Fuel Tech, Inc. (FTEK) on Q3 2022 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Fuel Tech Inc. Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Devin Sullivan, Senior Vice President of The Equity Group. Thank you, sir. You may begin.
Devin Sullivan: Thank you, Maria. Good morning everyone and thank you for joining us today for Fuel Tech's third quarter 2022 financial results conference call. Yesterday after the close, we issued a copy of the release, which is available at the company's website www.ftek.com. Our speakers for today will be Vince Arnone, 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 21-E 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 of 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 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 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. Having said that, I'd now like to turn the call over to Vince Arnone, President and CEO of Fuel Tech. Vince, please go ahead.
Vince Arnone: Thank you, Devin. Good morning and I want to thank everyone for joining us on the call today. We are pleased to report strong third quarter results led by the growth in our Air Pollution Control business segment and better than expected performance for our FUEL CHEM business segment. For the third quarter of 2022, revenues increased by 6.1% year over year to $8 million. Our balance sheet at September 30th reflected cash and cash equivalents of more than $24.1 million, $9.8 million in investment securities, and we had no long-term debt. We've also made further progress in developing our Dissolved Gas Infusion or DGI technology, which we are aiming to further develop and commercialize as expediently as we can. Our recently released white paper has validated the efficiency and effectiveness of the DGI technology, which we view as a future driver of our business. And we were pleased to announce 2.7 million of new APC contract awards last week from new and existing customers. Our APC business segment revenue this quarter rose 40% to $2.7 million compared to the third quarter of last year. This brings APC's year-to-date revenue to approximately $7.7 million, which exceeds full year 2021 revenue of $6.9 million. We continue to pursue a global sales pipeline of $50 million to $70 million consisting of a variety of projects and in markets. And we are expecting additional contract bookings of $2 million to $4 million before the end of this year. Our FUEL CHEM business segment revenue surpassed our expectations, driven by several factors, including an overall increase in energy demand, which has positively impacted coal fired dispatch in regional areas where we have our program installed. As a result, we are raising FUEL CHEM's 2022 revenue guidance to between $14 million and $15 million, up from our previous estimate of $13 million to $15 million. As we stated on our last call, we continue to work to develop new marketing strategies to reach key decision makers at all domestic coal-fired utilities to reintroduce our FUEL CHEM cam program benefits, including lowering the cost of dispatch by offering fuel flexibility, extending facility life and improving overall facility profitability, and structuring a program that is active only when the unit owner wants to capitalize on high energy demand and related high unit capacity factor opportunities. We are also continuing to investigate providing our chemical technology solution to address the emissions created by the burning of high sulfur fuel oil in Mexico, which is being undertaken without the necessary environmental remediation and at the expense of the health of surrounding communities. We continue to watch the development of this activity very closely. However, we do believe that political pressure is building in favor of the implementation of our FUEL CHEM program and additional facilities in Mexico. And our partner is currently in discussions with the state-owned facility, CFE regarding the application of the technology at several units. With respect to APC, has noted on last quarters call increasing energy demand escalating natural gas prices. And the unavailability of renewable sources of power generation in certain regional areas are driving both an increase in coal fired dispatch and an extension of the operating lives of certain coal fired power generation facilities. We're actually seeing this both in the United States and in the European marketplace as well. These trends provide a favorable landscape for us to capitalize on new APC project opportunities that could be driven by the proposed recent update of the Cross State Air Pollution Control rule, which is also known as CSAPR, and the Good Neighbor provisions of the Clean Air Act, which is expected to be finalized in Q1 of 2023. EPA entered into a consent decree earlier this year to update the CSAPR rule with NOx reduction requirements. So, that sources and up to 25 specific states can comply with the 2015 National ozone standards, while meeting the Good Neighbor requirements of the Clean Air Act. These CSAPR revisions could impact utility and industrial sources, requiring NOx control starting as early as 2023 for utility sites and 2026 for industrial sites. In fact, one of the projects that we announced last week for SNCR-related engineering services was influenced by the expectation that this regulation would be implemented in 2023 in substantially the same form as its current proposed state. Over the past few months, we have received inquiries from several former and current customers regarding projects that could potentially be required, depending on the final requirements of the regulation. And we will continue to follow this activity closely as we move into the first quarter of next year. Again, for the APC segment, we continue to pursue opportunities for our SNCR and ultra-product offerings, and had been awarded multiple contracts in recent months for the provision of these technologies. Additionally, other recent contract awards have involved the application of our SNCR emissions control solution to reduce nitrogen oxides from stationary combustion sources for both domestic and international applications, and our Flue Gas Conditioning technology to improve the performance of electrostatic precipitators for an international unit. One last point, decarbonization continues to be top of mind for many industries and we are closely watching the planning of the steel industry and others, as they pledged to invest in technologies to improve their global carbon footprint. Fuel Tech has long standing relationships with technology suppliers and end users that will assist in our ability to capitalize on these opportunities as they continue to develop. We have continued to make progress in our Dissolved Gas and Fusion Business Initiative which we call DGI that focuses on the efficient delivery of oxygen for industrial and municipal water and wastewater treatment. In October, we released a white paper that validated the efficacy of this technology, specifically demonstrating that greater than 99% of the oxygen supplied to the DGI System was delivered, the treatment reservoir is dissolved oxygen with no loss to the atmosphere. This study is an important validation of our DGI technology and we work with two experienced experts in the fields of aeration and water and wastewater treatment to structure the test protocol and to measure and evaluate the performance results. DGI has the potential to displaced or enhanced traditional aeration technologies by enhancing or increasing the capacity of underperforming aeration systems, providing supplementary oxygen for existing operations, delivering residual dissolved oxygen at higher concentrations and dosing rates than traditional technologies, and meeting demand immediately for wastewater streams during process upsets, changing requirements, or short retention scenarios. The benefits to be derived from the application of DGI are many and can include regulatory compliance, increased treatment capacity, and the avoidance of material capital spending, water preservation and minimization of chemical utilization, odor control, and improving overall water quality for humans and wildlife. As I noted on our prior conference call, we are in the process of searching for an experienced water and wastewater treatment executive to assist us in guiding the development, commercialization, and ultimate expansion of our DGI business. And we are hoping to complete this search before the end of the year or shortly thereafter. This role is critical as we look to formulate our plans to approach our addressable markets that consist of municipal wastewater and water utilities, agricultural applications, food and beverage facilities, including dairy farms and software manufacturers, landfills, and natural bodies of water and reservoirs. Lastly, we have taken some necessary steps regarding the marketing initiatives in support of DGI, which include product collateral, and website modifications. And we have much more planned in the future as we expand Fuel Tech's reach and the application of technologies for clean air and pure water to benefit our planet. In closing, I want to again thank the Fuel Tech team for their continued hard work and dedication. We are pleased with our positive third quarter performance results and are excited about our prospects as we approach the end of 2022 and we begin to enter 2023. With that said, I'll now turn the discussion over to Ellen. Ellen, please go ahead.
Ellen Albrecht: Thank you, Vince and good morning, everyone. For the third quarter of 2022, consolidated revenues rose by 6.1% to $8 million from $7.6 million and last year's third quarter. The increase over the prior year quarter was driven by a 40% rise in APC segment revenues to $2.7 million from $1.9 million, reflecting increased project activity and the timing of project execution. FUEL CHEM product line revenue declined to $5.3 million from $5.6 million in last year's third quarter, primarily due to the loss of one customer from a permanent plant retirement. As Vince mentioned, FUEL CHEM perform better than our initial expectations and the outlook for the year for FUEL CHEM has also improved. Consolidated gross margin was 45.8% compared to 49.2% of revenues in the third quarter of 2021, which reflected a higher contribution of lower margin business from the APC project segment. APC segment gross margin was 34% compared to 41.7% in last year third quarter's due to a shift of product and project mix. Gross margin for the FUEL CHEM segment remained flat at 51.9% in Q3 compared to 51.8% in Q3 of 2021. Consolidated APC segment backlog at September 30th, declined to $8.8 million from $9.1 million at December 31st, 2021, reflecting the completion of project activity. Backlog at September 30th included $5.5 million of domestically delivered projects backlog and $3.3 million of foreign delivered project backlog compared to $3.4 million of domestic delivered project backlog and $5.7 million of international project builder backlog as of December 31st, 2021. We expect that $8.4 million of consolidated project backlog as of September 30th will be recognized in the next 12 months. Last week we announced an additional $2.7 million of new APC contract awards, $1.4 million of which was not included in the September 30th backlog. SG&A expenses for the quarter increased to $3.3 million from $2.8 million in the third quarter of 2021. The increase was primarily due to employee related costs. As a percentage of revenue, SG&A in the third quarter of 2022 was 40.8% compared to 37% in 2021 third quarter. We are targeting SG&A for the full year 2022 exclusive of any additional investments that would be required to grow our business, specifically our DGI segments. Research and Development expenses for the third quarter declined to $207,000 from $340,000 in last year's third quarter, due primarily to the timing of execution of current project initiatives. Our operating income narrowed to $192,000 from $578,000 and last year, third quarter reflecting reduced margins and increased SG&A expenses. Our net income for the quarter was $314,000, or $0.01 per share compared to a net income of $670,000 or $0.02 per share in last year's third quarter. Adjusted EBITDA was $421,000 compared to adjusted EBITDA of $884,000 in the same period last year. Moving to the balance sheet, I'm happy to report that our financial condition remains very strong. As of September 30th, we had cash and cash equivalents of $24.1 million. We have also invested approximately $10 million in U.S. government-backed backed debt securities reflected on our balance sheet as $2.5 million and $7.3 million in short-term and long-term investments respectively. The maturities of these debt securities ranged from three to 36 months and yield a blended return of approximately 3%. Interest income for the quarter was 92,000. Working capital was $29.9 million or $0.99 per share. Stockholders' equity was $44.8 million for $1.48 per share, and the company has no debt. Our efforts remain focused on new contract awards, expedient execution, and technology innovation, we continue to prioritize our cost control spending and mitigate supply chain challenges as best possible. We're excited for future success with our DGI technology and believe the strength of our balance sheet to bolster these initiatives. I'll now turn the call back over to Vince.
Vince Arnone: Thanks very much, Ellen. Operator, let's please go ahead and open the line for questions.
Operator: Thank you. We will now be conducting a question-and-answer session.
