Earnings Call Transcript - FTEK Q1 2022

Operator, Operator

Thank you, Rob. Good morning, everyone. And thank you for joining us today for Fuel Tech’s first quarter 2020 financial results conference call. Yesterday after the close, we issued the press release. A copy of 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 Principal 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 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, 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 conditions, cash flows, performance, business prospects and opportunities to differ materially from those expressed in or implied by these statements. Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any forward-looking statements contained herein to reflect future events, developments or 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. With that said, I'd now like to turn the call over to Vince Arnone, President and CEO of Fuel Tech. Vince, please go ahead.

Vince Arnone, CEO

Thank you, Devin. Good morning. And I want to thank everyone for joining us on the call today. After a strong end to 2021, I am pleased to report an improved beginning to the new year versus prior year performance. For the 2022 first quarter, our revenues improved by 10%. SG&A reflected a continuing commitment to cost control measures. Backlog improved and our current balance sheet reflects total cash of more than $35 million and no debt. APC revenues increased by about $1.3 million from last year's first quarter. While still well below historical levels, we continue to believe that APC revenues for the year will exceed the $6.9 million reported for full year 2021. Our backlog at March 31, 2022 was $9.6 million, of which approximately $7 million is expected to be realized over the next 12 months. We announced $5.3 million of new orders during the first quarter of the year and are pursuing a global sales pipeline of $50 million to $75 million. We are tracking projects with a contract value of $5 million to $10 million that are expected to be awarded before the end of Q2 or early in Q3, and we are optimistic regarding the outcome. FUEL CHEM revenues declined due to a decrease in power generation demand in the areas of the country that our units serve, and margins were down slightly as a result. As we head into the warmer summer months, we anticipate a seasonal increase in demand as the end of Q2 and all of Q3 are typically the best performing months for our FUEL CHEM business segment. When we last spoke, I had noted that we had expected FUEL CHEM revenues to be in the $13 million to $15 million range for 2022 and that the reduction from 2021 was due to one known plant shutdown as of 12/31/21, from a long-term customer in the business segment; the return of a more normalized maintenance outage schedule in 2022; and continued pressure on the remainder of our customer base to optimize program usage. We are still expecting revenues to be in this range. I’m pleased to report that we recently started up a FUEL CHEM program on a new coal-fired unit this past month in the Western United States, and thus far the program is working well. The new customer is using our program to burn a challenging coal as they seek to generate power at full capacity levels during the high-demand summer months. If the program continues to be successful, we would expect to see revenues of $500,000 to $1 million for the full year 2022. Overall, when taken in combination with the improved outlook at APC, we continue to expect that total revenues for 2022 will show a modest improvement from 2021. For the APC segment, we continue to pursue opportunities for our SCR and ULTRA product offerings. Recent contract awards and current discussions have involved the application of our SNCR emissions control solution to reduce nitrogen oxides from stationary combustion sources for domestic and international applications, and also our fuel gas conditioning technology to improve the performance of electrostatic precipitators for an international client. Additionally, decarbonization is top of mind for many industries, and we are closely watching the planning of the steel industry and others as they pledge to invest in technologies to improve their global carbon footprint. Fuel Tech has longstanding relationships with technology suppliers and end-users that will assist in our ability to capitalize on these opportunities as they develop. Of note, we have been receiving a noticeably higher volume of inquiries from potential new and former utility and industrial customers regarding EPA’s proposed update to the cross-state air pollution control rule, also known as CASPER, that was published on April 6th of this year in the federal register. The previous CASPER rule was based on 2008 Ozone National Ambient Air Quality Standards where NOX is a precursor pollutant to ozone. The EPA entered into a consent decree early this year to update the CASPER rule to make it compliant with the 2015 national ozone standards, while meeting the good neighbor requirements of the Clean Air Act. These CASPER revisions could impact utility and industrial sources requiring additional NOX control starting as early as 2023 for utilities and 2026 for industrials, and we are receiving inquiries related to these potential new standards as we speak. For our FUEL CHEM segment, we are continuing to explore ways to broaden the application of our chemical technology. We are preparing to do a fresh outreach to all domestic coal-fired utilities to reintroduce our FUEL CHEM program benefits, including lowering the cost of dispatch by offering fuel flexibility and the ability to burn lower-cost fuels; extending facility life; and improving overall facility profitability. Additionally, as we have discussed in prior calls, we are continuing to investigate providing our chemical technology solution to address 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 are continuing to support our partner in Mexico as they engage with local officials to advance the solution. The current Mexican government supports utilizing indigenous fuel sources for power generation to ensure that they can move towards becoming energy independent. There is currently a glut of high sulfur fuel oil in Mexico as the international market for this product has been significantly reduced with the adoption of the new International Maritime Organization restrictions, which prohibit the use of this fuel for ocean transport. We will continue to watch the development of this activity closely. However, we do believe that political pressure is building in favor of the implementation of our FUEL CHEM program at additional facilities in Mexico. Our partner is currently in discussions with the state-owned utility CFE regarding the application of the technology at several units at one plant site. With respect to our developmental dissolved gas infusion or DGI business initiative, we continue to have high expectations for this technology, which focuses on industrial and municipal water and wastewater treatment. I'm pleased to report that we have made progress towards advancing this nascent business towards commercialization. DGI offers an innovative alternative to current aeration technologies, utilizing a patent pending saturator vessel. DGI infuses gas into a liquid at high operating pressure, which allows the gas to be dissolved into the liquid with greater than 95% efficiency. The gas-infused liquid is then injected into an end-use reservoir using a patent pending zoned injection array that delivers best-in-class gas transfer efficiency. This delivery system enables our DGI technology to provide fast, precise and controllable dosing of dissolved gas, augmenting underperforming traditional technologies and providing real-time response to varying process needs. The modular, compact and scalable system configuration of DGI technology allows for rapid deployment. The system can be used as a standalone operation or to augment aeration assets for increased treatment capacity without significant capital investment. On our last call, we laid out our 2022 goals for DGI. Today, I want to give you an update on where we stand with respect to those objectives and provide some additional information. The first goal was the completion of documented DGI performance testing that is independently verified by experts in the fields of aeration and wastewater treatment. While supply chain difficulties delayed our ability to start our testing by about six to eight weeks, we have made good progress in this area and expect to have the results of our testing before the end of the second quarter. I'm pleased to report that DGI is performing favorably. Second, we targeted to identify our addressable markets in conjunction with our water and wastewater treatment marketing specialists. Our addressable markets consist of municipal wastewater and water utilities, agricultural applications, food and beverage facilities, including dairy farms and soft drink manufacturers, landfills and natural bodies of water and reservoirs. Across these end markets, DGI can address a variety of issues including regulatory compliance, water preservation as a replacement for chemicals to treat wastewater, odor reduction and improving overall water quality for humans and wildlife. We have begun to identify potential customers in each of these business verticals and we’ll create specialized marketing campaigns that address the individual concerns of these customers. Our third goal was to construct an internal resource base specifically in support of DGI. Goals one and two were intended to be a precursor to this third goal. Now that we have confidence in the performance of the DGI technology and in our belief that there are viable end markets for the technology, we will begin to plan for the build-out of our resource base in support of DGI as we move throughout the remainder of 2022. As I have indicated previously, we have been very measured in our approach towards our investment in DGI, and this approach will continue as we evaluate resource requirements prospectively. Our current goal for DGI is to have one to two commercial applications before the end of 2022. That's ambitious, but we are working diligently to achieve this objective, and we look forward to keeping you apprised of our progress as we work throughout the year. In closing, I want to again thank the Fuel Tech team for their continued hard work and dedication. We remain excited about 2022, and we look forward to keeping you apprised of our progress. With that said, I'll now turn the discussion over to Ellen. Ellen, please go ahead.

Ellen Albrecht, CFO

Thank you, Vince, and good morning, everyone. For the first quarter 2022, consolidated revenues rose 10% to $5.5 million from $5 million in last year's first quarter. The increase was driven by a $1.3 million increase in APC segment revenue to $2.2 million from $0.9 million in last year's first quarter, reflecting project execution timing and revenue generation from new orders booked in late 2021 and the first quarter of 2022. The FUEL CHEM product line revenue declined to $3.4 million from $4.1 million in last year's first quarter, primarily due to a decline in power generation demand in the regions our unit serves and the sale of equipment to a FUEL CHEM customer in the first quarter of the prior year. Consolidated gross margin was 41.4% of revenues compared to 46.9% in the first quarter of 2021, reflecting lower gross profit margins from both operating segments. APC gross margin was 35.2% compared to 41.5% in last year's first quarter due to a shift in project and product mix, while gross margin for FUEL CHEM declined from 45.5% to 48% in last year's first quarter, driven by higher material, freight and labor and administrative costs. Consolidated APC segment backlog at March 31, 2022, rose to $9.6 million from $9.1 million at December 31, 2021. Backlog at March 31st included $4 million of domestic delivered project backlog and $5.6 million of foreign delivered project backlog as compared to $3.4 million of domestic delivered project backlog and $5.7 million of international project delivered project backlog at December 31st. We expect that $6.7 million of current consolidated backlog will be recognized in the next 12 months. SG&A expenses were stable at $3.1 million for the 2022 and 2021 quarterly period. As a percentage of revenue, SG&A in the 2022 first quarter declined to 55.2% compared to 61.6% in the 2021 first quarter. For 2022, we are targeting SG&A between $12 million and $12.5 million, exclusive of any additional investments that will be required to grow our business, specifically our DGI segment. Research and development expenses for the first quarter declined to $220,000 from $415,000 in last year's first quarter. While our project-specific initiatives remain our top priority, particularly our DGI initiative, the decline was primarily attributed to a reduction in administrative resource expenditures. Our operating loss narrowed to $984,000 from $1.2 million in last year's first quarter, reflecting higher revenues, improved margin, and lower operating costs. Our net loss for the quarter was $998,000 or $0.03 per share compared to net income of $398,000 or $0.01 per share in last year's first quarter. Net income for the first quarter of 2021 included $1.6 million of other income, reflecting full forgiveness of the loan proceeds from the paycheck protection program established pursuant to the Cares Act. Absent this other income, the net loss for the 2021 first quarter would have been $1.2 million or $0.04 per share. Adjusted EBITDA loss was $868,000 compared to an adjusted EBITDA loss of $943,000 in the same period last year. Moving to the balance sheet, I'm happy to report that our financial condition remains strong. As of March 31st, we had cash and cash equivalents of $34.2 million, and our restricted cash was $1.1 million. Working capital was $37.5 million or $1.24 per share. Stockholders' equity was $45.3 million or $1.49 per share, and the company had no debt. We were off to a solid start in 2022, and we continued to remain focused on improving financial performance, cost control initiatives, and efforts related to our core and expanding businesses. I will now turn the call back over to Vince.

Vince Arnone, CEO

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

Operator, Operator

Our first question comes from the line of Amit Dayal with H.C. Wainwright.

Amit Dayal, Analyst

Just with respect to how we should sort of think about revenue cadence for the rest of the year. Could you give us some sense of whether you are anticipating sequential improvements given the strength you've seen recently through 2022?

Vince Arnone, CEO

In general, Amit, we normally expect to see a little bit of an improvement, driven by chemical technologies late in Q2 and then in Q3. Before going to look at what I would say might be our best revenue-performing quarter, it's less likely to be Q3. But as we noted, we are working off some APC backlog as well. Depending on the timing of us working off that backlog, that could easily shift quarter-to-quarter. So overall, as I stated, we are looking at an uptick in revenue year-on-year from ‘22 versus ‘21. The timing of how that falls into Qs 2, 3, and 4 could shift a little bit, but generally I would expect to see Q3 probably being the best-performing quarter.

Amit Dayal, Analyst

And then on the gross margin side, it looks like there is some pressure relative to last year. How should we think about margins this year? And can you give us a sense of historically what sort of average APC and FUEL CHEM margins have been, and maybe what you are anticipating for those in 2022?

Vince Arnone, CEO

Let's talk about the business segments independently, so let's talk about FUEL CHEM first. As Ellen noted, the first quarter of ‘22 was approximately 46%. Our revenues for the quarter were a little bit lower than we had thought they were going to be due to demand predominantly. But generally speaking, FUEL CHEM margins have historically been approximately 50% on an overall basis. I would expect to see that FUEL CHEM for all of ‘22, once we start generating more revenue moving into Q2 and Q3 and offset some of the fixed costs that are associated with that program, that 46% is going to start to increase and push towards 50% once we get to a full year outcome basis. We've been fortunate in that a good percentage of the price increases or, I should say, the pricing pressure that we felt on our chemical technology side, we've been able to absorb by our customer base. So again, we should approximate historical FUEL CHEM margins on a full year basis. APC margins vary by product line and should say by product technology solution mix, historically, anywhere between 30% and 40% on average. So for full year 2022, probably somewhere in between 30% to 35% is probably what I would target for APC margins for the full year as we look at that.

Amit Dayal, Analyst

Are you expecting power generation demand to be up? We're already seeing you added a new customer, it looks like for FUEL CHEM. Just seems like there may be an uptake on the power generation demand. Are you seeing similar sorts of developments taking place for that segment for FUEL CHEM especially?

Vince Arnone, CEO

Our number of base customers has decreased compared to historical levels. When one of our base customers reduces their dispatch due to demand fluctuations, it impacts us as a company. Looking ahead for the rest of the year, we do not anticipate any unusual occurrences. Here in the Chicago area, where temperatures are in the 90s, we expect that as summer proceeds and our clients feel the effects of the warm weather, dispatch will increase, allowing us to take advantage of that. We've also recently acquired a new FUEL CHEM customer in the Western US. This customer is keen to ensure they have no issues during the high-demand summer months and has turned to us for support. Our program with them began at the end of last month and is currently going well. While they may not utilize our program for the full year, even a commitment of four to six months would yield significant additional revenue and margin for us. I mentioned that we plan to revisit the marketplace to highlight the advantages of our FUEL CHEM program. We're observing shifts in the market where many utilities are hesitant to enter into long-term coal contracts and are instead considering spot market options to reduce dispatch costs. This may lead them to use coals that their units weren't originally designed to burn, and that is where our FUEL CHEM program could be advantageous. We're closely monitoring these changes and are determined to explore and identify any potential opportunities available to us.

Amit Dayal, Analyst

And then just last one, you said you are targeting one to two applications for DGI by the end of 2022. I don’t know if I heard that correctly. Could you elaborate a little bit on what those applications could be?

Vince Arnone, CEO

They, in all likelihood, could be commercial demonstrations. They could be the sale of a smaller scale system. It's a goal that we set internally for the company as we're looking to push DGI forward. Not expecting any material revenues from DGI in 2022; that's something that I have stated previously. But as we look to take steps to move DGI forward, we're building upon where we are today. Once we start to move forward, once we're able to come out a little bit more publicly regarding the capabilities of DGI, that will enable us to talk a little bit more deeply about what commercialization looks like. So for us for this year again, the sale of one to two systems is a target. As we learn more specifically about the end market demand and how DGI is going to fit into the markets I outlined, we'll be able to talk more about that in the future. But right now, one to two systems is a goal, and again, not expecting material revenues in 2022.

Operator, Operator

Our next question is from George Caspar, a private investor.

Unidentified Analyst, Analyst

I'd just like to press a little bit more on the water treatment situation. I'm a little surprised that it's taking this long to actually get a delivery completed. What's underway in terms of the process of your goal to satisfy customers that the water treatment process represents an opportunity for them to take it on? Is there something that you're still doing in terms of the technology that you haven't got to the end of yet? Could you just explain a little bit more about the process here?

Vince Arnone, CEO

Keep in mind that we first started talking about DGI pre-COVID, if you will, pre-2020, and we licensed the technology around early 2019. Initially, we spent a lot of time looking at the technology and developing some enhancements. Just when we were looking to advance into the marketplace with DGI is when COVID hit. There were sites preparing to put the equipment out there for demonstration purposes to develop and better understand the actual performance impacts of the technology. So we lost time in ‘20 and ‘21 due to COVID. However, the situation also allowed us to approach our development of this technology in a very structured way, whereby we've incrementally developed the technology. We've worked with outside firms, experts in water and wastewater treatment, to identify segments of end-use markets where DGI could be applicable. Those studies were just completed at the beginning of this year. We are now working with a marketing company to determine how we're going to go to market publicly with DGI. The primary item we haven't had in hand that we really need to go forward is documented supportable, verifiable DGI performance results. Whether it’s a commercial demonstration or something set up in a test environment that we have certified by experts in the field. That’s what we are finalizing right now. As I said in my commentary, we're expecting to finalize that by the end of the second quarter. Once we have that, and we ensure that the system performance deliverables meet our expectations, we'll be able to go to market with DGI’s capabilities. At that same point in time, we are going to look to further address how we will support DGI internally through a resource base. We've been very structured in our approach towards building out DGI. We're mindful of our financial resources in support of DGI. However, we're getting close to the point where we will push this forward at a greater pace.

Unidentified Analyst, Analyst

Yes, it just seems like it's a tremendous opportunity in the market considering both in California, particularly and even in Florida, the reduction in water processing capacities are really starting to show, particularly in California right now, because it's dry. It looks like they're really going to be looking for more effort on the kind of equipment that you potentially could supply into the market. I would hope that you can really take advantage of that.

Vince Arnone, CEO

George, you’re spot on. We are seeing that wastewater treatment infrastructure, whether municipal or industrial, is indeed in short capacity. As we look at markets of opportunity, we will be considering areas whereby DGI could serve as an augmenting enhancement to some of those facilities. It's a developing market as we look at many parts of the world as well.

Unidentified Analyst, Analyst

And then one quick question on the natural gas turbine market. Anything materializing there for you at this point in time that would be larger than what it has been in the past? It just looks like natural gas turbine is going to get further pushed here.

Vince Arnone, CEO

We're definitely pursuing any and all opportunities that come our way. As you know, our technology works well to support NOx reduction for the installation of natural gas turbines. We have not seen the development of additional data center opportunities that we discussed post our 2017, 2018 installation on 20 units in the Western US. What we haven't seen is the additional development of that marketplace, but that’s not to say it won’t continue to develop because the needs for data centers are ever-growing. We're watching it closely but we are in good positions with relationships with natural gas turbine OEMs. So that puts us in a good place. So we're ready to respond when those markets continue to develop.

Operator, Operator

Next question comes from the line of William Bremer with Vanquish Capital Partners.

William Bremer, Analyst

Can you provide an update to us on your sales initiatives and how you go into market across your platform?

Vince Arnone, CEO

As it relates to base business technologies, both for FUEL CHEM and APC, we continue to utilize a combination of an internal direct sales force and manufacturing representatives. One trend we have seen is a decline in our use of manufacturing representatives generally here in the country. I think the overall market opportunities regarding our end markets for those representatives focused solely on pollution control technologies have looked to move on to other business lines. So we find ourselves utilizing reps a little less than in the past. As for our outlook on water, we will have to build out our approach, which will be a combination of an internal sales force and also manufacturers' representatives specific to the targeted industries. So it’s likely we will continue to use a similar business model.

William Bremer, Analyst

Has there been any change in your sales personnel since the beginning of the calendar year?

Vince Arnone, CEO

There has not.

William Bremer, Analyst

I call upon this because one of your key competitors and peers had extremely strong bookings yesterday. I mean, out of the pocket bookings. So there's definitely a market; it just seems you guys need to pick it up on the sales side and the booking side. I want to go into DGI and can you give me an idea of your focus? I know it's going to be a modular type of infrastructure gearing towards wastewater. Give us an idea of how small a pool you believe could be performed as well as how large, and have we had the examination of our system for say a million-gallon pool of water or wastewater that needs to be aerated?

Vince Arnone, CEO

What we've found is that we're going to require systems of varying sizes from the multimillion-gallon basins to much smaller systems. Initially, we believed that the majority of the systems would need to be larger scale. So we developed a larger scale DGI system to deliver 2,000 pounds of oxygen a day targeting larger basins. However, upon further investigation, we discovered we will also need systems that deliver as little as 25 pounds of oxygen a day. This size would be comparable to our pilot/lab scale system already in-house. We're strategizing on what a Fuel Tech small-scale delivery system will look like for the end markets. In fact, we’ll be meeting on that next week. It's something that we're monitoring closely. These systems will be modular, and they will need to cover a wide variety of application sizes as we explore end markets.

William Bremer, Analyst

And then I'd like to take this to the sales side. Is this going to be, or could we utilize the strength of the balance sheet and perform a, say, a multiservice agreement with our end customers over a few years for recurring revenue, or is this going to be more in essence a sales type system?

Vince Arnone, CEO

I'm hopeful we can find a combination of both. I envision that water treatment will allow for recurring revenue opportunities. I believe capital sales may have some follow-on service components. To your point, we may be able to use our balance sheet to create advantageous arrangements, and I would enjoy that.

William Bremer, Analyst

I echo George's remarks on the wastewater market. There have been many acquisitions in the last two quarters that could potentially compete with Fuel Tech. So my essence, and I agree with George, is that we need to start really moving quicker than we are.

Vince Arnone, CEO

Understood, point noted. Please know that the entirety of the Fuel Tech team has this as a priority.

Operator, Operator

Thank you. At this time, we've reached the end of our question and answer session. I'll now turn the floor back to management for closing remarks.

Vince Arnone, CEO

Thank you, operator. I would like to again, thank the entirety of the Fuel Tech team for their support. I would also like to thank all of our investor base for their patience as they provide the leadership team with the confidence in bringing Fuel Tech back to profitability and generating shareholder value. Thanks everyone and have a good day.

Operator, Operator

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