Q1 2020 Earnings Call

Greetings and welcome to the fuel Tech first quarter 2020 financial results Conference call. At this time, all participants are any listen only mode.

Question answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone Keypad. As 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.

Thank you Jesse good morning, everyone. Thank you for joining us today for fuel Tech's first quarter 2020 financial results Conference call.

Yesterday after the close where you should a copy of the press release, which is available at the company's website Www Dot F. G UK dotcom.

The speakers on today's call will be Vince Arnone, Chairman, President and Chief Executive Officer.

I want all booked the Companys principal financial officer.

After prepared remarks, we will open the call for questions from analysts and investors.

Before turning things over the Vince I'd like to remind everyone that matters discussed in this call except for historical information all forward looking statements as defined in section 21, He and the Securities Exchange Act of 1934 as amended which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act would like to 95.

And reflect fuel Tech's current expectations regarding future growth results for future growth results of operations cash flows performance and business prospects opportunities and assumptions made by an information currently available to our company's management [noise].

Joel tickets tried to identify forward looking statements by using words, such as anticipate believe plan expect estimate intend will and similar expressions, but these words or 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 one eight under the caption risk factors and subsequent filings with Securities Exchange Act of 1934 as.

Amended which could cause fuel tech's actual gross results of operations financial condition cash flows performance business prospects and opportunities to differ materially from those expressed in or implied by these statements.

We'll take undertakes no obligation.

Updates such factors, what you publicly announced the results are there any forward looking statements contained herein.

Reflect future events or 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 FCC.

That said I'd now like turn the call over to Vince Arnone Vince. Please go ahead.

Thank you Devin.

Good morning, and I want to thank everyone for joining us on the call today.

I hope that your families are safe and in good health.

We are just a short time removed from our 2019 year end result.

And so my remarks today will be agreed.

I'll begin with an overview of how the cold It 19 pandemic, it's impacting fuel tech and how we are addressing these challenges.

Gilts that qualifies as an essential business.

Under the state of Illinois Executive order.

And our operations remain accurate.

We have developed and deployed series initially initiative designed to minimize disruption to our normal business activities.

And preserve our ability to execute on our objectives.

We are focused on supporting our current and potential future customary requirement.

Our APC and fuel Chem business segment. During this critical period of time.

And our deploying recommended safety protocols.

Across our enterprise to ensure that our employees.

Customers and suppliers remained stable.

Overall, the impact of coping 19 on our financial results for the first quarter of 2020 was not material.

However, as we moved into the second quarter, we are seeing some impact on our business activity.

For our fuel Chem business segment.

Operations have continued.

We have continued to provide our program to our customer base.

However, the extensive economic slowdown driven by called at 19 has dramatically reduced electricity demand and as a result energy dispatched to many power generation units.

Our fuel Chem revenue will deteriorate get accounts that are not dispatch for power generation.

It is difficult to quantify the overall impact on financial performance.

Electricity demand and dispatched will vary by geographic region.

With the timing of return of economic activity and the impact of weather likely to be critical driver.

For our APC business.

Oh for potential New awards.

And for execution on existing contracts.

Depending on the nature of the customers business.

And there are near term planning requirements. We are finding that some projects are moving forward as plan.

While others are being delayed until such time as the economic outlook becomes more clear.

Against this backdrop. However, we are experiencing some progress with respect to new business development at each of our operating segments.

Oh.

We were very pleased that you announced last week the receipt of two demonstration orders using the fuel Chem proprietary tippy biotechnology.

I referenced this opportunity during our fourth quarter call in March and we're very pleased that just came to fruition.

The demonstrations are for new domestic industrial renewable power customers that utilize biomass as a source of fuel which has been a target application for us and both the U.S. and your markets for some time.

Chemical injection for all three units is scheduled to commence this quarter and assuming a successful demonstration ongoing commercial programs will begin in the third quarter of 2020.

These commercial programs are estimated to generate annual revenues of 500 to $750000 per site when the units at the site, our operational and utilizing the technology on a continual basis throughout the year.

Beyond biomass, we are closely following additional opportunities to expand fuel chem domestic operations.

Including those that require the conversion other units fuel source to a lower rank coal to reduce the units operating cost structure.

In Q4 of 2019, we installed our fuel Chem program on Q domestic coal fired utility unit at the same site, where the plant with which you in switching to a lower quality coal to reduce their cost of dispatch.

We are discussions with the same customer [noise].

To install our fuel Chem program on multiple units at a separate site later this year.

We will discuss our progress on this opportunity as we move throughout the year.

We're continuing to pursue opportunities for additional fuel chem applications.

I only asked and municipal solid waste units in Europe.

In Southeast Asia, the our partner Amazon comparison for the pulp and paper industry, where we are using our recovery can program.

And another southeastern Asian countries, where coal is a primary source of fuel power demand can related pricing, that's high end, where slagging and fouling is an issue.

Longer term, we continue to build on our progress or with our partner in Mexico to employ our solutions to help them mitigate harmful emissions by burning high sulfur fuel oil.

Our partner continues to engage with government officials in Mexico to advance this solution.

As the reduction in oil price has provided further impetus for the Mexican government to explore the burning of the high sulfur fuel oil produced by Pemex The state owned oil company.

Our partner began discussions last month with CFP. The state owned utility for contract extensions <unk> for the two current sites on which we are installed and these contracts it shouldn't be executed shortly.

One Stein and it's our hope that we will be able to expand our program to several other sites that are capable of burning the high sulfur fuel oil.

For a b C. We are cautiously optimistic about new awards. This year and are in various stages of negotiations for contracts with an aggregate total value of $10 million to $15 million that we are targeting to close by the end of the current second quarter.

These awards are weighted towards the U.S. and Europe, and primarily for our SCR ultra and SNC our offerings.

Notwithstanding the impact of Cobot 19, New project Awards.

See our adult refer natural gas applications and industrial markets continued to provide our best business opportunity.

This includes focusing on small to medium gas turbine combined cycle plant projects.

Such as the combined heat and power upgrades at universities, and large medical complexes and new opportunities and the oil and gas segment.

We continue to supports and partner with small turban suppliers and suppliers of internal combustion engines for stationary deployment and exploit the development of plug and play small engine SCR solutions for the distributed power generation market.

We're also monitoring activities at the state level, where new environmental guidelines that may produce opportunities to install best available the retrofit control technology.

Certain sources of admissions.

We continue to track opportunities in Europe related to our ultra MCR and SCR technologies.

As well as those associated with Brad the best available referenced technology guidelines that were issued in August of 2017 with compliance timelines through 2020 and beyond.

Longer term, we are tracking APC opportunities in India, Southeast Asia, and South Africa.

The emergence of Kobin 19 to an already challenging business environment has amplified the importance of our previously announced financial and operational restructuring initiatives.

As previously announced.

I'm very grateful for their support Oh fuel Tech's senior leadership and board of directors, who have agreed to voluntary compensation reductions of 10% that are expected to produce annualized cost savings of approximately $300000.

The suspension of our underperforming China operation is substantially complete.

Which has removed $2 million of annualized annual operating losses from our profit last statement.

And we have collected and repatriated a total of approximately $800000 in cash from our China customers as of March 30, Onest 2020.

With additional repatriation to fund expected later in year.

With all of these initiatives.

We have taken significant strides to better align our cost structure to meet the level of business generated by our markets today.

While maintaining the ability to deliver all of our products and technologies to markets. We serve and we will continue to review our cost structure on ongoing basis.

For 2020.

We target total less DNA costs.

Between 13.5 and $14 million.

We ended the quarter with 11.1 million in cash and cash equivalents and no debt, which we view as a significant band and yes, we whether this challenging environment.

We continue to closely monitor and manage our cash flow and liquidity needs and believe that our current cash position combined with the cash flow expected to be generated from operations are adequate to fund planned operations of the company for the next 12 months.

We believe that the actions noted above.

Well also establish a basis for material improvement in our financial performance as we move through 2020 and beyond.

As we noted in our press release.

And onsite demonstration of our water technology solution at a pulp and paper facility in the Midwest, what's delayed due to cold at 19 restrictions.

We expect to commence this trial once the restrictions are lifted however, we cannot at this time determined when the demonstration will commence.

Before turning things over to Ellen are acting pretty principal financial officer, I'd like to address a couple of additional items.

First.

We changed the date of our annual meeting of shareholders to June 16th 2020 at 10 am Central time from the originally scheduled date of May Twentyth 2020.

This change was made to accommodate public health measures in Illinois that were put in place to respond to covert 19.

We do expect that in person attendance will be possible by June 16th. However, we have also provided the dial in number for anyone interested and attending virtually and that information is available in our press release dated may fit on this subject.

On the same topic among the proposal for vote is one that provides the board of directors with the ability to effective reverse stock split if necessary to maintain our NASDAQ listing.

The NASDAQ stock market has informed us that due to the market volatility associated with cobot 19.

Good day by which we must regain compliance has been extended until September 18th 2020.

Appliance is regained after our stock closes above one dollar for 10 consecutive trading days.

We welcome this extension and appreciate the nasdaq's stance during these unprecedented times.

Finally on April 15, 2020.

We entered into an agreement with our lender pursuant to the Paycheck protection program under the Corona virus aid relief and economic Security Act, providing for alone and the principal amount of approximately $1.6 million.

This funding was completed in the second quarter.

And is therefore not reflected in our financial statements for Q1 2020.

In closing I want to thank everyone. Once again for your ongoing interest in fuel Tech.

The fuel tech team has proven to be a committed resilient and create a group of individuals.

And we remain motivated to ensure financial sustainability and ultimately a growth platform for our for our stakeholders.

Im very proud of our teams response to a very very difficult business environment.

With that said I'll turn the discussion over to Alan Alan. Please go ahead.

[noise], Thank you Ben and good morning, everyone.

Consolidated revenues declined to $3.8 million from $10.2 million in Q1 of 2009.

Question significantly lower revenues from our APC segment as well as the revenue decline repeal Kim.

APC revenues for the first quarter up 21 were $1.2 million as compared to 5.8 million in the first quarter 2009.

Well, we're APC revenues were the result of a decline in backlog entering the first quarter is lower than expected new HCC contract Award.

Well, if the timing of completion of current project.

Backlog at the ended the quarter with 9.2 million comprised of 8.4 million domestic project and point 8 million Mark born and.

Projects included in backlog represents a variety of fuel tech technology offering across many yet.

Yes, it can revenues for the quarter were 2.6 million as compared to 4.4 million during the first quarter 2009.

The decline in revenues is attributed to lower electric on demand, which affected normal operation and allowed or unplanned outages, except for let's now.

As Vince mentioned, we recently secured two new demonstration orders for fuel Chem, which are expected to begin chemical injection in the second quarter.

Consolidated gross margin for Q1, 21, and 2019 were 40% of revenue.

Consolidated gross margins were flat despite lower revenue due primarily to the mix between 80 and fuel Chem.

APC gross margin was 430000 or 36% as compared to 1.9 million or 33% in Q1 2019.

This slight men. It also attributed to product mix in the segment.

You will come gross margin was 1.1 million or 40%, 45% in Q1 as compared to 2.1 million or 48.4% in Q1 2019.

For comparative purposes, APC rebelled for Q1 2020 included no revenues from Beijing, Okay.

And an operating loss of approximately $20000.

In Q1 of 2019 revenues from be Beijing fuel Tech were $350000 and the operating law with 850000.

Backlog at the ended Q1 for Beijing fuel Tech is approximately $30000.

As noted last quarter, we are continuing to work with our insurance companies to secure reimbursement for our warranty liability that caused a record 82 million dollar charts in the fourth quarter of 2019.

Upon settlement with the insurer all amounts received will be applied reversed the charge in the future quarter.

At this time he matter running open.

We continue to focus on controlling our costs with DNA for Q1, 2020 declining by 12.8% to $3.9 million from $4.5 million in Q1 of 2019.

Yearend 2019 marked the fourth consecutive year that I DNA decline and we expect that trend will continue in 21 without sacrificing the level of support for our current customer base, nor our business development activity.

As Vince mentioned, we are targeting estimate of approximately 13, a half to $14 million.

R&D expenses in the quarter increased to 324008 58000, an increase from last year's first quarter. This reflected our continued focus and effort on the development of the dissolved gases using technology initiative as we were planning to commence the customer demonstrates.

In late in Q1 that was delayed by corporate night.

Net loss from continuing operations with 2.6 million or 10 cents per share compared to a net loss from continuing operation of 1.3 million or five cents per share in first quarter of 2019.

Beijing fuel Tech had net income from continuing operation in Q1 of 2020 130000 compared to a net loss of 850000 in the first quarter 2019.

Income in the current quarter for Beijing fuel Tech is attributed to collection efforts of outstanding receivable.

Our balance sheet at March 31st 2020 remain debt free and we had cash and cash equivalent of one of 11.1 million, including restricted cash of 3.1 million.

Our working capital balances at the ended the quarter with 14.7 million, which will continue to support the ongoing operating the business.

With respect to valuation our book value per share with 95.

Our tangible book value per share with 83.

And our working capital per share with 58 cents as of March 31st 20.

Now I'd like to turn the call back over to them.

Thanks, very much Ellen operator, let's please go ahead and open the line for some questions. Thank you.

Absolutely, ladies and gentlemen, she would like to ask a question at this time. Please press star one on your telephone keypad.

Information indicates that your line is in the question Q you made fresh start to if he would like to your move your question from the Q.

All participants using speaker equipment and may be necessary to pick up your hands. So pressing the star keys, one let me. Please let me pull for questions.

Thank you. Our first question comes from the line item at dialogue with H.C. Wainwright. Please proceed with your question.

Thank you good morning, everyone.

Hey, good morning, I mean, how are you.

Good good how are you doing.

Well thank you.

Yes so.

We expect to you know the $10 million to $15 million NEPC deals you guys are pursuing.

And expecting to goes maybe into two krwtwenty one of the steps through meaning this suits grocers to close these deals and how many customers is this attribute it to.

Right regarding the first of all things for you or your question and I Hope that you on your family are safe and healthy.

So regarding your your your question the near term orders that were were following.

They're primarily for U.S. and European marketplaces, the steps that we're following our basically very specific ongoing dialogue with the the specific customers that that we're addressing as as part of these bid processes.

Yes, we do have some larger contract values that are included in this 10 to 15 dollar call. It targets for New awards, but we also have some smaller contract values that are included in that that pool of potential projects as well I'm is as we usually do but but these are awards that that that should close one way or.

The other here before the end of Q2 and as I noted, we're following them with a with hyper intensity if you will.

Understood. Thank you for that and then maybe towards the back on.

With respect to the backlog the 9.2 million that you I got the in those.

The first quarter is there's going to be recognized by the end of two anybody or is that a different days and then would you like this.

Right that we will recognize all of that coming in through in 2020, I'm. It it'll likely be I would say oh five to 6 million of that that 9.2 that will actually come into revenue in 2020 based upon the call. It the planning time horizon with that customer base that represents that backlog.

Based upon what we know today.

Understood.

And then maybe a little bit Woodmac grew another question you know the changes in sort of demand for electricity.

Is there anything we can do as a company you drew sort of going through those trends I'm, obviously not in the near term, but from a longer term perspective.

Right. It yeah, what we're going through right now is obviously, it's it's something that we haven't seen before I mean, my relative to the lack of electricity demand just in general prior to the impact of this past couple of months, obviously, we were seeing significant trends towards.

Of utilization of of natural gas as a primary fuel stores for power generation in this country.

In renewables as well obviously so.

Our focus on the fuel Chem side of the business has been the capitalize on those coal fired a utilities that are remaining and still are being dispatch for power trying to find those pockets of opportunity whereby those coal units were looking to be kept the alive, even is as a sporadic or peak power generators.

To help them, Brad we reduced their cost structures by using lower ran cold and and being supported by our fuel Chem program. So that's been something that we've we've been doing on ongoing basis independent of the impact of covert 19. The other items that we worked on is trying to focus on utilizing fuel chem for for other sources of fuel.

The biomass opportunities that we did sign the contract for a little bit earlier here in the year, we're really quite a.

Quite a quite a nice accomplishment for us it's a market that we we've have we didnt want to play in a little bit more extensively a there are more units that are burning coal is the greener fueled the greener biomass fuel if you will today and we hope that will have an opportunity to expand with those applications in the U.S. hand in Europe.

Relative to your brought a broader question relative to is there anything that we can do to maintain a business level in during this.

The decline in electricity demand overall, that's a tough one on that as we sit here right now Unfortunately, the product line the fuel Chem product line specifically it is only required when those units our R&D up and running so so that business to the extent, we have an extended period of.

Further a disruption to the economic activity, we will feel it we just don't know what what what that impact is going to be today.

And so it's fair enough.

Yes, I guess those.

Things.

So you stick back in queue. Thank you so much.

Thanks Summit appreciate the call.

Thank you. Our next question comes from Pete Enderlin Nic Partners. Please proceed with your question.

Good morning, Thank you.

Hey, good morning, Pete I'm hope, you're you're you're you're safe and healthy.

Thank God.

Two and a thank you talked things to deal with I just had two.

Yes.

First one is regarding the fuel Chem impact can you quantify sort of the relative effect impact of.

Lower demand and unplanned outages both of those.

And in fact, I would think lower demand is going to be more of an issue in the second quarter, but how how did those two sort of play out in the first quarter.

Yeah, we what we saw in Q1 was I would say probably more outage related than overall demand related.

Generally speaking in terms of the knocks down if you'll come revenues in Q1.

But to your point in Q2.

What we're seeing other customer base do is because of the lack of demand where we're finding that some of our customers are willing to take some extended outage time to ensure that they they get all of the the necessary maintenance work completed before they enter their high demand season.

Which is summertime, obviously, so we are seeing our customer base.

Take outages and perhaps longer outages than they normally would take because of of the the downturn in demand for for power generation. So so yes, we are feeling it and again as I mentioned to you a amid it's just very difficult to for us to quantify what that impact is going to be.

We are seeing some units come back up and start to run here in the month of Maine, which is good sign as we are seeing some pockets of warmer weather activity that necessitate those units to be running.

But on the other hand, we are feeling a little bit of the extended outage impact as well so we'll feel a little bit of both in the second quarter for fuel Chem.

Okay then.

What can you say about the potential number of sites that could be addressable market for the to see biomass program. You mentioned too I have no idea, whether there could be 10 5100.

As a reasonable.

A number for the total market.

Cardless or whether you would have a specific target for market share.

Right.

No I would say that at this point in time I'll give you a range. It's it's not too I'm not going to give you 100, but it's probably in the in the 25 to 50, Oh you need range a that is available in out there today and that would include all of North America that would not include potential European market applications.

With our fuel Chem business historically, unless we've actually proven the technology to be successful for an application. It's made it difficult for us to tend to go ahead, and then have that reference client then to use as a basis for for sale to another customer base.

The customer that we're actually working with with the speed. These two recent awards. They're focuses is purely on providing.

Power generation via renewable via use of biomass and good they're turning out to be a on a very nice a client relationship for for US as we sit here today, and we would look to try to build others such similar relationships in the future.

Thanks, That's helpful. And then one last question for me, which is.

Qualitative you might say.

As you've been.

Really working for several years on.

Adding new string to the boat broadening the base of business.

When you look at the <unk>.

50, bio mass opportunity and the DG I opportunity.

What do you think is likely to be more significant so nationally for you over long period of time.

Pete I would have to say that as we sit here today and as we looked at our longer term planning and thinking.

Our focus on water is one that we believe and that we want to be the on the larger generator of.

A future improved financial performance for for fuel Tech.

We do believe in that and marketplace. We do believe me the technology that we have licensed it has taken us a little bit longer to move that into markets that we would like we are talking with additional parties as we sit here today to investigate other means providing that type of technology to the marketplace. So from my perspective.

Pete It's our initiative on the water side that I would expect to.

Have a larger future benefit for for our company.

Well that's interesting because given what did you just said.

The biomass opportunity, that's that's pretty significant want to over long period of time. So I appreciate that thank you very much.

You're welcome P.. Thank you very much stay safe.

Thank you interpret they have no additional questions at this time sounds like the pass the floor back over to Mr. arnone for any additional closing comments.

Oh, Thank you Jesse I want to thank everyone for joining us on the call today I want everyone to to stay safe a healthy as we as we work through this is very difficult time as as they as a population.

Thanks for your interest in the company, we're doing everything that we can to ensure that we deliver value to our stakeholders and that will always continue I promise you that thanks for your time today.

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

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