Fuel Tech Q3 2023 Earnings Call Transcript

There are 7 speakers on the call.

Operator

Greetings and welcome to the Fuel Tech Inc. 3rd Quarter 2023 Financial Results Conference. 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.

Operator

It is now my pleasure to introduce your host, Devin Sullivan. Thank you, Devin. You may begin.

Speaker 1

Thank you, Cat, and good morning, everyone. Thank you for joining us today for Fuel Tech's Q3 2023 Financial Results Conference Call. Yesterday after the close, we issued a copy of our results. That release is available at the company's website at www.ftek.com.

Speaker 2

Our

Speaker 1

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 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. Jueltech has tried to identify forward looking statements by 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 ks 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.

Speaker 1

Fuel Tech undertakes no obligation to update such factors or to 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.

Speaker 3

Thank you, Devin. Good morning, and I'd like to thank everyone for joining us on the call today. Our results for the Q3 reflected continued double digit revenue growth for our Air Pollution Control, or APC segment, With sales up 36% from last year's Q3 and an expected and welcomed rebound in revenue at FUEL CHEM, which saw revenue double from the immediately preceding Q2 of 2023. As program activity for this segment normalized following a period of reduced operation driven by unscheduled downtime and temporary maintenance on our installed units. We continued to maintain a conservative cost profile with SG and A expenses trending at or slightly below 2022 levels, secured new ATC contracts and ended the quarter with over $33,000,000 in total cash and investments and no long term debt.

Speaker 3

We believe that the future of our company lies not only on capitalizing on the opportunities offered by our existing products and end markets, but also on developing and commercializing new products and market opportunities. To that end, The continuing development of our Dissolved Gas Infusion Technology, or DGI, remains as a high priority. In following up on our discussion from our Q2 earnings conference call regarding DGI, we are very pleased to have completed the on-site deployment And pilot testing of our DGI technology at an aquaculture setting in the Western United States. Over the 100 day demonstration, the DGI technology delivered and consistently controlled the dissolved oxygen levels And a band between 9 12 milligrams per liter, which is approximately 150 percent of atmospheric saturation. Based on an analysis of the results and post study consultation with the client, the DGI technology not only met the pilot study expectations and parameters, but in many cases exceeded them for consistent delivery of high quality dissolved oxygen on demand.

Speaker 3

The client reported excellent results from taste tests by local chefs, including an absence of trimethylamines within the harvest. Results from this study will be published in an abstract and presented at the Aquaculture America Conference At their location for both their next growth cycle and their larger scale development plans. In addition to this demonstration, We are continuing our conversations with other potential channel partners as we look to deploy DGI in other end markets either late this year or early in 2024. DGI is best described as a technology that involves the efficient transfer of high concentrations of gas into a body of water to drive chemical or biological reactions, such as wastewater treatment or for process improvements such as industrial applications or aquaculture. Our DTI system is a 2 step technological process Where first, a slipstream of processed water is pressurized and infused with oxygen using Fuel Tech's patented saturator And secondly, this oxygen laden slipstream is returned to the process basin through a patent pending injection array for optimal distribution and gas residence time.

Speaker 3

At present, we are utilizing DGI to deploy oxygen into bodies of water. However, We do believe that DGI can be applicable for other gases as well, such as ozone. DGI's benefits include The precise control of dissolved oxygen levels for all processed applications and ability to extend plant capacity Without major expansion or capital outlay, odor reduction and minimal bubble formation for extended residence time. We believe that DGI is applicable across several end markets, including pulp and paper, food and beverage, Chemical or petrochemical, water and wastewater treatment and aquaculture. Now let's please I'll spend a few minutes discussing our APC and FUEL CHEM Business segment.

Speaker 3

Our FUEL CHEM business segment benefited from the return of our larger scale customer units To more normalized levels of usage after experiencing extended downtime in the second quarter associated with reduced dispatch driven by weather related demand and unscheduled maintenance outages. We expect FUEL CHEM's performance in the Q4 of this year To be at a reduced level from the $4,100,000 reported in last year's Q4 due primarily to a reduction in program utilization levels At our primary accounts from the very high levels experienced in 2022. This will result in lower annual revenues at FUEL CHEM when compared to full year 2022. With respect to international opportunities For the FUEL CHEM segment, we are continuing to follow the opportunity to expand the provision of our chemical technology in Mexico, We are a partner in that country to address the emissions created by the burning of high sulfur fuel oil, which is being undertaken without the necessary environmental remediation And at the expense of the health of surrounding communities. Earlier this year, we executed a 2 year extension to the program that we currently have in place at one facility, and we do believe that political pressure is building In favor of the implementation of our FUEL CHEM program, add additional facilities in this country.

Speaker 3

Our partner is in discussions with the state owned utility, CFE, regarding the application of our technology at several units. For the APC segment, revenue rose by 36% to $3,700,000 from last year's Q3, driven primarily by the timing of project awards and the commencement of work on contracts announced during 2022 and continuing through the 1st 9 months of 2023. These projects involved our SCR, SMCR and Ultra Emissions Control Solutions and Natural Gas and Coal Fired Units in the U. S, Europe and the Pacific Rim. As previously announced, we have secured $2,200,000 of new project awards during the Q3.

Speaker 3

And earlier this week, we announced an additional $2,600,000 of new awards. Based on our visibility to projects that are in development, We expect a minimum of $3,000,000 to $4,000,000 in additional awards before the end of this year. Last quarter, we discussed the U. S. Environmental Protection Agency's issuance of a rule finalizing requirements That obligate 23 states to reduce emissions of nitrogen oxides from power plants and certain industrial facilities.

Speaker 3

According to the EPA, this action was designed to tighten nitrogen oxide emission requirements by updating the Cross State Air Pollution Control Rule to meet the Good Neighbor requirements of the Clean Air Act. The good neighbor rule has currently been stayed by several circuit boards covering sources in upwind states. Within the past few weeks, sources in affected downwind states have petitioned the Supreme Court to proceed with the rule. For the near term, upwind sources will likely not be required to reduce their nitrogen oxide emission levels We'll serve as a catalyst for new APC orders over the next several years as utility and industrial customers explore ways to further reduce dock emissions. In fact, it is important to note that we have received and responded to several requests for budgetary proposals as customers prepare to address The upcoming compliance requirements as part of their capital budgeting requirements for 2024 and beyond.

Speaker 3

We will provide further analysis and commentary on this regulation as more information becomes available in the future. Through the 1st 9 months of 2023, APC revenues have already exceeded the revenue recognized for the entirety of 2022. Based on our effective backlog at quarter end, the business development activities we are pursuing and our previously noted expectations for FUEL CHEM, We expect that total revenues for 2023 will increase modestly to between $27,000,000 $28,000,000 up from $26,900,000 in 2022. This base case outlet excludes any material contributions from DGI as we are still in the early stages of commercialization and any significant contributions to APC from the EPA rule earlier this year. In closing, I want to once again thank the Fuel Tech team for their ongoing continued hard work and dedication and our shareholders for their continued support as we continue to evolve our operations and expand our presence as a global supplier of technologies that enable clean air and pure water.

Speaker 3

With that said, I'm going to turn the discussion over to Ellen. Ellen, please go ahead.

Speaker 4

Thank you, Vince, and good morning, everyone. We are pleased with our Q3 results, reflecting higher net income, a significant revenue improvement in our FUEL CHEM segment compared to the immediately preceding second Quarter of 2023 and continued strength in our balance sheet. For the quarter, consolidated revenues were flat at $8,000,000 compared to last year's 3rd quarter driven by improved results year over year in our APC business segment. Consolidated revenues for the 20 APC segment revenues for the quarter increased 36 percent to $3,700,000 from $2,700,000 in the prior year period, driven by the timing of project execution and the recognition of ancillary APC orders. This increase was Set by a decline in FUELCOME product revenue for the quarter that was the result of lower dispatch electrical generation demand and changes in product and fuel usage at certain accounts.

Speaker 4

As noted, PUCAM revenue more than doubled from Q2 2023 when this segment was affected by customer driven maintenance outages. Consolidated gross margin for the Q3 was 45% of revenues as compared to 46% of revenues from the prior year period. Although APC gross margin rose to 40% from 34% in last year's Q3 Due to a change in project and project mix, lower revenues for the FUEL CHEM segment impacted margins on a consolidated basis. Q3 2023 gross margin for the PULQEM segment returned to historical levels of right around 50%. Consolidated APC segment backlog as of September 30, 2023 was $5,600,000 down sequentially from $6,600,000 At June 30, 2023 $8,200,000 as of December 31, 2022.

Speaker 4

Backlog at quarter end consisted of $2,400,000 of domestically delivered project backlog and $3,400,000 of foreign delivered project backlog. As Vince noted, we have recently announced new contract awards and expect to add this to the backlog balance prior to the end of the year. We continue to maintain an expense discipline across our enterprise. SG and A expenses for the Q3 decreased to $3,000,000 from 3 point For the full year 2023, we expect SG and A expenses to range between $12,800,000 $13,200,000 as we strategically invest in resources to support current business initiatives. Research and development expenses for the Q3 increased to $513,000 from $207,000 in last year's Q3.

Speaker 4

This increase was primarily due to continuing investments in our DGI water treatment technologies and in support of our pilot testing initiative. We will continue to invest as needed in our R and D efforts in support of our commercialization of our DGI technology and to actively pursue commercial applications for technologies outside of our traditional markets. We continue to take advantage of the favorable interest rate environment and as of September 30, 2023, have invested in excess of 30 $1,000,000 in held to maturity debt securities and money market funds. This generated $322,000 of interest income in the 3rd quarter Nearly $1,000,000 of interest income for the 2023 9 month period, up from just $100,000 in the same period last year. We continue to expect that interest income for 2023 barring any unusual cash deployments to grow the business will approximate $1,300,000 Net income for the Q3 was $459,000 or $0.02 per share compared to net income of $314,000 or $0.01 per share in the same period 1 year ago.

Speaker 4

Adjusted EBITDA was $352,000 compared to an adjusted EBITDA of $421,000 in the prior year period. We continue to maintain a strong financial position. As of September 30, 2023, we had cash and cash equivalents of $13,500,000 and short and long term investments of 19,700,000 Working capital was $31,900,000 or $1.05 per share. Stockholders' equity was $44,100,000 or $1.45 per share. And the company continues to have no outstanding debt.

Speaker 4

We are confident in our ability to fund our ongoing growth initiatives, pursue new product and market opportunities and maintain our strong financial position, which we view as important competitive advantage. Thank you for your time, and I'll turn the call back over to Vince.

Speaker 3

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

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions.

Speaker 2

Good morning, guys.

Speaker 3

Good morning, Amit.

Speaker 2

Hi, Vince. Just with respect to DJI, I mean, it looks like the How quickly and the balance sheet that you have, how quickly can you move this to Just expanded efforts with other pilot stage opportunities and even I know you may be a little How should we think about revenues from this coming through for you guys? How quickly can that happen now that you have seen these With

Speaker 3

respect to this particular Customer, our next step here is probably going to be engaging in an equipment lease or rental arrangement with them for their next growth cycle, Which will likely start before the end of this year, early next year. But with this small system that we're using there, we're not expecting material revenues. Relative to your, call it, your more broad question on how quickly we can get perhaps more systems out In a commercial environment, premature for me to talk about any sort of revenue level for 2024. But what we are going to be doing now that we do have some, call it, pilot or demonstration success in our hands, As I noted in my commentary, we're going to take this information out publicly via conferences and look to expand knowledge about DGI And marketplaces. So that is going to be our next step.

Speaker 3

Yes, we have solid balance sheet. As you know, we've been Using our funds carefully regarding how we do invest in DGI, But with each step, it's providing us more impetus, if you will, to further invest to pick the pace up a little bit regarding commercialization. So that's something we're evaluating right now as we're looking to end 'twenty three and move into 2024, but we're going to be looking at some resource enhancements, Human Resource Enhancements, we're going to be looking at perhaps adding additional DTI systems To have on hand, yes, inventory for potential sale or demonstration, that's everything that's in process right now. When we look to have our first call in 2024, which will be in that early March time frame, obviously, I'll have more to talk about regarding the development of DGI at that point in time. But suffice it to say, between now and then, we are expecting To have additional demonstrations, we are expecting to have some small level of commercial revenue.

Speaker 2

Thank you for that Vince. Just looking ahead a little bit into 2024, maybe it's a little early, but how do you feel about sort of your setup With respect to the visibility you have right now for 2024, could that be Another sort of year over year period for you or revenue growth period for you?

Speaker 3

Right. I mean

Speaker 2

Any color on how you are positioned for sort of in the next 12 months would be helpful. And the reason I ask this question, Vince, is You have cash per share $1.45 roughly and the stock is trading well below that. Just trying to understand where the disconnect is and what investors may or may not be thinking about the opportunities in front of you.

Speaker 3

Amit, completely understand, and I share your sentiment regarding where we're trading today visavis Our cash value per share, visibility in terms of me sitting here and providing guidance on 24, it is premature. However, I will tell you that I would be disappointed as CEO of the company if we would not be targeting another year of revenue increase In 2024 over 2023. So that's the statement that I'll make today. I think that the disconnect on valuation, I think as we are able to provide more positive information to the public and more make more people aware of what Fuel Tech is actually providing Both as an environmental solutions company to the world today and also from a pure value perspective, I think, hopefully, we'll see that disconnect in valuation change as we move into 2024.

Speaker 2

Thank you, Vince. I'll take my other questions offline, but appreciate all the color. Thank you so much.

Speaker 3

You're welcome. Thank you.

Operator

Our next question comes from Mark Silk at Silk Investment Advisories. Mark, please proceed.

Speaker 5

Hi, Vince. Thanks for taking my questions.

Speaker 3

Hi, Mark. Good morning to you and thanks for joining.

Speaker 5

Okay. So in the October 9th edition of Barron's, there was an article discussing Europe's first ever carbon based tariff. So some of the highlights were The imports to Europe will now face attacks based on carbon emissions caused by manufacturing. The goal of the legislation is to encourage more countries to write laws that So this could reconfigure international trade flows over the next 5 years and potentially result in new carbon fees going into effect in more countries. So taxes will start being collected in 2026 and will increase gradually until they are equal to EU carbon Prices in 2,034.

Speaker 5

So

Speaker 3

I have

Speaker 5

a few questions. So you've done a great job controlling expenses relative to revenues. And something like this can really accelerate growth for Fuel Tech. So since you have the technology and To mitigate this risk for many companies and industries, can you discuss Maybe a cost effective strategies that would allow you to participate in this opportunity. So for instance, Fuel Tech could pursue resellers and partnerships around the world where you provide the solutions and they can supply the sales force.

Speaker 5

So this could be a revenue sharing agreement without you incurring start up costs, etcetera, but would lead only to variable costs in relation to increased sales.

Speaker 3

Mark, thanks for the question. I appreciate it. And actually for everyone's benefit, Mark did actually I'll share the commentary on the European carbon tariff with me and I have done a little bit of reading on that myself. So Mark, thanks for It's a monumental undertaking what the EU is actually looking to put in place today. To your point, they put the requirement out.

Speaker 3

It's in a transitional phase as we sit here today. Evidently, they're going to start Try to gather some data on carbon credittariffs, if you will, starting in 2024. Now Mark, as you know, the right now, the targeted industries are the call it the highest level polluters on the planet. It's cement, it's iron and steel, aluminum, electricity and hydrogen. So these are many of the end markets That Fuel Tech addresses today with our technology base via addressing European customers or via addressing Customers in different parts of the world.

Speaker 3

So from our perspective, we need to see how this tariff program is going to develop, obviously. But as companies around the world are looking to reduce their carbon footprints, we work very closely with the steel industry over many, many years We have good relationship with steel, particularly in the U. S, not as strong in the EU as we sit here today. So we'd have some work there to do. With some of the other industries, I think we're going to continue to look to capitalize on helping those industries reduce their carbon footprint By applying our nitrogen oxide technologies on their facilities as we have the opportunities to work with them prospectively.

Speaker 3

So it's difficult to call this out as what I would call a specific targeted opportunity Because we have been dealing with these industries historically, and we will continue to try to capitalize on any attempts that these industries are looking to make to reduce their carbon footprint. As we get more information on this regulation in particular and better understand How companies are looking to address it? We'll gather more information on our end, and I'll be happy to share that on next earnings conference call as well.

Speaker 5

Yes, because one of the thoughts is that where the U. S. Is reducing their dependence on coal, that's not necessarily the case for other countries.

Speaker 3

Correct.

Speaker 5

So I mean, what's interesting about this is this could really change the prospects for your Product from a regulatory requirement to an economical one in order to avoid basically recurring taxes, I. E. Expenses. Would that is that correct?

Speaker 3

Under a cap and trade type system, that's exactly how it would work.

Speaker 5

All right. I mean, so the positive is obviously this doesn't make sense to pursue now as your company is trading below Kash. But it just, I think, brings awareness that it's an interesting investment and potential takeover target. But you don't have to Let's switch to DGI for a second. So congratulations on the success of the pilot.

Speaker 5

So you and Mr. Adecker

Speaker 3

Bill has a couple of thoughts in mind where there will be low hanging fruit, we believe. I think Our next demonstration is likely going to be one of those areas that we are going to be targeting, but it's not something that I can speak to at this point in time. It is a demonstration of what we're looking to engage in as we move into the Q1 of next year. But Bill has been working diligently across his Body of relationships in multiple industries to indeed do just that, find those areas that could be an immediate fit for DGI. To be honest, aquaculture came as a little bit of surprise to us.

Speaker 3

But as we found out, it's an area that is really Perfectly suited for the DGI application. But Bill has some other targets in mind as well.

Speaker 5

So also some of the areas that aren't low hanging fruit, but it makes sense to concentrate on, I. E. Lucrative future deals, Would those be mixed with reasonable sales cycles or it's going to be another one of these 100 day type of experiments or just because you already Short success in this, maybe it shortens the time frame?

Speaker 3

Yes. I've if past practice relative to how Fuel Tech has done business, It comes to true with DGI. We'll probably need to have more demonstrations than not, particularly It's still at the beginning of the commercialization of the product, because everyone is going to want to see proof of concept at their facility As opposed to just making the assumption, it's going to work immediately. But as we do have what I would call repetitive business And in specific end markets, I think that should diminish over time.

Speaker 5

The other question is, just in general. Have you looked into like some areas that you could potentially have some recurring revenues as that would probably knowing

Speaker 3

Referring to DGI specifically or Yes.

Speaker 5

Just any part of the business.

Speaker 3

Yes. We obviously, We have really been fortunate to enjoy the recurring revenue that we've had from our Chemtech business. Unfortunately, That has diminished over the past decade or so with the heavy focus on reducing the utilization of coal. However, that being said, We are looking at trying to find other ways whereby we can enhance our recurring revenue platform, Whether it be spare parts and services for our systems or anything otherwise, because recurring revenues are Obviously, fabulous to have in hand and typically the higher gross margin than our typical system sales. So it's something that we are working on as a company.

Speaker 5

Great. And lastly, I appreciate you buying stock after last quarter's earnings around $1.20 It would be nice to see More insight of buying from the Board and upper management to give shareholders confirmation that you believe in the future growth of the company.

Operator

Our next question comes from Jim McIlree from Dawson James. Jim, please proceed.

Speaker 6

Thank you and good morning.

Speaker 3

Hi, good morning, Jim.

Speaker 6

Can you discuss the gross margin outlook for Q4 given the revenue outlook? It sounds like there

Speaker 3

might be a little bit of

Speaker 6

decline, particularly Well, actually, it seems like there might be a little bit of gross margin decline for both businesses in Q4 relative to Q3. Do I have that Right or about right?

Speaker 3

Yes. I would say, Jim, that for Q4 for APC, likely to see A little bit of a downtick there. We did have the favorable impact of a, call it, an ancillary revenue Scenario, if you will, in Q3 that did give us a little bit of a bump up on the APC margin side. So I would think that would revert back to more traditional 35 ish percent levels in Q4. And Chentek, Given the fact that we are looking at a little bit of a reduction in revenue in Q4 from Q3, I'd say flat to a little bit lower for ChemTek.

Speaker 6

Got it.

Speaker 3

Thanks. So on a weighted average basis, yes, down, down from Q3.

Speaker 6

Yes. Got it. And as far as I know you're reluctant to talk too much about 2024, but At least conceptually, as DGI ramps up next year, will that

Speaker 3

I definitely envision that we are going to be adding some resources for GGI in 2024. The pace of business opportunity will drive the level of that resource add. Right now, Jim, I wouldn't call it a material number as I see it today, Couple $300,000 on an annualized basis relative to how it would roll out and impact 2024, Somewhere in that range as we would look to add a couple of individuals throughout the year. We'd be looking at some field resources, Perhaps some sales resources as well to support that business development.

Speaker 6

Is it fair to think of it as Success based or success based with maybe a couple of months lag?

Speaker 3

I would say it's very fair, yes.

Speaker 6

Okay. Okay, great. And then my last question is, can you discuss the Maturity of your investment portfolio, just broad brush, are you extended out A long period of time or is it, call it, 18, 24 months for

Speaker 3

Yes. When we first Understood. When we first started putting our portfolio in place, we had laddered the investments from a minimum of 90 days, maximum Of 36 months. And so, as they've expired, we've reinvested, but trying to keep A similar, call it, range of expiration window. So some of the earlier maturities that we had obviously were at When we put them in place originally, we're at some of the lower rates, but we've replaced them with maturities coming at this point in time, Yes, averaging 5% or a little more than 5% on some of those items as well.

Speaker 3

So today, we're probably a weighted average of somewhere in the 4% maybe a little bit more range. But as we have some of those early maturities start to drop off, I think that our weighted average is going to pop up as we move throughout 2024.

Speaker 6

And with the recent decline in long term rates, do you have to mark to market any of those or as long as you Have indicated they're going to be held to maturity. You don't have to mark them to market.

Speaker 3

Yes. Held to maturity is basically how we're accounting for these. We do not mark to market.

Speaker 6

All right. Fantastic. Thanks a lot. Appreciate it. Thank

Speaker 3

you, Jim. Appreciate it.

Operator

Over to Vince Arnone for closing comments.

Speaker 3

Thank you, Cat. I'd like to thank everyone for joining us on the call today. We were pleased with our Q3 performance here in 2023. Looking forward to what's hopefully going to be a strong end and an excellent beginning to 2024 since we won't have our next conference call until approximately early March of 'twenty four. Again, thank everyone for joining.

Speaker 3

To our shareholders, investors, other stakeholders, a good holiday season to everyone, and Thanks for your support. Fuel Tech appreciates it. Thank you.

Operator

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

Earnings Conference Call
Fuel Tech Q3 2023
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