Fuel Tech Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Fuel Tech Second Quarter 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Connor Rodriguez, Investor Relations at The Equity Group.

Operator

Thank you. You may begin.

Speaker 1

Thank you. Good morning, everyone. Thank you for joining us today for Fuel Tech's 2nd Quarter 2023 Financial Results Conference Call. Yesterday after the close, we issued a copy of the release, which is available at the company's website, www.fueltech.com. Our speakers for today will be Vince Arnone, Chairman, President and Chief Executive Officer And Alan Albright, our Chief Financial Officer.

Speaker 1

After prepared remarks, we will open the call for questions from our analysts and investors. Before turning things over to Vince, I would like to remind everyone that matters discussed in this call, except for historical information, Are forward looking statements as defined in Section 21E of the Securities and 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 the information currently available to our company's management. Fuel Tech has Try to identify forward looking statements by using words such as anticipate, believe, plan, expect, estimate, intend, Well and similar expressions, but these words are not the exclusive means of identifying the 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 and Item 1A under the caption of 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 and business prospects and opportunities to differ materially from those expressed and or implied of these statements.

Speaker 1

Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any forward looking statements contained herein to reflect Investors are cautioned that all forward looking statements involve risks and uncertainties, including those in the company's filings with the SEC. With that said, I'd like to turn the call over to Vince Arnone. Vince, please go ahead.

Speaker 2

Thank you, Connor. Good morning, and I'd like to thank everyone for joining us on the call today. Our results for the Q2 of this year We're mixed between our business segments, with APC segment revenues rising 25% from last year's Q2, offset by a decline in revenue from the FUEL CHEM segment due to unscheduled and temporary maintenance related downtime at units utilizing our technology. We continue to maintain a conservative cost profile, invest in our growth, specifically with respect to our water and wastewater treatment technology, Optimize our balance sheet, and we ended the quarter with total cash and investments of nearly $33,000,000 and no long term debt. As discussed last quarter, we commenced our first on-site demonstration as part of our dissolved gas infusion technology initiative, which we call DGI, using a small scale dissolved oxygen infusion system at an aquaculture setting in the Western United States.

Speaker 2

The deployment, which is scheduled to conclude later in Q3 of this year, has already demonstrated encouraging results that are in line with our objective of improving the customers' operational productivity and efficiency using optimized The DGI system is able to consistently maintain dissolved oxygen levels In excess of 150 percent of saturation across a variety of site conditions and the DO level is being maintained within an optimal range At this stage of the demonstration, it is too early to tell the total effect of the higher level of DO on the growth rate of the animals being farmed. However, initial data appears to show an improvement in this metric. We are meeting all of the customers' test objectives thus far and our internal expectations at this point as well. We look forward to successfully completing this trial in Q3 and are in discussions for a longer term solution with this customer pending the outcome of this pilot. In addition to this demonstration, we are continuing to pursue additional demonstration opportunities across multiple end markets, Finalizing marketing documentation for all markets of interest are in the process of identifying channel partners And supply chain partners.

Speaker 2

And lastly, we are working on the design basis for a commercial scale small scale DGI system. Now let's spend a few minutes discussing our APC and FUEL CHEM business segments. Our FUEL CHEM segment Experienced a decrease in revenue and operating profit in the Q2 of this year due to the impact of unplanned unit outages As we have now entered the Q3 of the year, all of our larger scale customer units Are running at historically normalized levels due to weather related dispatch, and we expect improved performance for FUEL CHEM for the second half of twenty twenty three. With respect to international opportunities for the FUEL CHEM segment, we are continuing to follow the opportunity to Ban the provision of our chemical technology in Mexico via our 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. We recently 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 at additional facilities in this country.

Speaker 2

Our partner is currently in discussions With the state owned utility CFE regarding the application of our technology at several units. As we look out to 2023 on a full year basis, we continue to expect that FUEL CHEM revenues will decline modestly From 2022 levels, due primarily to a reduction in program utilization levels at our primary accounts From the high levels experienced in 2,002, client maintenance driven outages during the Q2, which I just mentioned and to the elimination of one account due to plant closure. Now for the APC segment. Revenue rose to $3,400,000 from $2,700,000 in last year's Q2, driven primarily by the timing of project awards and the commencement of work on contracts announced during 2022 and continuing through the 1st 6 months of 2023. These projects involve our SCR, SNCR and Ultra Emissions Control Solutions at natural gas and coal fired units in the U.

Speaker 2

S, Europe and the Pacific Rim. Last week, we were pleased to announce $2,200,000 in new project awards. These awards support projects serving various end markets and with scheduled completion dates ranging from Q3 of this year to Q1 of 2024. Additionally, we have good visibility to incremental contract awards in the amount of $3,000,000 to $5,000,000 which we would expect to be awarded before the end of Q3. Last quarter, we discussed the U.

Speaker 2

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. According to EPA, this action was designed to tighten NOx emission requirements by updating the cross state air pollution control rule to meet the good neighbor requirements of the Clean Air Act. We continue to believe that this new federal rule will serve as a catalyst for new APC orders over the next several years as utility and industrial customers explore ways to further reduce stock emissions. Based on our actual performance in the first half of this year, the effective backlog that we have in place today and the business development activities we are pursuing, We remain confident that our APC revenues for 2023 will exceed 2022 APC revenues of $10,600,000 Driven primarily by the APC business, we also continue to expect that total revenues for 2023 Will increase modestly to between $28,000,000 $30,000,000 up from $26,900,000 in 2022.

Speaker 2

This base case outlook excludes any material contributions from DGI as we are still in the early stages of commercialization and any significant contributions to APC from the recent EPA ruling in March. In closing, I want to once again thank the Fuel Tech team for their 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. With that said, I'd like to turn the call over to Ellen. Ellen, please go ahead.

Speaker 3

Thank you, Vince, and good morning, everyone. For the quarter, consolidated revenues were $5,500,000 compared to $6,400,000 in last year's 2nd quarter, reflecting higher APC segment revenues, offset by a decline in FUEL CHEM product revenue. APC segment revenue increased 25 percent to $3,400,000 from $2,700,000 in the prior year period. This increase was primarily driven by timing of project execution and new APC orders announced during 2022 and continuing through the 1st 6 months of 2023. FUEL CHEM product revenue was $2,000,000 compared to $3,600,000 In the prior year quarter, primarily the result of unplanned client maintenance and outages throughout the quarter.

Speaker 3

As Vince mentioned, we believe these outages have subsided and that FUEL CHEM's performance has returned to historical operating levels and will improve in the second half of the year. Consolidated gross margin for the Q2 was 37% of revenues as compared to 42% of revenues in the prior year period. This decline can be attributed to changes in segment mix with a slight decline in APC gross margins due to project and technology mix and lower FUEL CHEM margins due to the lower revenue for the FUEL CHEM segment. Consolidated APC segment backlog as of June 30 was $6,600,000 down sequentially from $7,600,000 at March 31, 2023 8 $200,000 at December 31, 2022. Backlog at quarter end consisted of $3,400,000 of domestic delivered project backlog and $3,100,000 of foreign delivered project backlog.

Speaker 3

SG and A expenses for the quarter were flat year over year at $2,900,000 For the full year 2023, we expect SG and A expenses to range between $13,000,000 $13,500,000 as we invest in resources to support current business initiatives and in the development of our DGI technology operations. Research and development expenses for the Q2 increased to $413,000 from $289,000 in last year's Q2. The increase was driven by new product development efforts in water treatment technologies and more specifically commercializing our dissolved gas infusion technology. Our operating loss was $1,300,000 compared to $485,000 for the prior year primarily driven by lower FUEL CHEM revenues, the effect of which were mitigated by relatively stable year on year expense and year on year expense profile. As we discussed last quarter, we continue to take advantage of the favorable interest rate environment and as of June 30, 2023 have invested approximately $30,000,000 and held to maturity debt securities and money market funds.

Speaker 3

This generated $307,000 of interest income in the 2nd quarter $646,000 for the 6 month period ended June 30, compared to $9,000 for the same period in 2022. We continue to expect net interest income for 2023, Barring any unusual deployments to grow the business will exceed $1,200,000 Our net loss For the quarter was $1,000,000 or $0.03 per share compared to a net loss of $356,000 or $0.01 per share in the Adjusted EBITDA loss was $1,200,000 compared to an adjusted EBITDA loss of $200,000 in the prior year period. Our financial position remains quite strong. As of June 30, we had cash and cash Equivalence of $15,100,000 and short and long term investments totaling an additional $17,700,000 Working capital was $31,200,000 or $1.04 per share. Stockholders' equity was $44,600,000 or $1.44 per share and the company continues to have no outstanding debt.

Speaker 3

I share Vince's optimism about our Sure. And upcoming improved performance and our ability to support Fuel Tech's expected growth. I appreciate your time. And now I'll turn the call back over to Vince.

Speaker 2

Thanks very much, Ellen. Operator, I'd now like to open the call for questions, please.

Operator

Thank you. Ladies and gentlemen, we will now be conducting our question and answer session. Our first question is coming from the line of Sameer Joshi with H. C. Wainwright.

Operator

Please proceed with your question.

Speaker 4

Hey, Vince. Hey, Alan. Thanks for taking my questions.

Speaker 2

Good morning, Sameer.

Speaker 4

Good morning. On the FUEL CHEM front, Are you getting the full benefit of the quarter? That is, were all the Unplanned maintenance activities at your client sites complete before commencement of 3Q?

Speaker 2

Can you ask that question one more time, Sameer? I lost a little bit of it, please.

Speaker 4

Yes. Sorry, sorry. On the FUEL CHEM front, For 3Q, are you getting all the like was there any unplanned maintenance or Into the 3Q or was it all completed in 2Q and 3Q? You will have full revenues.

Speaker 2

Yes. It was largely completed in Q2, Sameer. Yes. As we've moved into Q3, those outages have been eliminated. We are seeing a more normalized run rate for our primary accounts And Q3 thus far.

Speaker 2

So we are not expecting any material changes in that activity right now.

Speaker 1

Right, right.

Speaker 4

And this takes into account one of the land closures previously discussed in 2018?

Speaker 2

That is correct. That is correct.

Speaker 4

Okay. Got it. On the SG and A front, They came in a little bit lower than we had expected and I know you have guided for a range. But are there any specific That you took to bring the SG and A down or was there some one time in this queue?

Speaker 2

No, I wouldn't say that there's anything unusual occurring right now with SG and A, Sameer. I mean, We're watching our development on the DGI front. As I have mentioned on prior conference calls, we have not invested significantly In human resources or other SG and A related expenses as it relates to DGI, So we're watching the timing of that quickly. As we do see signs that this is going to fully turn into a commercially viable activity, We will see increases in SG and A related to that further investment. Other than bringing in our lead of DGI earlier This year, Bill Decker, we have not made material changes in human resources for DTI.

Speaker 2

But as soon as we see signs of success, and particularly with the demonstration that's ongoing right now, as we move throughout this year into 'twenty four, we will be talking about some About some expanded investment in SG and A as it relates to water and wastewater treatment. That just has not happened yet.

Speaker 4

Understood. That is on the SG and A front on the TI. Correct. But on the R and D front, I know 2Q expenses were slightly Because of this demonstration, and I think you're working on other opportunities. Should we expect R and D expense to be Couple of $100,000 more are in line with 2Q rather than 1Q?

Speaker 2

I would say that The Q2 number that you're seeing right now, you would expect to see in Q3 and perhaps Q4. Yes, we are investing in the demonstration. That is going to continue into Q3 and we would expect as we move throughout the year to have the opportunity to engage in additional demonstrations as well. So Yes, I confirm that. We would expect to see that uptick a little bit through the remainder of this year.

Speaker 4

Okay. And sticking to DJI, just maybe we have discussed this in the past, but Would these systems, these installations be customized or do you have sort of a Standard modular design that you can like put multiple units off. Can you just give us a sense of how it looks?

Speaker 2

Right. I mean the way we've originally looked at the design for the DGI systems is To be able to have them modular in nature, to be able to meet different application requirements. So that is our approach. The demonstration that we're doing right now is a small scale DGI system demonstration. It delivers about 15 pounds of oxygen per day.

Speaker 2

As I've mentioned in prior conference calls, we actually Have designed and built a DGI delivery system that can deliver up to £2,000 of oxygen per day. So we're looking at developing a, call it, a modular range of systems that can be used for a variety of different end market applications. That's our intent.

Speaker 4

Understood. And just maybe last one, are we expecting any I know in your outlook, you do not have any revenues from DGI. But is there a possibility that one of these demonstrations Would convert into an order that can be recognized, say, in the Q4 of 2023?

Speaker 2

I would say, yes, that is a possibility. I would not expect it to be material, Sameer, but yes, it is a definite possibility. Understood.

Speaker 4

I think those were all my questions. Thanks for taking those.

Speaker 2

Thank you, Sameer.

Operator

Thank you. I'm not seeing any additional questions at this time. So I'd like to pass the floor back over to Vince Arnone for any additional closing remarks.

Speaker 2

Thank you, operator. Once again, I'd like to thank all of our stakeholders, our employee team, Our Board of Directors and of course our shareholders for their continued support, we are working diligently to bring Our water and wastewater treatment initiative to commercialization, at the same time, we're continuing our focus on efforts on Expanding our base business segments to the extent we can on a global basis. Thanks again for your time and thanks for your interest in Fuel Tech. Everyone have a great day. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference and webcast. Once again, we thank you for your participation and you may disconnect your lines at this time.

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