Fuel Tech Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 6 speakers on the call.

Operator

Greetings. Welcome to Fuel Tech Inc. 1st Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference I will now turn the conference over to Devin Sullivan, Managing Director of The Equity Group. Thank you. You may begin.

Speaker 1

Thank you, Sherry. Good morning, everyone, and

Speaker 2

thank you for joining us today for Fuel Tech's 2024 Q1 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.

Speaker 2

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 ks in 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 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 details in the company's filings with the SEC. With that said, I'd now like to turn the call over to Vince Arnone.

Speaker 2

Vince, please go ahead.

Speaker 1

Thank you, Devin. Good morning, and I'd like to thank everyone for joining us on the call today. Given that we last spoke not that long ago in connection with our year end results, I'll keep my commentary brief today. Although we've begun the year more slowly than anticipated in our APC and FUEL CHEM business segments, we expect that our performance for these businesses will show steady improvement as we move through 2024. In addition, we are very encouraged by the progress we are making at our Dissolved Gas Infusion or DGI Business Initiative, and we ended the quarter in a very strong financial position with cash, cash equivalents and investments of over $32,000,000 and no long term debt.

Speaker 1

Now let's discuss our results for the Q1 in more detail. As a general statement, our results reflected the impact of customer driven delays in the execution of existing contracts in our APC business segment, while our performance in FUEL CHEM was impacted detrimentally by historic warm weather across the U. S. That affected unit dispatch and by unscheduled plant outages. For the APC segment, I remain pleased with our ongoing execution of existing projects and our team's current business development activities, which continue to reflect an increased focus on global emissions protocols across a variety of fuel sources.

Speaker 1

In 2023, we benefited from the continued adoption of our ULTRA, SCR, SNCR and FCC emissions control solutions at natural gas and coal fired units in the U. S, Europe, South Africa and the Pacific Rim, and I expect this to continue into 2024 and beyond. Independent of the potential impact of favorable regulatory outcomes, which I will discuss shortly, we are well positioned to take advantage of current industrial market trends, which include plant capacity expansion across several industries the incentivized use of small turbines to replace traditional less clean power generation the development of the biocarbon industry the continued emphasis on decarbonization on a global basis and the focus on using our ULTRA systems as the safe source of ammonia for SCRs at hospitals and universities across the U. S. We are providing proposals to customers for both near and longer term needs regardless of regulatory drivers, and we are currently watching the progress of $5,000,000 to $10,000,000 in APC contract opportunities that could close in our favor before the end of Q2 or shortly thereafter.

Speaker 1

Now on the regulatory front. We continue to monitor progress related to the adoption of the U. S. EPA's Cross State Air Pollution Control Regulation to meet the Good Neighbor requirements of the Clean Air Act, which we believe can be a potential catalyst for APC growth in 2024 and for the remainder of this decade as utility and industrial customers explore ways to further reduce NOx emissions. Over the past several months, we have received and responded to multiple requests for budgetary proposals as customers prepare to address the upcoming compliance requirements as part of their capital budget planning for this year and beyond.

Speaker 1

As discussed on previous calls, the rule currently obligates 23 states to reduce emissions of nitrogen oxides from power plants and certain industrial facilities to limit their impact on downwind states. The ultimate timing of the effectiveness of the rule is uncertain because several upwind affected states and sources have challenged the efficacy of EPA's proposed regulation in multiple courts, and stays of the effectiveness of the rule have been issued for many upwind states. In February of this year, oral arguments were presented to the Supreme Court by both sides, and we are closely monitoring the potential impact of the Supreme Court's ruling on whether to stay the rule for all states when it is issued later this year. In addition to the Good Neighbor Rule, we are also watching the progress of EPA's rule for large municipal waste combustor units, which is independent of the Good Neighbor rule. This rule reduces the nitrogen oxide emissions requirements for large municipal waste combustor units.

Speaker 1

Fuel Tech has had a long history of assisting this industry in meeting its compliance requirements, and we have had discussions with customers in this segment to support them in their compliance planning. The municipal waste combustor rule is currently in a public comment period with compliance deadlines expected sometime in the next 3 years. Lastly, within the past 2 weeks, EPA has issued new stringent greenhouse gas emission standards that require 90% reductions from most new gas fired plants and existing coal units by 2,032. This same proposed rule tightens the mercury and air toxic standards requirements by 2028, wastewater discharge limits for coal fired power plants by 2029 and ash handling and disposal from coal fired power plants over the next several years. This combined rule comes at a time when there are projections of potential shortfalls in power generation over the next 5 to 7 years in certain geographic regions in this country due to data center power demands and increases in computing power requirements resulting from the adoption of artificial intelligence.

Speaker 1

And we are in the process of evaluating the potential impact of these rules across our technologies and the power generation market. Now for the FUEL CHEM segment. Revenues declined from the prior year Q1 due to a decrease in operational demand from our client base, resulting from warm weather across the U. S. And, to a lesser extent, unscheduled plant outages and closures compared to the same period in 2023.

Speaker 1

As mentioned on our last conference call, we have been pursuing multiple additional FUEL CHEM development opportunities, which could provide incremental revenue contribution in the second half of twenty twenty four for both coal and biomass fired boilers. I'm very pleased to say that we have received an order for our FUEL CHEM demonstration at a new coal fired power generation site in the Western U. S. The demonstration is expected to commence later this month and if it becomes a commercial account, is expected to generate annualized revenue approximately $1,500,000 to $2,000,000 at historic FUEL CHEM gross margins. And in addition to this domestic opportunity, we are in discussions with 1 additional coal fired power generation facility regarding a demonstration later this year, also in the Western we are also pursuing an opportunity to address the concerns of a biomass fired boiler operator.

Speaker 1

With respect to international FUEL CHEM opportunities, we remain in discussions with our partner in Mexico to expand the provision of our chemical technology in that country. We expect that the nation's upcoming presidential election in June will provide us with additional clarity on the likelihood of this opportunity as the favorite candidate is an environmental engineer by background and could take a favorable position on the implementation of environmental policy. We will provide more color on this opportunity on our next conference call.

Speaker 3

As we move into

Speaker 1

the second half of twenty twenty four, we expect FUEL CHEM revenue to improve due to the increased power demand and associated unit dispatch that comes during the summer months and to contributions from the new coal fired unit demonstration that will commence later this month. With our DGI initiative, our momentum continues. Last month, we executed an agreement to commence and complete a demonstration of DGI at a municipal wastewater site. In this instance, our DGI solution will be used to reduce hydrogen sulfide in the wastewater via oxygenation to reduce corrosion inside the wastewater lines. This application will demonstrate DGI's capability to extend the life cycle of aging infrastructure and eliminate the need for costly maintenance activities.

Speaker 1

Following the successful demonstration of our technology at a U. S. Shrimp farming facility last year, we are in discussions with the owners of that same facility to incorporate DGI into their commercial scale planned stacked raceway system. The client is expecting to have their aquaculture aquaculture system functional by the end of the year, and we are in the process of providing a proposal for a DGI system that will meet the precise needs of this aquaculture environment. Additionally, for aquaculture, we are in discussions with a potential new aquaculture client in the U.

Speaker 1

S. That is considering incorporating DGI into a greenfield, pit hatchery site in the Western states. There are many other target markets of interest for DGI, including pulp and paper, food and beverage, chemical, petrochemical and horticulture, and we look forward to addressing these markets prospectively. On the marketing front, we have been increasing our efforts to communicate the benefits of DGI to targeted end markets and customers, and we will be present at additional conferences later this year. Based on our effective backlog today, the business development activities we are pursuing and our previously noted expectations for FUEL CHEM, we expect that total revenues for 2024 will exceed the total revenues recognized in 2023 of $27,100,000 and we will provide further guidance as we move throughout 2024.

Speaker 1

This base case outlook excludes any material contributions from DGI as we are still in the early stages of commercialization, any significant contributions to APC from the above referenced EPA regulations and the impact of material business development activities for FUEL CHEM. In closing, I want to thank the Fuel Tech team for their continued contributions to our business. It is their hard work, passion and dedication that drive our ability to be successful as a company. Additionally, I thank our shareholders for their continued support. We continue to expect that 2024 will be an important year in the growth and development and evolution of Fuel Tech, and we look forward to keeping you apprised of our progress.

Speaker 1

Now I'd like to turn the call over to Ellen.

Speaker 4

Thank you, Vince, and good morning, everyone. For the quarter, consolidated revenues declined to $5,000,000 from $7,300,000 in last year's Q1, reflecting declines in both the APC and FUEL CHEM segments from the prior year period. APC segment revenue decreased to $2,300,000 from $3,600,000 in the Q1 of 2023, primarily related to customer related delays and project execution. FUEL CHEM segment revenue declined to $2,600,000 from $3,700,000 in the Q1 of 2023 due to a decline in electrical generation demand and unscheduled plant outages. Consolidated gross margins for the Q1 were 41% of revenues, an increase from 38% in the Q1 of 2023, reflecting an increase in APC segment gross margin to 38% of segment revenues from 27% in the prior year period, due in large part to the mix of projects and services executed during the quarter.

Speaker 4

Result of lower segment revenue. We expect FUEL CHEM segment margins to return to historical levels as we continue throughout the year. Consolidated APC segment backlog on March 31 was $6,200,000 down from a backlog of $7,500,000 at December 31, 2023. Backlog at March 31, 2024 included $1,800,000 of domestically delivered project backlog and $4,400,000 of foreign delivered project backlog compared to $2,600,000 of domestically delivered project backlog and $4,900,000 of foreign delivered project backlog at December 31. We expect that $6,000,000 of current consolidated backlog for the APC segment will be recognized in the next 12 months.

Speaker 4

SG and A expenses increased slightly to $3,300,000 from $3,200,000 in Q1 of 2023, reflecting higher employee related expenditures. Given the decline in revenue, SG and A as a percentage of revenue in the 20241st quarter increased to 68% from 45% in the same prior year period. Research and development expenses for the Q1 rose to $376,000 from $218,000 in the same period a year ago, mainly reflecting our ongoing investment in the development of new technologies to expand our product offerings into the water and wastewater treatment markets and more specifically our DGI systems. Our operating loss was $1,700,000 compared to a loss of $658,000 in last year's Q1, reflecting a reduction in overall revenue, a shift in margin contribution from product mix and slightly higher operating expenses for the quarter. We continue to take advantage of the favorable interest rate environment and as of March 31, have invested more than $30,000,000 in held to maturity debt securities and money market funds.

Speaker 4

This generated $311,000 of interest income in the 1st quarter compared to $339,000 in the prior year period. Our net income for the quarter was $281,000 or $0.01 per share compared to a net loss of $414,000 or a loss of $0.01 per share in the same period 1 year ago. Net income for the Q1 of 2024 included an extraordinary other income amount of $1,700,000 related to the recording of income associated with the expected receipt of the employee retention credit during the quarter, as compared to an other expense of $90,000 in last year's Q1. For those of you not familiar with the employee retention credit, the CARES Act established by the U. S.

Speaker 4

Government was enacted to provide certain relief as a result of the COVID-nineteen pandemic. This tax relief, along with other stimulus measures, allowed for employers to claim a refundable tax credit against the employer share of Social Security tax for qualifying periods in 20202021 subject to certain criteria. Under the provision of the Act, the company was eligible for refundable employee retention credit, which was claimed in Q1 of 2024. Adjusted EBITDA loss was $1,500,000 compared to an adjusted EBITDA loss of $569,000 in the same period last year. Lastly, moving to the balance sheet.

Speaker 4

Our financial condition remains very strong. As of March 31, we had cash and cash equivalents of $11,400,000 and short and long term investments totaling $20,700,000 Working capital was $27,700,000 or $0.90 per share. Stockholders' equity was $44,000,000 or $1.43 per share and the company continues to have no outstanding debt. To reiterate Vince's earlier comments, we remain confident in our ability to fuel our growth initiatives, pursue new product to market opportunities and maintain our strong financial position, which we view as an important competitive advantage given ongoing macroeconomic uncertainties. We have a pipeline of significant growth opportunities across business segments that position us for positive growth in 20 24.

Speaker 4

I'll now turn the call back over to Vince.

Operator

Our first question is from Amit Dayanal with H. C. Wainwright. Please proceed.

Speaker 5

Thank you. Good morning, everyone.

Speaker 1

Good morning, Amit.

Speaker 5

So with respect to I know weather related issues, etcetera, caused a little bit of weakness in 1Q. But overall, have you been adding new customers? It looks like in the field chem segment, you may have added new customers. Just Vince, maybe if you could give us some color on how that part of the business is holding up in terms of new customer additions, etcetera?

Speaker 1

Right. I would say in terms of adding new customers, this year is really in terms of those types of opportunities, we're seeing more of them this year than we have in a little while, which is great for us to see at this point in time. As I mentioned as part of my script, we just signed an order for a demonstration that will literally be starting in about 2 weeks' time. And so we're encouraged about that opportunity. It's a large coal fired unit in the Western U.

Speaker 1

S. And we're in discussions with the 2nd coal fired unit. Similar geographic location, coal fired, as I said, and also a large unit. And that possibly could start sometime in Q3. And then on top of that, we've had some discussions with some owners of biomass fired boiler units as well that also could be new business opportunities.

Speaker 1

So I would say this year is really the 1st year in a while that we're seeing a larger scale of new business opportunity. We have not seen that in the past couple of years. So it's a new outlook for us. It's driven by pressures for those remaining coal fired utilities to reduce their cost structure. It's driven by the need for some units to be available to run as support power for certain regions of the country and other drivers as well.

Speaker 1

So I'm very pleased that we're seeing the ChemTek opportunities come in our direction. They are very solid gross margin generating business opportunities. And I would love to be able to see total revenue from Chemtech kick back up to what it was 4 or 5 years ago. I'm not saying it's going to get there, but and any addition that we can bring on board right now, particularly in a coal fired unit, is a nice benefit for us. So long answer to your question.

Speaker 5

I appreciate that answer. You also mentioned sort of the increase in electricity demand stemming from AI and data needs, etcetera, that is underway at a macro level. Yes. You have a balance sheet. I know your immediate products may not directly cater to those opportunities, but are you thinking about any acquisition opportunities that brings you closer to those types of opportunities going forward?

Speaker 1

Nothing that we're looking at right now, Amit. When we talk about some of those macroeconomic trends, it ultimately is supporting some of the, call it, lengthening of the life of the utilization of a lot of the coal fired units. That, in its own right, is going to hopefully mean additional business for Fuel Tech in our current technology suite. So we're looking at that macroeconomic trend in a favorable light as we sit here today. But we aren't necessarily pursuing any acquisitions that would provide us the ability to address other needs, if you will, that are driven by additional power demand, whether it be AI or data centers and the like.

Speaker 1

But those trends are generally favorable for Fuel Tech, as are the trends in support of some additional environmental regulation.

Speaker 5

Understood. Just last one for me on the DJI side. It looks like you potentially could convert the pilot, right, shrimp farm into a customer. Like how big should we think these order sizes can be when you deploy sort of a full system or full scale offering for these types of customers?

Speaker 1

So to answer your question, yes, we are hopeful that we're able to go ahead and convert that demonstration, which was indeed successful, to a commercial sale. We're looking at putting the configuration together for a DGI system that will meet the needs of a commercial scale system for this, scrimp farm owner, if you will. Right now, I probably see this as a capital sale, I'm just going to give you a ballpark in terms of what this system would be offered at, and I'd say $500,000 to $1,000,000 in terms of a capital sale of a DGI system, just to give you a ballpark range.

Speaker 5

Okay. And when these are deployed, Vincent, do they also do you attach sort of maintenance type of contracts or additional revenues?

Speaker 1

Yes. To the extent we're able to build in support aftermarket contracts, we will. I still think we have a little bit to learn relative to the deployment of these systems at sites and the ongoing necessary maintenance that's going to be required. We're not expecting that it's going to be extensive at customer sites once it's up and running. But to the extent that we can provide ongoing support on a quarterly basis or whatever is needed via contracts that support that activity, we'll definitely look to do so.

Operator

Our next question is from Mark Silk with Silk Investment Advisories. Please proceed.

Speaker 3

Hi, Vince. Thanks for taking my questions.

Speaker 1

Hi, Mark. No problem. How are you?

Speaker 3

I'm doing fine. Thank you. On the APC delays, was that is that really basically because of the court issues? Or this is just a regular delay?

Speaker 1

I would say more regular delays, yes, not necessarily related to court issues because with the business that we were expecting pull into 2024, we really didn't factor in anything that was going to be regulatory driven. That would be what I would call incremental business opportunity for us, and we'll know more about that a little bit later on this year. So I would call the delays just normal delays in both project execution and in coming to contract with certain potential customers.

Speaker 3

Okay. That's encouraging. And then in your guidance, you're basically not putting in there any positive court rulings, correct? So there could be a slight surprise on the upside? Correct.

Speaker 3

Great. On the FUEL CHEM, that's actually exciting that it's coming to life a little bit. Is also you laid out really the reasons, but another one I want to know is, is it because also there's not many other competitors anymore just because it's not a growing industry?

Speaker 1

Actually, for this particular technology application market, there really aren't any competitors for what we do specifically with FUEL CHEM. But it requires a specific customer need for us to be utilized and our program is not inexpensive. But if we offer a client the ability to keep their units running during high demand times and by perhaps using a lesser quality coal or a difficult to burn coal, they recover the cost of our program very, very quickly. So no one else does what we do with this technology, but the very specific need isn't necessarily out there at all coal fired units.

Speaker 3

Okay. That's great. And then the I'm intrigued by this municipal wastewater site. You talk more of this like what are they looking for? What are you bringing to the table?

Speaker 3

That's the first question and then we'll go from there. Yes. So the site

Speaker 1

we're looking to demonstrate at is it's again, it's a municipal plant. And in certain stages of the treatment process, there are areas whereby the wastewater becomes less than oxygenated or it has less oxygen than it needs to go ahead and maintain what I would call good quality water. And when in this part of the application, when it doesn't have the oxygen it needs, it actually creates hydrogen sulfide. And over time, hydrogen sulfide is going to erode the insides of those lines. So the application we're working on is specifically attempting to keep these feed lines as part of the wastewater treatment plant, keep them oxygenated at specific levels whereby they don't create any detrimental effects to that piping system.

Speaker 3

So how do they find you by the way?

Speaker 1

How do these guys find us? That's a good question. Actually, these folks actually were a contact of Bill Decker. Bill is the gentleman we hired last year to help us support the development of DGI. So these folks that we're working with are well established in the water and wastewater treatment industry.

Speaker 1

And hopefully, they will turn out to be a good partner of Fuel Tech, respectively.

Speaker 3

So the interesting thing is, municipalities versus private industry, it's not a competitive, let's say, competition, right? So are you able to kind of work with them and say, listen, we want other municipalities to watch this, so it's more of an open trial just because it's going to benefit really any water any municipality in the country?

Speaker 1

Yes. We're really we're taking this step by step, right? But what we need is a first success. And once we have the first success, then we'll be able to work with that documented science based data driven result. And then we can expand on that documentation, if you will, with other municipalities.

Speaker 1

So I think we need to take the first step here and ensure we have a successful demonstration and then we move forward from there.

Speaker 3

Okay. And then I know last call someone was asking about insider buying. So hopefully it sounds like you're getting your ducks lined up. So hopefully we see some more insider buying. And good luck going forward.

Speaker 1

Okay. Mark, thank you very much.

Operator

We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Arnone for closing comments.

Speaker 1

Thank you, operator. I'd like to thank everyone that joined the call today. I'd like to thank the entirety of the Fuel Tech team for their support on Fuel Tech's activities and as usual, thank all of our stakeholders, shareholders for their continued support of Fuel Tech. Everyone, have a great day, and we'll talk to you again soon. Thank you.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Powered by Quartr
Earnings Conference Call
Fuel Tech Q1 2024
00:00 / 00:00