December 31. Backlog at September 30 included $1.1 million of domestic delivered project…

Thanks very much, Ellen. Operator, let's now please go ahead and open the line for questions.

[Operator Instructions] And our first question is from the line of Sameer Joshi with H.C. Wainwright.

So my first question is about the EPA action on the Good Neighbor provision. I know I'm asking to hear in your crystal ball, but do you have any visibility on how long the circuit courts may take to review this and then for the EPA to formulate its new regulations? Any idea of time line? Is it like a couple of quarters, 4 to 6 quarters?

My crystal ball, I think, unfortunately, doesn't have a good answer for you. Obviously, now we're going through a change of administration at the same time that some of these provisions are being reviewed. So I think a specific time line is actually very difficult to predict as we sit right now at this point in time, Sameer. I wish I can give you a better timing on that. But unfortunately, it's very difficult for us to predict. We watch all of the regulatory boards for any updates that we see on these actions and these provisions. As we learn more, we'll share more with everyone that's interested in Fuel Tech as we do our conference calls. But right now, I hesitate to even give you a tentative time frame. We just don't know.

Yes. No, that's fair. And one of the reasons to ask that question is also, does your -- any of your existing revenue come from the enforcement of this Good Neighbor provision in those 12 states? Or this is just if it goes in your favor or it is favorable to you, I should say, this is additional upside that you would get?

Correct. Good question, and thank you for asking that. The additional project opportunities that we were talking about with this, call it, updated Good Neighbor provision are all upside to us. And it will not impact any of the, what I would call, standard ongoing project work that we would expect to see from industrial unit business and some utility business as well as we move through the end of this year and into 2025 and beyond. The upgrade to the Good Neighbor rule that we were following was something that we were looking at for significant material upside potential. It will not impact the base level of revenues that we have been experiencing for these past couple of years.

For the next -- for the FUEL CHEM -- moving to the FUEL CHEM business, you mentioned the $1.5 million to $2 million in annual revenue potential. This is in addition to your existing installed base, right? I mean this is something that you have not announced before and is expected to come into play over the next few quarters and then for several years thereafter.

Yes. It is definitely an incremental coal-fired unit for us. The revenue range that we're expecting is indeed incremental revenue for the Chemical Technologies business. I hesitate to go ahead and tell you with regard to forecasting just to add this number to revenues that we've experienced in prior years because every single year, we have impacts both upside and downside on base accounts relative to equipment outages that our customer base has, relative to some of the seasonal issues that we have with weather as well. But that being said, answering your question specifically, it's an incremental coal-fired unit that we are extremely pleased to see. And we are very hopeful that as we move into the first quarter of next year that we'll be able to add an additional coal-fired unit as well because as you well know, adding base accounts on Chemtech is extremely meaningful and very profitable for us.

Yes. And so again, thanks for that because it seems except for outages or downtime, the contracted coal plants or deployments are increasing with this 1.5 to 2 and then some potential coming in an additional in the next -- early next year.

Yes.

In the press release from yesterday, again, the $2 million in orders, does it include the potential orders and the orders in hand that were described in that press release? Or is the $2 million only from orders in hand?

That's only orders in hand. And as I had mentioned as part of my commentary, we are expecting additional orders as we move towards the end of this year. There's a high probability of us having $2 million to $4 million in additional contract awards before the end of this year, very, very early into 2025 at the latest. So it's $2 million announced yesterday, contracts -- those are contracts in hand already.

Great. On the DGI front, this -- and maybe I misheard, but this demo that is being planned for the state government agency, is the demo expected to be like operational in the second half of 2025? Or is some -- is the demo underway or sooner than that and then a potential order in the second half of 2025?

So the demonstration with the fish hatchery in the Western U.S. will actually commence on or about April 1 of next year, 2025. That's when the demonstration is going to commence. That's when the -- this agency will start their next growth cycle for the next batch of fish that they are looking to grow. So yes, it will start then. It will last 4 to 6 months. And then with success, we would then look to have an order in hand as we move towards the latter part of 2025. That's with that demonstration. The other 2 demonstrations that I talked about that we are looking to finalize an agreement for would be more near term in nature as in potentially starting before the end of this year.

Understood. And then just in terms of outlook for the rest of the year, the outlook is for $25 million to $26 million top line revenues. Does that imply year-over-year fourth quarter down revenue? Because I think you had $6.3 -- $63 million in the December quarter last year?

Yes. At this point, it does, Sameer. And it's due to the timing on execution of the air pollution control projects that I was making reference to. On a couple of contracts, in particular, we've had delays from our direct customers and as a result, their end customers that have shifted the timing of execution of project work. Earlier this year, I would have told you that our Q4 would have been a better Q4 than we're talking about right now just based upon the expected execution time frames. But these time frames, unfortunately, they're not under our control, and it's something that we just have to adapt to with our customer base. So the downside is, yes, it's going to be a lower-than-expected Q4 revenue number. But -- the upside is that dollar value it stays in our backlog and will be recognized in 2025. It does not go away.

[Operator Instructions] Our next question is from the line of Marc Silk with Silk Investment Advisors.

All right. On the fish hatchery deal you announced a week or so ago, you said this is an extended demonstration. So does that mean you've been working with them previously and they just want to go to the next level?

By extended, that was referring more to the temporal aspect, just a longer-than-normal demonstration time frame because we're going to look to monitor the progress of the performance of DGI over the full growth cycle of the fish. And a 4- to 6-month demonstration is longer than what I would call a normal demonstration for us. So that's the basis for the extended terminology.

Okay. And then is there any revenue that will help you cover costs?

Not for this demonstration nor for the other 2 that we're looking at. We have not finalized the agreements for the other 2 demonstrations. If we're able to cover some cost, Marc, we will absolutely seek to do so. Given where we are today with DGI, we're looking to get this technology out and operational and demonstrated so we can become as -- so we can become commercialized as quickly as we can. So we are willing to absorb demonstration-related costs, which for us typically aren't that material in any event. But in answering your question, right now, we are not expecting any sort of cost recovery funds on the demonstrations.

So on the exhibition and the show that you guys presented at, can you kind of like give us some more maybe just more color anecdotes. So an example is like what are people saying to you, for instance, like I have been looking for this type of technology and nobody is focusing on this issue. I mean, again, where -- as we invest in the stock, it's nice to kind of know what these customers are saying. I know it's not going to turn into deals, but I just want to see what the market is thinking, and that will probably give us as investors a little bit more clarity as far as the excitement of this product.

Yes. I think the -- I'd say the primary response that we get is that customers are looking for a new solution for old problems or a new solution for technologies that have been in place for multiple decades. That's sort of the most frequent comments that we're hearing from potential customers. And that is actually reflected in each of the 3 demonstrations that we're working with today. All 3 of them are looking to go ahead and make a modification from moving away from their existing source of dissolved oxygen, if you will, and moving over towards something that could improve their performance, something that could lower their cost structure, a variety of other benefits that could come their way.

And then as next year, we're going to have a new administration and what I've noticed is a lot of times they say they are for clean water and clean air. And also going forward, it looks like now the sources of energy in this country will include clean plus the traditional "dirty energy". So I would think on the dirty side, maybe comment a few things like, for instance, where there might have been some plants that were going to close if it wasn't this a new administration. And kind of how can you capitalize on that? I know a small company like you, you can't really put your money for like as far as promoting you within the government. I'm lobbyist, that's the word I was coming with. But maybe if you can kind of -- I know it's just this happened, but I'm sure you were thinking about it. So how can we capitalize on something like this, considering that's what they've kind of publicly said already about their energy policy going forward?

Yes. It's obviously in interesting times, and there is going to be a shift in how energy is going to be generated prospectively, right? I think that's apparent. But for us, it's probably going to be a little bit of a mixed bag of a scenario for us. So to your primary point, as it relates to fossil fuel generation, I think that we can expect that the fossil fuel is obviously going to remain in play in a very strong way. I think we're going to continue to see natural gas used as a significant source of fuel for power generation, perhaps an expansion of natural gas for power generation. And there's going to be more drilling for natural gas as a resource, if you will. That will occur. At the same time, we had talked earlier in the year about the extension of life of coal-fired units. Just as a general theme because we've been talking about in this country and in other parts of the world about there being a power generation shortage driven by data centers, driven by AI, driven by support for cryptocurrency mining and the like. And so even prior to what's transpired over this past handful of days, there have been public discussions and public statements about the extension of life for coal-fired units. So that's real. Now with now the new administration coming on board, I think we might see more of that. To what extent, it's difficult for us to forecast that right now. But if we're going to see possible extension of coal-fired lives, that could provide some additional business opportunity for us. And the way we capitalize on that is via putting ourselves out in front of those remaining coal-fired generators that could have an opportunity for either our APC technologies or for our chemical technology approach as well. So that's the way we would look to capitalize on that, okay? That's on the upside. On the other side of the equation, as I was answering Sameer's question earlier, proposed regulations for increased emissions reductions are likely going to be postponed or possibly modified. I think that's to be expected. We've heard about a decrease in support for regulatory bodies in general, shrinking regulation and regulatory bodies. There may be a reduction in funding for the EPA. We don't know that as we sit here today, but that's a possibility as well. So it will be interesting to see how this plays out. But there is a scenario whereby with a more heavily focused approach on fossil and its utilization for power generation that, that can give us a little boost over this next 2-year time frame. Long-winded answer, but it's what we know today.

No, that's what I was looking for. I appreciate that. And I also appreciate that you and Ellen showing the investment community how confident you are in the business by buying some shares for yourselves. So anyways, well, good luck, it will be an interesting year coming out.

Our next question is from the line of William Bremer with Bankers Capital.

Okay. Did I hear you correctly that we will be implementing 2 additional pilots for the DGI division before the end of this year? And if so, can you give some granularity in terms of the end markets, maybe the depths, et cetera, the nozzles, the pressures that you're looking at, at these 2 different field trials?

So just to clarify, Bill, I said we are pursuing the additional 2 demonstrations as we sit here right now. We don't have demonstration agreements finalized yet. But there is the possibility that both of them could be up and running before the end of this year. That would be the, call it, Vince's optimistic scenario for those 2 demonstrations, okay? So we're following them closely. We're in discussions on a daily basis, but looking to move them forward, okay? That said, I can give you a little bit of granularity on each of them. One of them is specifically in the municipal wastewater treatment arena. And this is the case whereby we would be looking to provide that municipal wastewater treatment facility with supplemental oxygen for their needs to address conditions that are basically what I would call nonstandard or upset conditions for their treatment facility. For this application, we would use -- we expect to use a little bit of a smaller DGI unit given the incremental oxygen demand that they would believe to be needed. And so it would be a smaller capital sale opportunity for this particular site, okay? Now the other one is actually with a large food producer in this country who at a meat processing facility, they are having challenges with their processing of wastewater at this facility because they've been using standard old-school aeration technology for the past 25 to 30 years, and it's starting to fail on them. And they are extremely concerned about having their wastewater treatment plant take down the entire plant operation. And so they reached out to us to see if DGI can be a replacement technology for their wastewater treatment operations. So this would be a potential larger equipment sale. It would be the largest DGI unit that we would look to make available. And so it could be a larger potential capital sale. But we're working through both of these processes with these 2 end customers. And again, hopefully, we'll be able to share some good news the next time we're able to talk publicly.

Agreed. You mentioned sale on these. Is it potentially an outright sale? Or do you think that maybe we have an opportunity to have, say, an MSA, a multi-service agreement over the next, say, 3 to 5 years in terms of the operating of these systems?

Right. We are open to either scenario, and we've been discussing more and more so the possibility to have long-term service arrangements for a DGI delivery system, if you will. For these 2 particular applications, I think they're more apt to be capital than long-term service contracts, but it's really too soon to know right now.

Okay. But it's something that would be presented to both of them before the signing.

Yes, as options, depending on what would best meet their needs.

Okay. All right. Let's turn to the Mexico opportunity. And if you could give us a little more granularity there, specifically within the past, say, 2 to 3 months, has there been more discussions, more meetings, et cetera?

Yes. So things have turned more favorable because of the administration that is now in place. That is factual. We know that. We know that our partner has been in contact with members of the new administration. In my discussions with our partner within this past couple of weeks time frame, okay, the new government is -- again, just became effective as of about 5 to 6 weeks ago. There's a lot that they're moving through. However, their environmental policy has become more prominent as part of their discussions, okay? And so it is our partner's expectation that our chemical technology approach could be used to help them with their environmental issues. We know that, okay? What remains undecided today is how much money the government is going to be willing to invest in some of the environmental technologies that they do indeed need to be applied to some of their fossil fuel burning units as we sit here today. So we're more encouraged than ever relative to what I would call the backdrop for the opportunity. But when you're -- no different than this country, when you're dealing with statewide agencies and the allocation of precious funds and funding, it's difficult for us to know when that converts into, call it, the real opportunity for us to generate revenue from chemical technology in Mexico. So we're extremely encouraged. Our partner is encouraged, but this still needs to be pushed forward within the Mexican government.

And it's my interpretation that you do have the FUEL CHEM deployed down there in a few of their boilers currently, right? So can you confirm that? And then how many additional boilers or opportunities, not saying that we have an opportunity to land all of them, but there is a potential of that. How many do you believe are available for us to at least petition, to at least try to land a contract with?

Right. So we've actually been functioning on a couple of small units at 2 different plant sites for more than a dozen years. So we've had the system up and running there, and we've been generating royalty income for a dozen years. So there's been what I would call a rolling proof of concept in place down there for this entire time frame. And so evidence that our program can function for its intended use. Now in terms of additional unit opportunities, there are many. There are approximately -- I'm going to give you a range because I don't have the specific numbers at 3 to 4 plant sites, there are approximately 13 to 15 additional units that are burning heavy fuel oil that could use our program. So it's potentially very material for Fuel Tech. But it's -- because it's been so uncertain from a time frame perspective, we don't focus on it as much as we would like to because the ability to make it reality is not within our control. The opportunity is sizable. It is sizable.

No, it's sizable. You're proven down there. It seems to me it's a plug and play, especially with the new administration and her environmental background. I think that the probability has gotten a little bit greater than it was in the past. And if I'm correct on this, it could be a very material event if this should come to play, given the fact that, hey, you had been proven down there as you specified for a number of years. It just seems that, hey, these other ones, we could do it, and we should be able to. So right. That's good.

Bill, one more comment for you. You're correct on all those points. And what we did as a company within this past, call it, 12 to 18 months is actually we did invest in having equipment ready to go for one plant site already. So we have equipment ready to go should this become an urgent response requirement down in Mexico, we're ready to go to equip one plant site with equipment to run our Chemtech program. So we've made that investment already.

And then. Okay. Let's just say we land 3, okay, I'm being optimistic here. How quickly do we need in terms of the purchase orders, et cetera, to ramp up for the next 2? Is that a month? Is that a quarter? Is that longer than that? How long of a wait if we had the order?

Yes. Probably, I'd give you a range of anywhere from 12 to 16 weeks at a minimum to get ready for -- we'd have to do new equipment build-out to be able to meet the needs of other plant sites, minimum 12 to 16 weeks to get ready. But in all likelihood Bill, if they do go forward, they would do it one site at a time and not all sites. That's our indication as we sit here anyway.

So the sites are inherently slightly different than one another?

All sites are a little bit different in terms of unit sizes and so on and so forth. So it might be the case whereby we need to change our equipment configuration a little bit from site to site. So there are those idiosyncrasies that we have to deal with as we work from one plant site to other plant site.

Thank you. At this time, we've reached the end of the question-and-answer session. And I'd like to turn the floor back to Vincent Arnone for closing remarks.

Thank you, operator. I'd like to thank everyone for taking the time to listen to the call today. I'd like to thank our employee team for their continued dedication and efforts towards making Fuel Tech and continuing to make Fuel Tech a solid brand name and an excellent company to work for. I'd like to thank our shareholders for their continued support as well and also our Board of Directors. With that, thanks, everybody. Have a great remainder of the day. Thank you.

This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.