Q2 2020 Fuel Tech Inc Earnings Call
Greetings and welcome to the fuel Tech Inc. second quarter 2020 financial results Conference call.
At this time all participants on the listen only mode. A question answer session will follow the formal presentation. If he would like to ask a question you May press star one on your telephone keypad.
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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.
Thank you Donna good morning, everyone and thank you for joining us today for fuel Tech's second quarter 2020 financial results Conference call.
Yesterday after the close we issued a copy of the release, which is available at the company's website www Dot F.T.K. dotcom.
Our speakers for today will be Vince Arnone, Chairman, President and Chief Executive Officer, and I went all booked the company's principal financial officer.
After prepared remarks, we will open the call for questions from our analyst and investors.
Before turning things over to Vince I'd like to remind everyone that matters discussed on this call except for historical information or forward looking statements as defined in section 21, He and the Securities Exchange Act with 1934 as amended which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 and.
And we're filling reflect a fuel tech's current expectations regarding future gross results of operations cash flows performance and business prospects and opportunities as well as assumptions made by any 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 to 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 under the Securities Exchange Act, the 1934 as amended which could cause fuel tech's actual gross [laughter] results of operations financial conditions 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 two publicly announced the results of any forward looking statements contained hearing to reflect future events developments for changed circumstances or for any other reason.
Testers are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in the company's filings with the FCC.
With that said I'd now like to turn the call over to Vince Arnone. Since please go ahead.
Thank you David Good morning, and I want to thank everyone for joining us on the call today.
I hope that you and your families are safe and in good health.
I'll begin today with an overview of how the Cobiz 19 pandemic is impacting fuel tech.
And how we are addressing these challenges.
We believe that the cobot 19 pandemic affected our air pollution control and fuel Chem operations in the second quarter, although the impact is difficult to quantify.
Many of the project specific delays that we had been experiencing in closing new APC business Awards were extended as a result of cobot 19.
Our fuel Chem segment was impacted by slower activity due to co big 19 in particular in the month of April and May.
A decline in economic activity drove reduced electricity demand, which led to a reduction in electricity generation and dispatch.
In particular or coal fired power generation units.
Fortunately the month of June showed improvement.
And thus far in the third quarter, we have returned to normalized run rate for use of our fuel Chem program.
It is important to note that fuel tech qualified as an essential business under the state of Illinois Executive order and our operations have been active.
Not only in the U.S., but on a global basis as well.
We developed and deployed a series of 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 customer requirements.
For our APC and fuel Chem business segments. During this critical period of time.
And our deploying recommended safety protocols across our enterprise.
To ensure that our employees customers and suppliers remains safe.
For APC business, both for potential New award and for executing on existing contracts.
Depending on the nature of the customers business.
And there near term planning requirements.
We are finding that some projects are moving forward as planned.
While others have been delayed until such time as the economic outlook he becomes more clear.
We do have active projects in our current pipeline.
And we are confident that we will close new awards with an aggregate total value of $10 million to $15 million by the end of this year.
We did pick your $2.2 million of New awards in early Q3.
And our in various stages of the proposal and negotiation process. These with customers for the additional awards that I've just mentioned.
These awards are weighted towards the U.S. in Europe, and primarily for our SCR ultra and SNC our offerings.
Notwithstanding the impact of Cobot 19 on New project Awards.
S T R and ultra for natural gas application and industrial markets continue 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 University and large medical complexes.
And new opportunities in the oil and gas segment.
We continue to support and partner with small turban suppliers.
And suppliers of internal combustion engines for staged for stationary deployment.
And look to exploit the development the plug and play small engine SCR solutions for the distributed power generation market.
We are also monitoring activities at the state level, where new environmental guidelines.
Including compliance with the EPA boiler MACT and regional haze rules.
They produce opportunities to install best available retrofit control technology on certain sources of emissions.
We continue to attract opportunities in Europe related to our old throughout SNC are an SCR technology.
As well as those associated with with Brad.
The best available reference technology guidelines that were first issued in August of 2017, and that had compliance timelines through 2020 and beyond.
Longer term, we are tracking APC opportunities and India, Southeast Asia, and South Africa.
And our fuel Chem business segment as I noted previously revenue generation was impacted by slower economic activity due to cold in 19 in particular and a bunch of April and May due to the overall decline enact in economic activity and related decline in electricity demand.
In the month of June and thus far in the third quarter. We have returned to normalized run rate for use of our fuel Chem programs and we expect third quarter revenue to approximate the revenue generated from the first six months of this year.
Early in the third quarter, we announced a new order for equipment supporting our TV targeted in fairness injection technology.
Three coal fired units in the United States.
He equipment installation and startup for these units should occur before the end of the third quarter and we expect that he contributions from these units throughout the second half of the year.
We are continuing to pursue opportunities for additional fuel chem applications.
At biomass and municipal solid waste units in Europe.
In Southeast Asia, the our partner Amazon Piris for the pulp and paper industry, where we are using our recovery Kevin program and another southeast southeastern Asian countries, where coal is a primary source of fuel power demand and related pricing was high in where slagging and following is an issue.
Longer term, we continue to build on our progress with our partner in Mexico to employ our solutions to help mitigate harmful emissions by burning high sulfur fuel oil.
Our partner continues to engage with local officials in Mexico to advanced this solution.
The reduction in oil price has provided impetus for the Mexican government.
To explore the burning of the high sulfur fuel oil produced by Pemex.
The state owned oil company and this oil is being burned however, largely without pollution control measures.
Pressure is now being placed on fee the state owned utility to install pollution control measures wherever this fuel has burned.
In June our partner solidified contract extensions with CFP for the two sites at which we currently have our fuel chem programs installed.
And now we're on the process of working with our partner to provide cost estimate.
For the expansion of our program to other sites that burn the high sulfur fuel oil.
We will watch this development closely as we move throughout the year.
Regarding our di di dissolved guest gas in Houston initiative.
We previously reported that a planned onsite demonstration of our water technology at a pulp and paper facility in the Midwest early in the second quarter of 2020 had been delayed to the impacted coated 19 and this demonstration is still delayed as of this date.
In July we signed a new license agreement.
Related to the DG technology with cadence Corporation.
And entity that purchased the assets from the prior license or of the technology nano to LLC.
Cadence Corporation, the company active and municipal wastewater treatment.
With a focused on delivering biological solutions to this market.
Under the terms of the new agreement fuel Tech has more flexibility regarding nonexclusive market access and can now manufacture all DG delivery system on its own.
We continue to advance conversations.
With several other potential customers of our Dbi technology across a variety of industries.
We continue to focus on our cost structure and unmade, maintaining an efficient financial profile relative to the opportunities offered by our current market environment.
Our rest DNA was approximately $3.25 million in the second quarter of the year.
When excluding the favorable impact of a reversal of a bad debt charge in the quarter.
For the full year, we expect us DNA to approximate $13 million to $13.5 million.
The execution of our cost reduction initiatives over these past few years.
Including the wind down of our China operation has enabled us to sustain in this difficult market environment.
In China, we have elected and repatriated in excess of $1 million in cash from our China customers as of June Thirtyth of this year with additional repatriation of a fun expected later Amir.
We ended the quarter with over 11 million in cash and cash equivalents.
As I noted during our first quarter conference call on April 15, 2020, the company entered into an agreement with its lender pursuant to the Paycheck protection program.
Under the Corona virus aid relief and economic Security Act, providing for alone in principle amount of approximately $1.6 million.
This funding was completed in the second quarter and is reflected in our financial statements at the end of Q2.
We believe that our current cash position combined with the cash flow expected to be generated from operations.
Our adequate to fund planned operations of the company for the next 12 months and that's all of the cost reduction efforts that we've accomplished have established a basis for material improvement in our financial performance as we move throughout the remainder of 2020 and beyond.
Despite this challenging business environment the fuel tech team remains focused.
And committed to delivering long term value for our shareholders.
With that said I'll turn the call over Q Ellen for her comments. Please go ahead Ellen.
Thank you Vincent and good morning, everyone.
Consolidated revenues declined to 4.4 million in the second quarter from 8.9 million in the second quarter 2019, reflecting significantly lower revenues for both APC and fuel Chem segment.
APC revenues for the second quarter of 2000 21.9 million as compared to 4.8 million in the second quarter of 2019.
Lower APC revenues were the result of a decline in backlog entering the year.
Lower than expected new APC content contract award and the timing of completion of current project.
Backlog at the ended the quarter with 8.3 million comprised of 7.2 million in domestic project and 1.1 million from our foreign entity.
Projects included in backlog represent a variety of fuel tech technology offerings across multiple geography.
As Vince mentioned, we did report 2.2 million of New award early in the third quarter comprised of projects from both technology segment.
You're welcome revenues for the quarter were 2.5 million as compared to 4.1 million during the second quarter 2019.
The impact of Cobot 19 affected revenues in our fuel Chem segment, which experienced reduced power demand and unscheduled outages beyond what we would consider to be normal for the period.
We have as Vince mentioned started to see a return to more normalized level. If we add we've entered the third quarter.
Consolidated gross margin for the second quarter, 2020, with 13.7% of revenues compared to 43.6% of revenue.
Last year second quarter.
This decline was driven.
To a lot driven to a large degree by $1.1 million charge in the APC segment to remedy and equipment nonconformist issue related to a previously disclosed equipment warranty liability with the U.S. customer.
Excluding the charge consolidated gross margin for the second quarter with 40%.
We have submitted a reimbursement request you aren't sure or the amounts expanded in the remediation and such amount it's within the coverage limits of our insurance policy.
We continue to work closely with the insurance company to resolve this matter and upon settlement with aren't sure. All amounts received will be applied to reverse the charge.
For comparative purposes, APC results for the second quarter of 2020, and 2019 included no revenues from our aging fuel tech.
Office, and an operating loss point 1 million and point 5 million respectively.
We remain focused on controlling our cost which continued to be reflected in our DNA.
As you named for the quarter was 2.8 million compared to 4.5 million in a second quarter of 2019.
Factors driving this decrease included cost savings realized by the suspension of our China operation along with reductions in certain administrative and consulting.
This metric declined by more than 38% compared to the second quarter of last year.
Included in this amount for the quarter is <unk> point $5 million reversal of previously quoted previously recorded expense related to a receivable on the aforementioned warranty liability claim.
In spite of this reversal SGN nay would have still seen a 20% 27% reduction from the same quarter in 2019.
We continue to expect that SDMA will decline in 2020 without sacrificing the level of support of our current customer base, nor the business development activity.
Research and development expenses increased by approximately 65270 1000, reflecting an increase in spending on our water treatment initiatives. Despite.
Delays due to coal based on our technology demonstration.
We continue to dedicate resources to other targeted initiated in support of continued product development and enhancement.
Net loss from continuing operations was 2.5 million or 10 cents per share compared to a net loss from continuing operation of 936000 or four cents per share.
Our balance sheet at June Thirtyth reflects the proceeds and obligation of approximately 1.6 million from our SD eight PPP alone and we had cash and cash equivalents of 11.3 million, including restricted cash of 3 million.
Our working capital balances at quarter end with 13 million, which will continue to support the ongoing operational needs of the business.
With respect to valuation our book value per share with 86 then.
Our tangible book value per share with 74 cents.
And our working capital per share with 53 cents at June Thirtyth.
Given our cumulative net operating loss losses of 5.1 million at June Thirtyth, which covered several geography, we expect that our income tax expense for 2020 will be at or near zero. This figure includes China, I know out which.
We will maintain given that we are preserving the legal entity in China.
Now I'd like to turn the call back over to them.
Alan Thank you very much and operator, let's take this opportunity to to open the lines for questions.
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First question is coming from.
Oh C. Wainwright. Please go ahead.
Thank you good morning, mints Marine Ellen.
Just on the backlog vintages would give us any color on unit what the mix is over here and I know you still anticipating around and or pursuing dentek, we've seen them in.
Opportunities do and do you expect any of that just sort of.
Add to the backlog.
We ended the year.
I would expect it to add to backlog Ahmed, but I would not expect that a great deal of it would actually pull through in the profit and loss statement in 2020 before the end of year.
Understood and the Minnesotans known what does is comprised of the backlog right now.
From a geographic perspective Ahmed.
Product perspective, just you know.
Oh, hey products effective it if it's predominantly SCR and ultra technologies and our backlog right now.
Okay.
Yes.
So with this you know this agreement on the water technology side, you know the kittens.
And with the DJ.
How does that sort of change some of your efforts and any color on.
There is any opportunity to accelerate these trials and violence or cost et cetera.
Yes, I think that again this is a a new agreement that we we've signed cadence actually acquired the assets of nano to LLC.
The agreement that we have in place now with cadence I would call it.
A little bit more favorable to fuel tech and that we now have expanded opportunity to enter some nonexclusive market areas that we did not it did not have the opportunity to enter previously.
Secondarily, we have the ability to to manufacture all of our DG delivery systems on our own.
Without having to purchase those systems from the license or.
Under our prior agreement, we did have the requirement to do that but not any longer and.
Given the fact that our long term history is in fabricating and designing skid based delivery systems I think thats an advantage to us generally speaking and then lastly cadence is well reach what we are respected in the municipal wastewater treatment area their focus had been.
Delivering biological reagents for wastewater treatment solutions and they became interested in the DG I technology as an enhancement to the to the biology biological reagents eight reagents that they were providing so what we believe that there's an opportunity to to.
Better partner with with cadence generally speaking than we would've had previously with nano to LLC as it relates to enhance development prospectively and I would hope is that would translate to an expedited timeframe for us to become commercial and marketplaces.
Thank you for that.
Well good last one just last one from me.
The second quarter, probably wouldn't you see.
Well we utilization.
Good powered electricity facilities.
Do you feel that has picked up.
Were.
It is somewhat of a recovery mode over there.
Yes, I see I I still think theres recovery, yet yet to go.
Fortunately, we have seen some some dispatch of coal fired units, which has been beneficial to us as Weve ended Q2, as we began in Q3 as I mentioned in my commentary relative to the fuel Chem system and related revenue performance.
So I am pleased to see that we have had some helpful. Whether in many parts of the country as well with extraordinarily warm temperatures associated with our or summer season, that's always the benefit to two overall dispatch.
And one of the factors that we saw earlier in the year and Cobot 19 was impacting those factors was the fact that because of a lack of demand. We saw some of the larger units not just taking their regular outages, but taking extended outages to do additional maintenance and repair because they had the opportunity.
To do so because there wasn't be the need to get those units back up and running to meet anticipated demand. So hopefully that is largely behind us and and we'll be able to can continue to stay on a path of a more normalized run rate. If you will for fuel Chem, but.
I'm optimistic about to what I'm seeing thus far in Q3, and hopefully that will that will.
Keep in place for the remainder of this year.
Thank you and stuff.
Yes.
Thanks.
Thank you. Our next question is coming from Jim The Gallery of Bradley Woods. Please go ahead.
Thank you good morning.
Hi, Good morning, Jim Tom.
Hey.
Second your commentary you talked about fuel Chem returning to normal levels.
Is that the same for pricing and margins or is there have been a change in pricing that would suggest margins are are changed.
No pricing is largely stayed the same and if it when you look at our fuel Chem performance call. His first half of this year over prior years, we do have a little bit of a fixed operating component for the fuel Chem business and as a result, because of the reduction in revenues. We've had in the first half of this year our merger.
And profile is actually a little bit lower than we would we would normally expected because historically, we've looked at approximate 50% gross margins for fuel Chem.
With the increased revenue generation I should say a return to more normalized levels, we'll see that return to call. It a more normalized 50% gross margin for fuel Chem business.
Great.
Thanks for that and then secondly I.
I was hoping you could help me understand the timeline on DG I do underside do.
I do recognize that the testing has been delayed but when we get passed that when they when you start the testing again, what's what's the timeline between testing how long that taken as her evaluation and then.
And then there's a contract negotiation if you could just.
And broad brushes tell me.
What's the timeline on on that would be once you start testing.
We will do well I guess, what I'll use as a basis for discussion on Jim is he the demonstration that we had planned on started.
Towards the end of Q1, beginning of Q2 at a at a pulp and paper facility. It was it was largely a.
On eight to 10 week demonstration period, or or thereabouts, where whereby obviously, we start with assessing baseline conditions of the water that we're looking to treat and doing all the necessary measurement and testing of that water.
As is and then we would start our demonstration program and monitor that over an eight to 10 week timeframe.
Coming out of Eddie to 10, we timeframe, obviously, we sit and assess with with customer the results of that demonstration and then hopefully we would look to be able to sit with that customer and move forward towards a a commercial agreement of some short whether it'd be a system sale, whether it'd be a system rental whichever bid.
This model would work out best for that particular customer.
So that's what a demonstration timeframe would look like with some slight modifications the depending on the specific customer and the application that we would look to be addressing.
So not to put words in your mouth.
But it sounds like.
The demo is eight to 10 weeks and maybe the devaluation afterwards would be a similar amount of time.
And then who knows how long it takes to.
To negotiate contracts and all of that but.
That is at a fair enough way to look at it so let's call. It 20 to 30 weeks before you.
Actually have assigned contract.
I would say that's fair just Jim on on a generalized basis, yes, I would hope in some cases, we'd be able to fit to work a little bit more expediently, but a lot is going to depend on.
The the nature of the customer that we're dealing with and how familiar they are with.
And air Rationed or advanced duration type of process relative to what it takes to completely convince them that the DG I system is something thats beneficial for them. So generally.
I think the timeframe is good.
Alright, great and last.
The PPP loan.
A number of other companies have been speaking to have been.
Suggesting that the loan is going to be forgivable for them is is that the case for you as well.
We definitely believe that to be the case.
The timing of bad debt forgiveness is indeed uncertain as we sit here today.
Great majority of the banks that were authorized by the FDA are actually setting up web portals for for having their their companies that did receive loans submit their.
Application for forgiveness information electronically as opposed to a lot of the paper processing that occurred with the the first wave of application. So we're in waiting mode waiting for that portal to be set up for for our bank and then.
We're told that that our bank has a 30 to 60 day period of time to review our information.
But they will also then submit the information to SBK because at the end of the day SBK has to approve of the forgiveness and then they will get back to our bank.
The timeframe for official forgiveness as we sit here today is uncertain, but to answer your first question, yes, we expect the loan to be forgiven.
That's great. Thanks, and if I I think I lied I'd like to ask one more.
The you talked about cobot, having impact on your business and that was the impact you you referred to was a lowering of.
Electricity usage some.
Is there another impacts that you either did or Didnt referred to is that you can't get people in the field to either service or install.
Are you having issues with that and it and if that's the case how are you going about mitigating that.
Yeah.
I didnt refer to that specifically on the PC side I did we referred to some call. It's a timing of award delays related to covert 19, but now that you bring up the other point, yes, we have had to deal with some challenges relative to having our personnel out in the field to either.
Do testing or commissioning of systems that are being installed or a variety of other reason so we've deployed remotes.
Conditioning tactics to help our direct customer base to work through.
Diagnostics and commissioning activities at site.
In many cases, depending on the the knowledge base of the the customer that you're you're dealing with or the direct contact that we're dealing with that a plant site.
It can be challenging.
Working remotely has great benefit, but in many instances you need to be their hands on and so working with our systems. In many cases is much more efficient when our technicians are able to get to sites. So largely in this country, we've been able to deploy RP our people to the customer sites. So we have had.
Issues outside of this country.
Trying to get our technicians Q2 states specifically to address commission commissioning related items and we're working through that on a daily basis.
Okay.
Thanks, a lot I appreciate the answers and.
Good luck with everything.
Thank you Jim take your have a good day.
Thank you. Our next question is coming from Pete Enderlin of Amazing partners. Please go ahead.
Thank you good morning, Vincent Ellen.
Good morning, beginning.
On the TPP loan.
I guess, it's a two year maturity.
It's set up initially is that correct.
Correct.
And.
I don't remember the.
Balance, but it looks like.
A lot of it was on.
Current liabilities and the rest was long term liabilities.
Right.
Oh, I'm, sorry, I'm, the 1.6 million, it's approximately 700000 incurred 900000 long term, yes, correct Q2 year maturity program first first payments I'm actually starts in month seven.
Okay. So thats why you have that the 700000 as occurred liability that is correct.
Okay and.
In order for to be for given you have to keep paying people I guess is that correct.
You have to keeping people during during certain coverage periods as defined by.
Call it be the PPP program regulations or stipulations, if you will and companies have the option to choose between an eight week covered period or 24, we coverage period.
As I had mentioned Q the to the prior color Jim.
We do expect be the loan to be forgiven.
Right. So did you pick eight weeks or 24 weeks.
We have not had to specify that as of today and so we have not.
Okay, but I guess, what I'm getting at it away is that.
Kept paying people. So you take a hit on your operating.
Line in exchange for at some point in the future presuming this is forgiven.
And effectively.
Nonrecurring gain.
Which would be treated as as such I guess, so maybe the way to look at this in retrospect is going to be.
Over the whole period of the of the loan because.
Incurring expenses.
By paying people and then you get the monies back later on when it's for dividends at the right way to look at that.
We are assuming that the loan is indeed forgive npts, we will take a.
Call It a benefit to income for the value of that loan at that point in time when that loan is formally forgiven.
Okay. Thanks, and then.
Remind us.
I know, it's a fairly old issue, but what was the warranty issue in the APC segment that cause this payment and insurers.
Issue and all that well actually was the warranty problem.
Right. We actually had this is a project that commenced in 2015, and then went through execution over.
The subsequent for your timeframe the project had some delays.
But it but effectively just at a high level of Pete we actually designed our system.
In a manner that was different than the specification and I'll leave it as as simply is that our design was.
Call It structurally sound and would have met all performance guarantee requirements, but we deviated from a one piece of the design specification and as a result, we needed to make some changes to some of the steel structures that we provided.
Okay.
So basically you had the.
Redo part of it and then that close to a million plus I think forgot that is correct.
Okay, and then lastly, how this new agreement for design cadence.
In terms changed somewhat.
Related to exclusivity.
What areas are exclusive now.
And how has that changed and what areas do you have not exclusive rights.
Everything that we had that was exclusive previously Pete is still exclusive today, so anything related to electric utilities and independent power producers that are as anything related to force products and biomass oil and gas cement carbon black glass steel and metal products.
That's all those are all fuel tech markets excuse exclusively.
What was added what was the ability to.
For us to address on a nonexclusive basis Aqua culture.
Any freshwater and seawater applications in anything related to livestock agriculture, agriculture. So we we added some additional market opportunities to be overall list, which ultimately could provide benefit.
Okay and are there geographical limitations in any event.
There are per the agreement none of that changed from from the original agreement. So Pete This it's largely a domestic focused agreement, but with the opportunity to look to to expand that fit the other geographies. If we approach the the license or.
In other words, you would have to reach an agreement with them on.
Any other geographical areas that is correct, yes, okay, well thanks, a lot for all the clarification then.
Good luck with dealing with always challenges on them on multiple fronts from.
Operating rates to new contract rates too.
Development programs and all of them good look.
Thank you. Thank you Pete I appreciate your support have a good day.
Thank you at this time I'd like to turn the floor back over to Mr. arnone for closing comments.
Thank you operator, I'd like to thank everyone for their continued interest in fuel tech as our last caller noted.
Siltech like many companies today is working through several challenges.
We still think we're well positioned to be able to pull ourselves.
Out of this challenging environment today, and and return value to our shareholder base.
That is our company's objective. So thanks, again folks and have a good day to day.
Ladies and gentlemen, thank you for your participation you may disconnect your lines for lock off the webcast at this time and have a wonderful day.
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