Fuel Tech, Inc.
Q4 2020 Earnings Call Transcript

Published: 16 Mar 2021

[Operator:]

Greetings. And welcome to the Fuel Tech Fourth Quarter and Year End 2020 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, Devin Sullivan, Senior Vice President of The Equity Group. Thank you. You may begin.

[Devin Sullivan:]

Thank you, Jessy. Good morning, everyone. And thank you for joining us today for Fuel Tech’s fourth quarter and year end 2020 financial results conference call. Yesterday after the close, we issued a copy of the press release, which is available at the company’s website, www.ftek.com.

[Vince Arnone:]

Thank you, Devin. Good morning. And I want to thank everyone for joining us on the call today. I am very proud of what our team has accomplished during this period of uncertainty and I am optimistic regarding our outlook for 2021 and beyond, as we continue on our path towards establishing a foundation for long-term and sustainable growth.

[Ellen Albrecht:]

Thank you, Vince, and good morning, everyone. We hope you have the opportunity to review our results. So my comments will be brief and focused on the fourth quarter. Consolidated revenues during the quarter increased 26.5% to $6.2 million from $4.9 million in last year’s fourth quarter, reflecting higher revenue for both the APC and FUEL CHEM business segments. After a sluggish start to the year due primarily to the impact of COVID, we experienced a strong second half. APC segment revenues increased to $2.5 million from $1.7 million, primarily results of project timing and completions. APC backlog at the end of the quarter was $5.3 million, $4.9 million of which was domestic and included a variety of Fuel Tech’s APC Technology offerings across multiple geographies, including the U.S., Europe and China. We anticipate approximately $3 million of current backlog will be recognized over the next 12 months. APC backlog has trended downwards during 2020 as results of the sluggish overall market that was compounded by deferred purchasing due to the uncertainties created by COVID-19. As mentioned in our press release, we are pursuing a global sales pipeline of approximately $40 million to $50 million. FUEL CHEM segment revenues rose $3.7 million from $3.2 million in last year’s fourth quarter, primarily reflecting contributions from the completion of installation of equipment and three new coal fired units, which began during 2020 third quarter, as well as the recovery of more normalized run rates across our business. Consolidated gross margin for the 2020 fourth quarter was 41.9% of revenues, compared to 0.1% of revenue in last year’s fourth quarter, which reflected an impact of a $2 million warranty charge to APC cost of sales in the fourth quarter of 2019. Excluding the charge, consolidated gross margin in 2019 was 41.1%. APC gross margin was 29% in the fourth quarter of 2020. Excluding the warranty charge, gross margin for APC in the fourth quarter of 2019 was 30%. On an annualized basis, both 2020 and 2019 were impacted by this warranty claim that was settled in 2020. Excluding these charges, APC gross margin for 2020 was 30%, as compared to 36% in 2019. The decrease in margin profiles attributed to the overall project mix. FUEL CHEM gross margin was 51% in the 2020 fourth quarter, as compared to 48% in the same period one year ago. As Vince mentioned, our cost control initiatives are ongoing and continue to be reflected in SG&A. SG&A for the fourth quarter declined by over 15% to $3.8 million from $4.5 million, reflecting lower administrative and professional costs. R&D activities remained flat. For 2021 we will maintain our focus on cost control initiatives and invest in projects and resources necessary to support the business and drive sustainable growth. Net loss from continuing operations for the quarter was $1.5 million or $0.07 -- a loss of $0.07 per share, compared to a net loss from continuing operations of $2.3 million or $0.10 per share, excluding the aforementioned warranty charge. Adjusted EBITDA loss was $1.1 million for the 2020 fourth quarter, compared to an adjusted EBITDA loss of $3.9 million in the third -- in the fourth quarter of 2019. Moving to the balance sheet. At December 31st, we had cash and cash equivalents of $10.6 million and restricted cash of $2 million for a total cash position of $12.6 million. In January of this year, $1.2 million of restricted cash has been released into operating cash related in December 2020 guarantee expiration. Working capital was $15.5 million. These figures do not reflect the February 2021 financing, in which we raised the total gross proceeds of $25.8 million. With respect to China, we collected and repatriated $1.9 million in cash from our China subsidiary in 2020. We continue to focus on collection efforts against an estimated available $1.5 million to $2 million of receivables and we expect to continue to repatriate additional funds in 2021. At December 31st, we had $25.8 million common shares issued and outstanding. This figure excludes the 5 million shares of common stock and the 2.5 million common stock purchase warrants issued in connection with the February 2021 capital raise. The recording of the proceeds from the capital raise will be reflected in our Q1 2021 10-Q filing. On January 8, 2021, the company was informed by the Small Business Administration that its Payroll Protection Plan loan in the amount of $1.5 million had been forgiven in its entirety. Income from the forgiveness of the debt will be realized in the first quarter of 2021. With respect to valuation, our book value per share was $0.88, our tangible book value per share was $0.78 and our working capital per share was $0.62. Our cumulative net operating losses at year end totaled $25.5million. These NOLs cover several geographies, including China. Approximately $10.7 will begin to expire in 2034. As a result of these NOLs, our income tax expense for 2020 was immaterial and we expect to have the same results in 2021. Now I’d like to turn the call back over to Vince.

[Vince Arnone:]

Thank you very much, Ellen. Operator, let’s go ahead and open the line for any questions.

[Operator:]

Absolutely. Our first question comes from the line of Sameer Joshi with H.C. Wainwright. Please proceed with your question.

[Sameer Joshi:]

Yes. Good morning. Thanks, Vince and Ellen. Hope you’re doing all right.

[Vince Arnone:]

Good morning, Sameer.

[Sameer Joshi:]

Good morning. So it seems like a good end to the year and looks like modest growth expected in 2021 and you have a good balance sheet now. What are the particular areas of focus and I know you mentioned DGI development and scale up. But are you planning on getting more demo units in place or is the focus going to be on scaling and building larger units?

[Vince Arnone:]

Okay. First of all, thanks for thanks for the commentary. And yes, we are looking for a modest improvement here in ‘21 versus ‘20. And to your point, our balance sheet right now is probably stronger than it’s been for the past eight-year timeframe. So we’re very pleased in terms of where we’re positioned today, okay? So in terms of where we’re going? As I noted, as part of my commentary, the further development and commercialization of water is, if not number one priority, number two priority for us as a company that as we sit here today. And so we need to convert our existing demonstration or demonstrations into commercial systems, and along with that, and working concurrently, we are going to look to make some investments to design and fabricate larger DGI delivery systems. What we found is as part of our discovery for end markets over this past couple of years is that the demonstration unit that we have been working with, while being a nice effective unit, in some cases does not provide us with the ability to prove out efficacy during that demonstration phase. So we need a larger, a more upscale unit to be able to do that. And so this next step is an important investment point for us. We’ve been working diligently on the design of the upscaled delivery system and I’m confident that we’re going to start to make some investments in that system here as we move into Q2. But that is, as I said, it’s not number one priority, it is definitely number two. The other part of our equation is, returning our base business segment to complete profitability. Our focus needs to remain on that because that’s necessary for our future success as well. We’re continuing our focus on SG&A. I would expect we’re going to come in 2021 with a slight reduction in SG&A from 2020, due to some steps that we took during 2020. So we’re going to have an infrastructure that’s going to be able to be better leveraged as well. So I think we’re well positioned to move forward here.

[Sameer Joshi:]

So, Vince, you just mentioned the first priority would be to return to profitability, and but at the same time, you are saying that your agenda will be lower. So what exactly are the -- is the push towards profitability going to look like?

[Vince Arnone:]

It’s a combination of both factors, Sameer. Obviously, as I’ve just said, SG&A is going to come down. But our topline, as I mentioned, for both FUEL CHEM and APC, we’re expecting to be improved versus 2020. 2020 was an extraordinarily difficult year for APC in particular. But even our FUEL CHEM performance was not at the level that it should have been, given some of the reductions in power generation demand that we had, in particular in quarters Q2 and Q3 of 2020. So it’s going to be a combination of both factors, Sameer, both topline growth and continued good management of our internal infrastructure.

[Sameer Joshi:]

Got it. Mexico and the high sulfur fuel oil usage there seems to be emerging and has been emerging as a good opportunity. What is your visibility in terms of timeline some revenues from that source?

[Vince Arnone:]

Yes. We’ve been watching this, as you will know, for the better part of this past year. And as we sit here today, there have been strong movements forward within Mexico did to move towards burning more of the high sulfur fuel oil, but not just burning it, burning it while deploying the necessary pollution control systems that are necessary to go ahead and protect the local population from the pollution, okay? As we sit here today, we know they are burning more of the heavy sulfur fuel oil than they have in past years. And we have every reason to believe that the Mexican Government is going to take the next step to go ahead and ensure that the pollution controls are going to be placed on these facilities, okay? They probably have to work out funding mechanisms and alike to ensure that this is able to get done within a reasonable timeframe. But, again, we’ve seen -- and working with our partner, we’ve seen continued steps forward locally in Mexico that leads us to believe that this is moving forward. From my perspective, I would think we would see something here in 2021 relative to it going forward. Exact timeframe, I don’t know. But the longer that time passes before there’s implementation, obviously then only further delays that come -- could come from that. But as we sit here today, even in today’s Mexican newspapers, there are at least two articles that are talking about CFE and burning heavy sulfur fuel oil and requiring plants to put on the pollution controls in conjunction with burning that fuel. What happened in Texas, was just further impetus for the Mexican Government to say internally, and to try to sell internally, the fact that they want to be power generation independent, they don’t want to solely be responsible for relying on natural gas coming from the U.S., because we’ve just proven out in the month of January and February, basically, the fact that natural gas lines were shut down, Mexico was not afforded the opportunity to receive that natural gas. There were millions of people over and above what we heard about in Texas that went out -- went without power for weeks and so that will not continue.

[Sameer Joshi:]

Right.

[Vince Arnone:]

So there’s impedance, timing is still difficult to predict. But I would expect something here in 2021, Sameer.

[Sameer Joshi:]

Understood. No. That’s fair enough. Just a sub-question to that. So does this potential from Mexico increase the upside to revenues, which you’re already are expecting to be modest growth year-over-year. So would these Mexico revenues be additional upside or have you included that in your expectation?

[Vince Arnone:]

We have included nothing from Mexico -- what I would call Mexico upside in our figures as we sit here today. The potential in Mexico is quite sizable. But until we have a, call a stronger feeling that it’s going to be realized, we won’t include any of those possible upside figures included in our numbers.

[Sameer Joshi:]

Okay. And may I just go back to DGI for a quick second. What is the scope of or dollars required for this upscale unit? And also what would be a typical first project implementation look like in terms of revenues for you?

[Vince Arnone:]

There are -- there going to be ranges, of course, Sameer, depending on size of system requires by the end customer to address their issues and the ranges could be pretty wide, okay? As we look at our capital investment internally for, call it, our next delivery system, I’ll give you a range of anywhere between $150,000 and $300,000 for internal capital spend to build out an incremental system that we can use for demonstration purposes or otherwise. But that will be an upscale system compared to the one that we have operating today, okay? On a plant-by-plant basis, once we get to actual commercialization, there could be multiples of these types of systems that could be deployed to a plant site to meet their demand. And so take the low end of the numbers that I provided, multiply that by 5 times to 6 times and that could be a capital equipment sale, if you will. It also could be a long-term lease scenario as well, whereby we’re providing our delivery system with a maintenance contract and other services that could go along and coincide with that capital equipment. So we’re open minded to the business model as we sit here today and we need to better understand that end markets and their constraints relative to funding as to how best suits their needs.

[Sameer Joshi:]

Got it. Understood. Thanks for that color. You mentioned your sales pipeline that you’re looking at is around $14 million to $15 million. Can you compare it to how it was at the end of 2019 and previous years? Is the sales pipeline much larger now or smaller or what that is?

[Vince Arnone:]

Yeah. In general, Sameer, I would say, it’s a little bit smaller than we’ve seen it historically. And the primary reason being is that within our current sales pipeline, we don’t have, say, two or three of what I would call larger contract value opportunities that reside within that pipeline. And that’s not to say that they won’t materialize once again, because they seem to every year or two. We will have something like that come through our pipeline. And then we’ve proven historically that we’ll have contract bookings of $7 million or $12 million on a per contract award basis. But as we sit here today, within our pipeline, I would say, it’s approximately the same number of opportunities, but not necessarily the level of overall contract value that we’ve seen historically. Keep in mind, we’re coming off in 2020 and that’s -- last year was a unique year for everyone in our business. And so I look at where we stand right now as a rebuilding of pipeline scenario as we move forward here in ‘21.

[Sameer Joshi:]

Got it. One last question on gross margins, I think, Ellen mentioned, I expect historical gross margins on DGI sales as well or maybe I got it wrong, can you confirm that?

[Vince Arnone:]

Yeah. We actually did not make a comment relative to gross margin on DGI. I think it’s premature to comment on that right now, Sameer. But I just as a, call it, at the lower end of the scale, I would think that, we’d be targeting 30% plus gross margins generally speaking for that, that product line.

[Sameer Joshi:]

Got it. Thanks a lot, Vince, and good luck for 2021.

[Vince Arnone:]

Thank you very much. We’ll talk to you soon.

[Operator:]

Thank you. The next question comes from the line of Pete Enderlin with MAZ Partners. Please proceed with your question.

[Pete Enderlin:]

Good morning and thanks for taking my questions.

[Vince Arnone:]

Good morning, Pete.

[Pete Enderlin:]

Vince, you talk about the $40 million to $50 million pipeline opportunity globally. Can you give us some sense of how that breaks down between the domestic and the international pieces?

[Vince Arnone:]

Yeah. As we sit here today, I’d say, it’s approximately $25 million domestic and then $15 million international with the European marketplace representing the majority of that international peace.

[Pete Enderlin:]

Okay. Your business today, obviously, is mostly domestic, and you could be looking for equal amounts coming from overseas, and you mentioned talking or using partners. But do we have any sense of how many partners you’re talking to were using? And how you relate to them, how do you get people to be partners with you and try to market the APC systems?

[Vince Arnone:]

Yeah. Now, when we talk in terms of partners, we usually talk in terms of either an OEM that requires our solutions as part of their ultimate package that they provide to an end customer or an installation contractor or engineering firm that is providing turnkey installation work. But as part of their bid package they require -- we require the quality of technology packages as well. And these are companies that we work with, in many cases historically, but we are looking to build new relationships as well. But it’s typically a contractor or subcontractor relationship that we have with these firms.

[Pete Enderlin:]

And about how many such firms would you say, you could characterize as having a relationship with now?

[Vince Arnone:]

I’d say four to five that require.

[Pete Enderlin:]

Oh! Really okay.

[Vince Arnone:]

Yeah.

[Pete Enderlin:]

I mean, I would have thought that on a worldwide basis, there could be multiples of 10 types of companies that you could work with, but you’re not working with them yet. Fair enough to say?

[Vince Arnone:]

Well, point -- differentiation in point, right, there’s a firm that we would call a partner that we are calling more aligned with on a bid-by-bid basis versus firms that we will bid to on a recurring basis, because we know that they’re looking for our scope of work, but we don’t necessarily have a, call it, a recurring business relationship with them per se. They’ll go out for multiple bids on a recurring basis. So there’s a difference between what I would call a close partner versus firms that we do business with on a regular basis. You know what I mean?

[Pete Enderlin:]

Yeah. Okay. And I have a question on the DGI Technology, you talk about higher capacity, which would be necessary for demos and maybe for many of the commercial installations, ultimately, as well. So what physical metric do you use to talk about the throughput of these systems? I heard you mentioned the dollar amounts, but I mean, give us some idea of what size and how you measure the size of such systems in physically?

[Vince Arnone:]

Understood. So when we’re talking about delivery systems, we’re talking about delivering pounds of oxygen per day into a body of water that needs to be treated. So this…

[Pete Enderlin:]

Okay.

[Vince Arnone:]

… is an example the system that we have today as a demonstration system delivers around 250 pounds per day of oxygen. There are going to be requirements that are going to be several multiples of that amounts to be able to treat the body of wastewater that requires treatment. It’s going to be completely different by industry. But that’s why we need to look to scale up as a next step. We’ve had enough experience with the system we’ve been working with to-date that we are taking all of our learnings and building them into our next phase of design and control and that’s what we’ll look to put forth as a next step and it’s…

[Pete Enderlin:]

Just a…

[Vince Arnone:]

Go ahead, please, Pete. No. No. You first.

[Pete Enderlin:]

Maybe naive question, but if you want to make it say 3 times to 4 times bigger, why should just design the specs to make it physically 3 times or 4 times bigger? What else do you need to do besides scale it up?

[Vince Arnone:]

Yeah. No. We need to be able to be sure a couple of things, right? Number one, scale up isn’t as always as it might seem to be, right? So we need to ensure that that the various components that are required to do the scale up are indeed going to be able to function in certain ways, okay? Secondarily…

[Pete Enderlin:]

Okay.

[Vince Arnone:]

… we’re looking to go ahead and build delivery systems that are going to be able to be delivered in -- not in a repeatable way, whereby if we design a system that’s capable of delivering 1,000 pounds a day. If a customer requires 2,000 pounds a day, we may have, as opposed to one system capable of 2,000 pounds a day we may provide them with two 1,000 pounds systems, which will give them more flexibility to adapt to their operating environment on a recurring basis. So we need to be sure that we’re scaling up in the proper way that’s going to be able to meet the needs of potential customers and we’re taking all of that into consideration.

[Pete Enderlin:]

Okay. Makes sense. One last question that is the provision for doubtful accounts seems to be fairly significant, is a lot of that China or is there some other stuff in there?

[Ellen Albrecht:]

No. It’s currently -- the majority of it is for China.

[Pete Enderlin:]

Okay.

[Ellen Albrecht:]

Our collection efforts have been very strong, but from a conservative perspective, we find it prudent to reflect the allowance for the China receivables.

[Pete Enderlin:]

So what’s the current reserve for China against the total amount approximately?

[Ellen Albrecht:]

Yeah. About a $1 million.

[Vince Arnone:]

The reserve is about a $1 million versus total possible collectability in China of…

[Ellen Albrecht:]

$2 million.

[Vince Arnone:]

…$2 million are there about, Pete. To Ellen’s point earlier, we’ve collected and repatriated just under $2 million from China in 2020. At a minimum here in 2021, we’re going to be able to repatriate at least another $1 million from China and then we’ll see what happens relative to outstanding collections after that. I have to tell you that I’m extremely pleased with the outcome that we’ve had with the wind down from China and our ability to go ahead and not only collect but repatriate some of those funds back to the United States.

[Pete Enderlin:]

Right. Okay. Thank you very much.

[Vince Arnone:]

Thank you, Pete.

[Operator:]

Thank you. It appears we have no additional questions at this time. So I’d like to pass the floor back over to Mr. Arnone for any additional closing comments.

[Vince Arnone:]

Thank you, Operator. I want to thank everyone that joined us on the call today. I want to thank all of our shareholders for their continued belief in Fuel Tech and the entirety of the employee team. As I mentioned, as part of my Q&A with Sameer, we are better positioned today as a company that we’ve been here -- been in approximately eight years from a strength of balance sheet perspective. We are dedicating all of our efforts right now to return to profitability and developing a growth based a platform of technologies for our future. And I thank everyone and have a good day.

[Operator:]

Ladies and gentlemen, this concludes today’s teleconference and webcast. We thank you for your participation and you may disconnect your lines at this time.