Fuel Tech, Inc.
Q2 2017 Earnings Call Transcript

Published: 15 Aug 2017

[Operator:]

Greetings, and welcome to the Fuel Tech Inc. Reports 2017 Second Quarter Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Devin Sullivan, Senior Vice President of the Equity Group. Thank you. You may begin.

[Devin Sullivan:]

Thank you, Audrey. Good morning, everyone, and thank you for joining us today for Fuel Tech's 2017 second quarter financial results conference call. Yesterday after the close, we issued a copy of the release, which is available at the company’s website www.ftek.com. The speakers on today's call will be Vince Arnone, President and Chief Executive Officer; and Jim Pach, the company’s Controller. After prepared remarks, we will open the call for questions from our analysts and investors. Before turning things over to Vince, I'd like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements as defined in Section 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 and 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 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 detailed in the company’s filings with the SEC. Having said that, I'd now like to turn the call over to Vince Arnone, President and CEO of Fuel Tech. Vince, please go ahead.

[Vince Arnone:]

Thank you, Devin. Good morning, and thank you, everyone, for joining us on the call today. Before we begin, I would like to mention that our Chief Financial Officer, Dave Collins is not on today’s call as he is addressing some personal matters and as a result, sitting in for Dave today we have, Jim Pach, our Corporate Controller. Jim, thanks for joining us today. In early June, we made an announcement that signaled a significant shift in our business strategy. To summarize, with the help of a third-party consultant that we engaged earlier this year, we undertook a comprehensive review of our operations and organization design with the goal of improving Fuel Tech’s financial profile further reducing our costs and enhancing long-term shareholder value. This study was part of a program that we have been actively managing over the past two years to stabilize our business and create a platform for improved results. In the recently completed second quarter of 2017, we took several steps that we believe will result in better operating performance for the second half of this year and will position the company for growth and profitability in 2018 and beyond. Primary among these actions taken, effective June 28th of this year, Fuel Tech suspended all operations associated with its pre-revenue development stage Fuel Conversion business segment. The transition associated with the suspension of the Fuel Conversion business segment is underway and has included staff rationalization, supplier and partner engagements and exploring the potential monetization of certain Fuel Conversion assets. I cannot comment on any specific monetization efforts as of this date, but we are in the process of having discussions with parties that we believe could have an interest in the Fuel Conversion technology. The decision that we took to suspend operations was driven by our inability to identify a funding source for a pre-revenue enterprise that did not dilute or otherwise damage the investment position of our existing stockholder base. Given the negative material financial impact that further ongoing support of Fuel Conversion would have had on our company, we felt that it was in the best interest of our stockholders to make this difficult but prudent decision in the second quarter. In the quarter, we recorded primarily non-cash charges of about $4.5 million covering building impairments, accelerated stock vesting, severance and other miscellaneous charges and Jim will discuss these charges in detail shortly. On an overall basis, I am very happy with the progress that we have made to-date in achieving many of our objectives including, first, announcing $22 million of new orders thus far in 2017 making it one of the most successful booking periods in the company’s recent history. We expect to announce additional contracts in the very near-term. Second, growing our June 30 backlog by just over $13 million from the end of 2016. On a pro forma basis, our backlog today stands at approximately $25 million. Third, reducing SG&A expenses to $11 million in the first half of 2017, compared to nearly $14 million in the first half of 2016 excluding charges. SG&A in the first half of this year declined to $10.2 million, which represents a 27% decline from the same period in 2016. And lastly, remaining on track to eliminate nearly $19 million of costs excluding charges for the three year period ended December 31, 2017. Despite the lingering challenges that remain, both operationally and within our existing end-markets, we are confident that our operating performance will improve significantly in the second half of 2017. Although there can be no assurances, we see the following trends developing in the second half of this year. An approximate 50% increase in revenues from the $18.2 million reported in the first half of the year, SG&A of between $10 million to $11 million, as compared to $11.1 million in the first half of 2017. Please bear in mind that SG&A for the first half of this year included $0.8 million in charges associated with actions taken as a result of our strategic review

[James Pach:]

Thanks, Vince, and good morning, everyone. Revenues for the second quarter of 2017 totaled $9.7 million, reflecting our historically low APC backlog figure of $8 million at December 31, 2016 and the timing of new project starts derived from the new contracts we have signed thus far in 2017. Revenues did increase on a sequential basis from the first quarter of 2017. As we have previously noted, we expect backlog to revenue conversion to accelerate with our third quarter results, which will help drive the anticipated revenue increase that Vince referenced earlier in the call. Our FUEL CHEM revenue for the second quarter of 2017 declined to $4.2 million from $5.1 million in the prior year and were about $400,000 below the first quarter of 2017. We continue to pursue opportunities at FUEL CHEM and we expect our FUEL CHEM revenue and margins for the second half of 2017 to be consistent with those reported in the first half of the year. Our gross margin percentage was 37.2% for the second quarter of 2017, which is effectively the same level of 36.8% in the second quarter of 2016. We continue to expect to report a blended gross margin between 35% and 38% in 2017. As Vince mentioned previously, our second quarter results included $4.5 million in charges consisted of the following, $3 million non-cash building impairment charge, $0.8 million non-cash accelerated stock vesting charge included in SG&A, $0.4 million in accruals associated with foreign operations included in cost of sales, $0.2 million in non-cash incremental inventory reserves included in cost of sales, and $0.1 million in severance charges. For the second quarter of 2017, our selling general and administrative expenses declined to $5.9 million or 12.4% from the comparative prior year quarter of $6.8 million. Excluding the $0.8 million of non-cash charges, SG&A was $5.1 million, a 24% decline from the second quarter of 2016. With the impact of our recently executed corporate initiatives, and those still planned for the remainder of this year, we will have removed more than $19 million of costs over the last three years. Our research and development costs for the first half of 2017 totaled $600,000, down slightly from $800,000 in the last year’s second quarter. This decline was due to prudent reductions in our overall research and development spending. As Vince mentioned, we are continuing to support new product developments and exploring ways to diversify our products and markets through our research and development efforts. Our balance sheet at June 30, 2017 remains debt free and we have cash and cash equivalents including restricted cash of $6 million totaling $12.6 million. This is a decline from $16.2 million we reported at the end of the first quarter and was a result of the use of cash in light of our historically low backlog at December 31, 2016. Thankfully, our backlog has grown considerably over the last seven plus months and we therefore expect that cash will begin to trend upwards in the second half of 2017. Our working capital balance at June 30 was $18.1 million, which will continue to support our ongoing operating needs of the business. Working capital does not include $5.0 million of restricted cash that was reclassified on the balance sheet to long-term during the quarter as a result of our two year renewal of our cash secured U.S. domestic credit facility. With respect to valuation, our book value per share was $1.49, our tangible book value per share was $2 and our working capital per share was $0.76 at June 30, 2017. In addition, we have another $0.69 per share in deferred tax assets, which have been fully reserved and are not included in any of the per share amounts quoted above. During the quarter, we amended our existing credit facility in the U.S. to extend the maturity date for two years. As was the case with the previous facility, the credit availability in U.S. is $5 million and it’s secured by cash from the company. The $1 million facility in China was also renewed for one year during the quarter and is also cash secured. Now, I would like to turn the call back over to Vince.

[Vince Arnone:]

Thanks, very much, Jim. Operator, we can now open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Pete Enderlin with MAZ Partners. Please state your question.

[Pete Enderlin:]

Good morning.

[Vince Arnone:]

Hey, good morning, Pete.

[Pete Enderlin:]

Thanks for taking my questions.

[Vince Arnone:]

My pleasure.

[Pete Enderlin:]

You had said, the company had said earlier that you expected to get something like $10 million to $15 million of new contracts in the second quarter. You announced $5 million I guess. And so, the question is, you now talk about $10 million to $15 million more by year end, is that some of the same contracts that have just been deferred? Are there other large new contracts that are pending? Or can you just shed a little more light on the flow of those contracts? And are they related to the total pipeline.

[Vince Arnone:]

Certainly, Pete, and thanks for the question. It’s a good one. First of all, the answer is yes. We’ve had a little bit of a deferral on the timing of some awards that we had expected to be coming in a little bit earlier of the year. And they are awards that are still very active and as I said in my commentary, I expect that we will be announcing some additional contract awards here in the very near term and they will be material awards. The figure that I quoted in my script of $10 million to $15 million between now and the remainder of the year, we believe is a very, very viable and achievable target for us at this point in time.

[Pete Enderlin:]

So does that mean that, that’s what’s more or less assured right now and it could well exceed that depending on how the rest of the prospecting in the pipeline goes?

[Vince Arnone:]

It’s difficult for me to say assured, Pete. I wish I could say that, until we have a signed contract, there is always a little bit of doubt. But let me just say that, I do have a very good level of confidence that those contracts will come into Fuel Tech’s hands.

[Pete Enderlin:]

And the accounts receivable level is basically the same as at year end, quite high in relation to revenues, because your revenues have dropped almost 50% and certainly well over 50% in the APC segment. So, the question is, why are those accounts receivables are so high? And is that part of the projection or the expectation for improved cash generation in the second half?

[Vince Arnone:]

Right. Another good question, Pete, another good question. On the AR, what we are dealing with is the, call it, the timing of execution of some of our Air Pollution Control projects. Some of our projects are executed on very different timeframes. Some of them execute rather rapidly over a three to six months timeframe. Many of them will execute over a one to two year timeframe, just depending on the execution requirements of the end-customer. So, we will have instances whereby we will have an ebb and flow in those AR balances that are specifically related to the timing of the mix of projects that we are executing at any given point in time. So that’s why we see that higher level of AR at this point in time, vis-à-vis, the actual revenue generation. To your second point, yes, we look at the remainder of this year on a cash flow perspective. We are looking at a stabilized increase in cash from where we are today. And yes, it is due to the timing of having some of that AR and that will start to flow through back into the cash line from that AR line.

[Pete Enderlin:]

Thanks, and Vince, you mentioned the potential especially in China for the ULTRA system, 225 installed based there now. Do those units generate any significant recurring revenues which would make for the installed base relevant or is the installed base just a recognition of business that you’ve already done that makes it hard to get more business, if you understand the question?

[Vince Arnone:]

I very much understand your question. The installed base is really your latter comment. It is 225 units whereby we have installed our ULTRA system on contracts that we have won. And that does not repeat – that does not represent an opportunity for recurring revenue for us on that installed base today. What we are looking forward to is the fact that, if indeed China does move completely away from the use of aqueous ammonia, that there could be another 1000 to 1500 units that don’t have a urea to ammonia conversion system installed on them today, that could represent additional capital project opportunities for our Beijing Fuel Tech entity.

[Pete Enderlin:]

Vince you mentioned safety concerns with aqueous ammonia. What are those? I mean, does this stuff has the potential to spill or explode or I don’t really know the chemistry of it?

[Vince Arnone:]

Yes, and yes. We don’t hear of too many incidences of, call it, a hazardous situation, but they are noted and we’ve had some in this country as well. But in this country, there are typically in much lower population areas. In China, they actually did mandate in some of their higher population areas that aqueous ammonia cannot be transported nor stored on sites, because a leak or a spill can have a very detrimental hazardous impact to those folks that are nearby to that spill or leak area. And so, it is a very hazardous chemical to both transport and store and again, we are seeing that at least, one of the big five utilities in China is starting to give consideration to moving away from its use, and if that’s the case, that just benefit for us, a good opportunity for us if you will.

[Pete Enderlin:]

Yes, on the charges, what was the genesis of the building charge? And also on the 800,000 of accelerated stock vesting, what do those involve?

[Vince Arnone:]

Pete, I am going to let Jim go ahead and address the comment on the building and on the charges related to the stock vesting, okay. Jim, please go ahead.

[James Pach:]

Thanks, Pete. The building impairment charge, the short answer to that is it’s due to the decline in our stock price; to get into more detail from a U.S. GAAP standpoint our market capitalization fell below our carrying value of our equity on our balance sheet. So that triggered us to take a look at our impairment, both on our APC and FUEL CHEM’s business segments. While there is no impairment on either segment, there is this corporate-wide asset which is our building which triggered you to look at fair value accounting. And the building’s carrying value was more than what the fair value was, so that triggered the impairment charge for the quarter. The long story short, in brief, it’s really due to the decline in our stock price. In terms of our…

[Pete Enderlin:]

Corporate headquarters?

[James Pach:]

Correct.

[Pete Enderlin:]

Okay.

[Vince Arnone:]

Yes, it is.

[Pete Enderlin:]

Right.

[James Pach:]

In terms of the accelerated stock vesting, as we had mentioned in our press release around June – or July 5th, we took some actions as management to reduce our SG&A spending going forward and one of the actions was to accelerate vest remaining stock, take the charge in the quarter and then, it clears us a path forward as we had mentioned in that July 5th press release.

[Pete Enderlin:]

Got it. Okay, thanks very much guys.

[Vince Arnone:]

Thanks for the questions, Pete.

[James Pach:]

Thanks, Pete.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of George Gasper, private investor. Please state your question.

[Unidentified Analyst:]

Good morning.

[Vince Arnone:]

Hi, George.

[Unidentified Analyst:]

Nice to hear your potential progress going forward here and what you have accomplished in the six months. Could you break down the backlog of $25 million as to what area of activity it is?

[Vince Arnone:]

We’ll do this just sort of little bit off the cuff here. If you don’t mind, George.

[Unidentified Analyst:]

Okay.

[Vince Arnone:]

A little more than half of that is going to be domestic based, probably in that $14 million to $15 million and then, I’d go just about in equal split for the remainder between our European and Asian geographies.

[Unidentified Analyst:]

Okay, all right. And then, in the second half, now, you’ve taken this non-cash charge. What might we be looking at in future charges in the second half, non-cash, other, to get you to out from under what you have to accomplish to get moving forward clean of charges?

[Vince Arnone:]

Right. As we sit here, right now, George, we are not expecting any, call it, incremental one-time charges in the second half of the year.

[Unidentified Analyst:]

Okay.

[Vince Arnone:]

I’ll give you one caveat on that. We do have – we are still carrying an intangible asset as it relates to our Fuel Conversion business. And that does remain on our books as of the end of the second quarter of this year. And it remains there because, as I noted in my commentary, we are aggressively pursuing ways to go ahead and monetize the assets that we’ve created over this past 2.5 years with our Fuel Tech team. So – and I say caveat because it’s our expectation to go ahead and monetize that asset, but in the event that we do have difficulty doing so, there would be a chance in the future that that could be a part of a non-cash charge as well. But I don’t expect that as we sit here today.

[Unidentified Analyst:]

Okay, all right. And then, you have mentioned, there was – in the past quarter, I believe, previous quarter, there was some reference in terms of potentially expanding your business and with the reference to water treatment, can you give us any thoughts on what your objective might be there? What area of that activity would you be interested in?

[Vince Arnone:]

Hey, George, it’s water treatment really entices us just because of the depth and breadth of the space and because we believe that we also can leverage a lot of the – very, very strong technical resources that we have internally within our Fuel Tech team. I really can’t be more specific in terms of specific areas that we are looking at in the water treatment space. But as I noted, I am hoping to be able to talk about that in more detail here in this, hopefully within this next quarter’s timeframe. But it is something that, as a company, we need to move away from some of our traditional more fossil fuel-oriented areas. We know that at some point in time, those opportunities are no longer going to be with us and they are not going to provide value for our shareholders. So we need to make the move into other areas of interest for our company as a whole and that’s what we are doing. There is a lot of work being done behind the scenes right now within the company to make that move. And so, that’s where we are definitely targeted. We do have good runway left as it relates to our Air Pollution Control and Chemical Technologies businesses and we are going to capitalize on those opportunities. But we have to make a move towards the other market areas. It’s necessary for our long-term future.

[Unidentified Analyst:]

All right. I am intrigued by this, because with your chemical backgrounds and what you have done, there seems to be a very serious situation developing among companies that process, brewing companies, soda companies, there is a lot of ammonia used in the processing or cooling process in the beverage industry. And we are hearing here in Wisconsin there is going to have to be some very serious change outs away from ammonia in terms of the cooling process that the plants do not meet specs going forward. So, that’s just an area that’s intriguing. My last question is, now, depending some of the stocks – reverse stock split, what’s the status on that?

[Vince Arnone:]

It’s something that obviously we are watching very closely. We are currently on a – we are on a timeline right now. We do need to see our stock start to move up – up above a dollar and have stayed there for a period of time to avoid the split requirements. And right now, the approximate timeframe whereby we would have to execute on the split is early to mid-November timeframe, so.

[Unidentified Analyst:]

I see.

[Vince Arnone:]

So, we are watching it closely as a company, we are doing the necessary preparations that we need to, to get ready to be able to do that just in case we have to.

[Unidentified Analyst:]

Right.

[Vince Arnone:]

So, we are watching it.

[Unidentified Analyst:]

Okay, all right. Well, just in closing, what’s really interesting regarding FUEL CHEM and at this point in time is that, the lack of burden on the debt side and the capacity probably to borrow more when you need it and to get all this new innovation going considering where your stock price is, it looks pretty cheap. Thank you.

[Vince Arnone:]

Thank you, George.

[Operator:]

Thank you. There are no further questions. That does conclude our question answer session. And at this time, I’ll now turn it back to your President and CEO, Vince Arnone for closing comments.

[Vince Arnone:]

Thank you, operator. As I noted in my commentary, 2017 is a very, very, very important year for Fuel Tech. We have taken many steps to stabilize our business operations over this past two - two and a half years. We believe we are in now better positioned financially to be able to prospectively show improved financial results. And as I just noted in my answer to George’s question, we are really excited about taking Fuel Tech into new market spaces prospectively. It’s something that as a team, we are now geared up to do. And as I noted, we are looking forward to discussing some of those opportunities in the near future. And I thank everyone for their interest in Fuel Tech and thanks to all of our shareholders. Have a good day.

[Operator:]

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