Q3 2023 Fuel Tech Inc Earnings Call
Ladies.
But right now I'm reading.
Greetings and welcome to the fuel Tech Inc. Third quarter 2023 financial results conference. At this time all participants are in a listen only mode. A brief question and 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 a reminder, this conference is being recorded it is now my pleasure to introduce your host Devin Sullivan. Thank you Devin you may begin.
Thank you Kat and good morning, everyone. Thank you for joining us today for fuel Tech's third quarter 2023 financial results Conference call yesterday. After the close we issued we issued a copy of our results that release is available at the Companys website at Www Dot F. T E K dot com.
Our speakers for today will be Vince Arnone, Chairman, President and Chief Executive Officer, and Ellen Albrecht Company's Chief Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors.
Before turning things over to Vince I'd like to remind everyone that matters discussed on this call except for historical information are forward looking statements as defined in section 21 E of the Securities Exchange Act of $19 34, 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 one a 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.
Cash flows performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements.
<unk> undertakes no obligation to update such factors or to publicly announce the results of any forward looking statements contained herein to reflect future events developments or changed circumstances or for any other reason.
Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in the company's filings with the SEC.
With that said I'd now like to turn the call over to Vince Arnone, Chairman President and CEO of fuel Tech Vince. Please go ahead.
Thank you Devin good morning, and I'd like to thank everyone for joining us on the call today.
Our results for the third quarter reflected continued double digit revenue growth for our air pollution control or APC segment.
With sales up 36% from last year's third quarter, and an unexpected and welcome rebound in revenue at fuel Chem.
We saw revenue doubled from the immediately preceding second quarter of 2023.
S program activity for this segment normalized following a period of reduced operation driven by unscheduled downtime and temporary maintenance on our installed units.
We continued to maintain a conservative cost profile with SG&A expenses trending at or slightly below 2022 level.
Security do APC contracts and ended the quarter with over $33 million in total cash and investments and no long term debt.
We believe that the future of our company lies not only on capitalizing on the opportunities offered by our existing products and end markets.
But also on developing and commercializing new products and market opportunities.
To that end the continuing development of our dissolved gas infusion technology or DTI remains a high priority.
And following up on our discussion from our Q2 earnings conference call regarding D. G. I. We are very pleased to have completed the onsite deployment and pilot testing of our DTI technology.
Aqua culture setting in the western United States.
Over the 100 day demonstration the TGI technology delivered and consistently controlled the dissolved oxygen levels and a man between nine and 12 milligrams per liter, which is approximately 150% of atmospheric saturation.
Based on an analysis of the results and post study consultation with the client the dji technology not only met the pilot study expectations from parameters, but in many cases exceeded them for consistent delivery of high quality dissolved oxygen on demand.
The client reported excellent results from taste tests by local chefs, including an absence.
Trimethylamine within the harvest.
Results from this study will be published in the abstract and presented at the Agriculture America Conference in February of 2024.
We are currently in negotiations with this client to deploy our TGI system at their location for both their next next growth cycle and there are larger scale development plans.
In addition to this demonstration we are continuing our conversations with other potential channel partners as we look to deploy <unk> and other end markets either late this year or early in 2024.
Dji is best described as a technology that involves the efficient transfer of high concentrations of gas into a body of water to drive chemical or biological reactions, such as wastewater treatment or for process improvements such as industrial applications or agriculture.
Our <unk> system is a two step technological process, where first the slipstream of process water has pressurized and infused with oxygen using fuel tax patented saturater.
And secondly, this oxygen laden slips slipstream is returned to the process basin through a patent pending injection array for optimal distribution and gas residents time.
At present, we are utilizing dji to deploy oxygen into bodies of water. However, we do believe that <unk> can be applicable for other gases as well such as ozone.
Cgi's Bennett benefits include the precise control of dissolved oxygen levels for all process applications.
And the ability to extend plant capacity without major expansion, our capital outlay odor reduction and minimal bubble formation for extended residence time.
We believe that <unk> is applicable across several end markets, including pulp and paper food.
Food and beverage chemical our petrochemical water and wastewater treatment and Aqua culture.
Now, let's please spend a few minutes discussing our APC and fuel Chem business segment.
Our fuel Chem business segment benefited from the return of our larger scale customer units to more normalized levels of usage after experiencing extended downtime in the second quarter associated with reduced dispatch driven by weather related demand and unscheduled maintenance outages.
We expect fuel <unk> performance in the fourth quarter of this year to be at a reduced level from the $4 1 million reported in last year's fourth quarter due primarily to a reduction in program utilization levels at our primary accounts from the very high levels experienced in 2022.
This will result in lower annual revenues at fuel Chem, when compared to full year 2022.
Yes.
With respect to international opportunities for the fuel Chem segment, we are continue.
To follow the opportunity to expand the provision of our chemical technology in Mexico via our partner in that country to address the emissions created by the burning of high sulfur fuel oil, which is being undertaken without the necessary environmental <unk> remediation.
Andy at the expense of the health of surrounding communities.
Earlier this year, we executed a two year extension to the program that we currently have in place at one facility and we do believe that political pressures building in favor of the implementation of our fuel Chem program at additional facilities in this country.
Our partner is currently in discussions with the state owned utility Cfe regarding the application of our technology at several units.
For the APC segment.
Revenue rose by 36% to $3 7 million from last year's third quarter, driven primarily by the timing of project awards and the commencement of work on contracts announced during 2022 and continuing through the first nine months of 2023.
These projects involved our SCR <unk> and ultra emissions control solutions that natural gas and coal fired units in the U S.
Europe and the Pacific rim.
As previously announced.
We have secured $2 2 million of New project awards during the third quarter.
And earlier this week, we announced an additional $2 6 million of New awards.
Based on our visibility to projects that are in development.
We expect a minimum of $3 million to $4 million and additional awards before the end of this year.
Last quarter, we discussed the U S environmental protection agency's issuance of a rule finalizing requirements that obligate 23 states to reduce emissions of nitrogen oxides from power plants and certain industrial facilities.
According to the EPA.
This action was designed to Titan nitrogen oxide emission requirements by updating the cross state air pollution control rule to meet the good neighbor.
<unk> of the clean Air Act.
The good neighbor rule has currently been stayed by several circuit boards covering sources and upwind states.
Within the past few weeks sources ineffective downwind states have petitioned the Supreme Court to proceed with the rule.
For the near term upwind sources will likely not be required to reduce their nitrogen oxide emission levels until the requirements and timing of the final rule have been resolved.
We continue to believe that this new federal rule will serve as a catalyst for new APC orders over the next several years as utility and industrial customers explore ways to further reduce nox emissions.
In fact, it is important to note that we have received and responded to several requests for budgetary proposals as customers prepared to address.
The upcoming compliance requirements as part of their capital budgeting requirements for 2024 and beyond.
We will provide further analysis and commentary on this regulation as more information becomes available in the future.
Through the first nine months of 2023, APC revenues have already exceeded the revenue recognized for the entirety of 2022.
Based on our effective backlog at quarter end the business development activities, we are pursuing and our previously noted the expectations for fuel Chem.
We expect that total revenues for 2023 will increase modestly to between to between 27% and $28 million up from $26 9 million in 2022.
This base case outlook excludes any material contributions from dji as we are still in the early stages of commercialization and any significant contributions to APC from the EPA rule earlier this year.
In closing.
I want to once again, thank the fuel tech team for their ongoing continued hard work and dedication.
And our shareholders for their continued support as we continue to evolve our operations and expand our presence as a global supplier of technologies that enable clean air and pure pure water.
With that said I'm going to turn the discussion over to Alan Alan. Please go ahead.
Thank you Vince and good morning, everyone.
We are pleased with our third quarter results reflect reflecting higher net income a significant revenue improvement in our fuel Chem segment compared to the immediately preceding second quarter of 2023 and continued strength in our balance sheet.
For the quarter consolidated revenues were flat at $8 million compared to last year's third quarter, driven by improved results year over year in our APC business segment.
Consolidated revenues for the 2023 nine months period rose to $20 8 million from $19 9 million in the same period last year.
APC segment revenues for the quarter increased 36% to $3 7 million from $2 7 million in the prior year period, driven by the timing of project execution and the recognition of ancillary APC orders.
This increase was offset by a decline in fuel Chem product revenue for the quarter that was the result of lower dispatch electrical generation demand and changes in product and fuel usage at certain accounts.
As noted fuel Chem revenue more than doubled from Q2 2023. When this segment was affected by customer driven maintenance outages.
Consolidated gross margin for the third quarter with 45% of revenues as compared to 46% of revenues from the prior year period.
APC gross margin rose to 40% from 34% in last year's third quarter due to a change in project and project mix lower revenues for the fuel Chem segment impacted margins on a consolidated basis.
Third quarter 2023 gross margin for the fuel Chem segment returned to historical levels of right around 50%.
Consolidated APC segment backlog as of September 30th 2023 was $5 6 million down sequentially from $6 6 million at June 32023, and $8 2 million as of December 31, 2022.
Backlog at quarter end consisted of $2 $4 million of domestically delivered project backlog and $3 4 million.
<unk> and delivered project backlog as Vince noted, we have recently announced new contract.
New contract awards and expect to add this to the backlog balance prior to the end of the year.
We continue to maintain an expense discipline across our enterprise SG&A expenses for the third quarter decreased to 3 million from $3 3 million last year.
This decrease was primarily due to timing of certain employee related expenses.
For the full year 2023, we expect SG&A expenses to range between $12 eight and $13 2 million as we strategically invest in resources to support current business initiatives.
Research and development expenses for the third quarter increased to 513000 from 207000 in last year's third quarter.
This increase was primarily due to continuing investments in our D. G I water treatment technologies and in support of our pilot testing initiative.
We will continue to invest as needed in our R&D efforts in support of our commercialization of our dji technology and to actively pursue commercial applications for technologies outside of our traditional markets.
We continue to take advantage of the favorable interest rate environment and as of September 32023 have invested in excess of $30 million in held to maturity debt securities and money market funds.
This generated 322000 of interest income in the third quarter and nearly $1 million of interest income for the 2023 nine month period up from just 100000 in the same period last year.
We continue to expect that interest income for 2023, barring any unusual cash deployments to grow the business will approximate $1 $3 million.
Net income for the third quarter with 459000 or <unk> <unk> per share compared to net income of 314000 or <unk> <unk> per share in the same period, one year ago.
Adjusted EBITDA was 352000 compared to an adjusted EBITDA of 421000 in the prior year period.
We continue to maintain a strong financial position as of September 30th 2023, we had cash and cash equivalents of $13 5 million and short and long term investments of $19 7 million working capital was $31 9 million or $1 <unk> per share stockholders equity was 44.
$1 million or $1 45 per share and.
And the company continues to have no outstanding debt.
We are confident in our ability to fund our ongoing growth initiatives pursue new product and market opportunities and maintain our strong financial position, which we view as an important competitive advantage.
Thank you for your time and I'll turn the call back over to Vince.
Thanks, very much Alan.
Operator, let's please now open the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yes.
Thank you Amit Dayal with our first question from H C. Wainwright Amit. Please proceed.
Good morning, guys.
Good morning, Amit.
Hi wins, just with respect to D. G. I mean, it looks like you know the pilot is working pretty well and you're seeing the results better than expected.
With these people.
No.
How quickly.
And the balance sheet.
How quickly can you move this to.
Expanded efforts with.
Pilot stage of opportunity that we wouldn't.
I don't know, maybe a little bit dependent on the customer itself.
Commercializing.
With this client who has had the pilot.
How should we think about revenues from this.
Coming through for you guys could think of them happen.
You've seen us.
Our results.
Alright, thanks for the question Amit.
With respect to this particular customer is our next step here is probably going to be engaging in a and equipment lease or rental arrangement with them for their next growth cycle.
Which will likely start be before the end of this year early next year, but with this small system that we're using there where we're not expecting material revenues are relative to your call. It your more broad question on how quickly we can get perhaps more systems out and in a commercial environment.
Premature for me to talk about any sort of revenue level for 2024, but what we are going to be doing now that we do have some call it pilot or a demonstration success.
In our hands.
As I noted in my commentary, we're going to take this information out publicly.
Via conferences and look to expand knowledge about dji and marketplaces. So that that is going to be our next step.
Yes, we have solid balance sheet as you know we've been.
Using our funds carefully regarding how we do invest in pgi, but with each step it's providing us more impetus if you will to further invest to pick the pace up a little bit regarding commercialization. So that's something we're evaluating right now as we're looking to end 'twenty three and move into 2000.
24, but we're going to be looking at some resource enhancements.
Human resource enhancements, we're going to be looking at perhaps adding additional DTI systems to have on hand inventory for a potential sale or demonstration.
That's everything that's in process right now when we look to have our first call in 2024, which will be in that early March timeframe.
Obviously I'll have more to talk about Rob regarding the development of <unk> at that point in time, but suffice it to say between now and then we are expecting to have additional demonstrations and we are expecting to have some small level of commercial revenue.
The tangible outcomes.
Just looking ahead, a little bit and ready to go into any for maybe it's a little early but how do you feel about sort of your setup.
Oh, yes.
So to the visibility you have right now for 2024 could that be another sort of year over year.
Period for you revenue growth figure for you.
Right I mean any color on how you are positioned for the next 12 months you know it would be helpful and the reason I ask this question Lindsay.
You have some.
Cash was $2 45 roughly.
And our stock is trading well below that I am just trying to understand where the disconnect is a new one.
Investors may or may not be thinking about.
The opportunities internally.
Yes, Amit.
Im Ed completely understand and I share your sentiment regarding where we're trading today vis VR.
Our cash value per share.
Our visibility in terms of me sitting here in providing our guidance on 24. It is premature however, I will tell you that I would be disappointed.
As CEO of the company, if we would not be targeting another year of revenue increase in 2024 over 2023. So that's the statement that I'll make today I think that the the disconnect on valuation I think as we are able to provide more positive information to the public and more make more.
More people aware of.
What fuel tech is actually providing both as an environmental solutions company and to the world today and also from a pure value perspective, I think hopefully we will see that that disconnect and valuation change as we move into 2024.
Thank you Vince I'll take my other questions offline, but I appreciate all the color. Thank you so much.
You're welcome thank you.
Our next question comes from Marc Silk Silk investment advisory fees Mark. Please proceed.
Hi, Vince Thanks for taking my questions.
Hi, Mark good morning to you and thanks for joining.
Okay. So in the October 9th edition of Barron's. There was an article discussing Europe's first ever carbon based tariff.
So some of the highlights for the imports to Europe will now face attacks based on carbon emissions caused by manufacturing. The goal of the legislation is to encourage more countries to REIT laws that reduce emissions and make sure that European manufacturers stay competitive with rivals operating and director and dirty of jurisdictions.
So this could reconfigure international trade flows over the next five years and potentially result in new carbon fees going into effect in more countries.
So taxes will start being collected in 2026 and will increase gradually until they're equal the EU carbon prices in 2034, So I have a few questions.
So you have you've done a great job controlling expenses relative to revenues.
And something like this can really.
To accelerate growth for for fuel Tech. So since you have the technology and expertise to mitigate this risk for many companies and industries.
Can you discuss maybe a cost effective strategies that would allow you to participate in this opportunity. So for instance.
You know fuel tech could pursue resellers and partnerships around the world, where you provide the solutions that they can supply the salesforce. So this could be a revenue sharing agreement without you incurring startup costs et cetera, but really the only to variable costs in relation to increased sales.
Okay.
Mark. Thanks, Thanks for the question I appreciate it and actually for everyone's benefit market actually.
Sure the commentary on the European carbon tariff with me and I have done a little bit of reading on that myself. So mark Mark. Thanks for that it's it's a it's a monumental undertaking.
The EU is actually looking to put in place.
Today.
To your point.
They they put a requirement out.
It's in a transitional phase as we sit here today evidently they are going to start to try to gather some data.
On.
On carbon.
Credit Slash tariffs if you if you will starting in 2024.
Mark as you know the the right now the targeted industries are the call would be the highest level polluters on the planet is cement, it's iron steel aluminum.
Electricity and hydrogen. So these are many of the end markets that that fuel tech addresses today with our technology base via addressing European customers or via addressing customers.
Customers in different parts of the world. So.
From our perspective, we need to see how this tariff programs going to develop obviously.
But as companies around the world are looking to reduce their carbon footprint.
Worked very closely with the steel industry over many many years and have good relationship with steel, particularly in the U S. Not is not as strong in the EU as we sit here today. So we'd have some work there to do with some of the other industries.
I think where we're going to continue to look to capitalize on helping those industries to reduce their carbon footprint by applying our nitrogen oxide technologies on their facilities as we have the opportunities to work with them prospectively. So it's.
It's difficult to call. This out is what I would call a <unk>.
Specific targeted opportunity because we have been dealing with these industries historically and we will continue to try to capitalize on any attempts that these industries are looking to make to reduce their carbon footprint.
As we get more information on this regulation in particular and better understand how companies are looking to address it.
We will gather more information on our end and I'll be happy to share that on next earnings earnings conference call as well.
Yeah, because one of the thoughts is that where the U S is reducing their dependence on coal that's not necessarily the case for other countries.
<unk>.
I mean, what's interesting about this is this could really change the prospects for your product from a regulatory requirement to an economical one in order to avoid basically recurring taxes I expenses does that would that is that correct.
Under under a cap and trade type system, that's exactly how it would work.
Alright, I mean, Joe.
The positive is obviously this doesn't make sense to pursue.
Districts, who now is your company is trading below cash.
But it's just I think brings awareness that that's an interesting investment and potential takeover target, but you don't have to comment on that let's switch to TGI for a second.
So congratulations on the success of the pilot.
Thank you and Mr. A decade discovered maybe any areas of in this industry of low hanging fruit for this product.
Bill has a couple of thoughts in mind, where there will be low low hanging.
Fruit, we believe I think our next demonstration is likely going to be one of those areas that we are going to be targeting but it is not something that I can speak to at this point in time, but it is a demonstration of where we're looking to engage and as we move into the first quarter of next year, but bill has been working diligently.
Across his body of relationships in multiple industries to indeed, do just that find those areas that could be an immediate fit for for dji.
To be honest Aqua culture came as a little bit of a surprise to us, but as we found out.
It's an area that is really.
Perfectly suited for for the <unk> application.
But bill has some other targets in mind as well.
So also some of the areas that are low hanging fruit, but it makes sense to concentrate on I eat lucrative future future deals would that would those be mixed with a reasonable sales cycles or it's going to be another one of these you know 100 day type of experiments or just because you're already.
Sure its success and this maybe it shortens the time frame.
Yes.
If past practice relative to how fuel tech has done business.
It comes to true it comes through with Dji will probably need to have more demonstrations and not particularly.
Still at the beginning of the commercialization of the product because everyone is going to want to see proof of concept. It quote unquote their facility as opposed to just making the assumption it's going to work immediately but as we as we do have.
I would call repetitive business in specific end markets I think that should diminish over time.
The other question is just in general if you looked into like some areas that you could potentially have some recurring revenues is that would probably knowing as you open the doors every year that there's some money coming in the door could definitely help the valuation of your stock.
Yeah.
Referring to dji, specifically or just any part of the business. Yes, we are.
Obviously, we we have really been fortunate to enjoy the recurring revenue that we've had from our our Chem Tech business. Unfortunately that has diminished over the past decade, or so would be the.
The heavy focus on reducing the.
Utilization of coal, however that being said we.
We are looking at trying to find other ways, whereby we can hands, we can enhance our recurring revenue platform, whether it would be spare parts and services for our systems.
Or anything otherwise because recurring revenues are obviously fabulous to have in hand, and typically the higher gross margin than our typical system sales.
So it's something that we are working on as a company.
Great and lastly, I appreciate you're buying stock after last.
Quarters earnings around $1 20, it would be nice to see more insider buying from the board and upper management to give shareholders confirmation that you believe in the future growth of the company. So with that I'll say, thank you very much for taking my questions.
Thanks, Mark have a great day appreciate it.
Our next question comes from Jim Mcveigh Macquarie.
Dawson James Jim. Please proceed.
Alright, Thank you and good morning, Hey, good morning, Jim.
Can you discuss the gross margin.
Outlook for Q4, given the revenue outlook it sounds like there might be.
A little bit of decline.
Particularly.
<unk>.
Well actually it seems like there might be a little bit of gross margin decline for both businesses in Q4 relative to Q3 do I have that.
Right are about right.
So I would say Jim that for Q4 for APC likely to see.
A little bit of a downtick there we did have the favorable impact of a I'll call. It an ancillary revenue.
Uh huh.
Scenario, if you will in Q3 that did give us a little bit of a bump up on the APC margin side. So I would think that would revert back to more traditional 35 ish percent levels in Q4 and Chem Tech.
Given the fact that we are looking at a little bit of a reduction in revenue in Q4 from Q3, I would say flat to a little bit lower for Chem Tech.
Got it.
Basically, yes, yes down down from Q3.
Got it.
And as far as I know, you're reluctant to talk too much about 2024, but.
At least conceptually has.
As <unk> ramps up.
Next year will that require a significant or a meaningful increase in either R&D or sales and marketing in order to support that business.
Definitely envision that we are going to be adding some resources for fergie Gi in 2024.
The pace of business opportunity opportunity will drive the level of that resource add.
Right now Jim I wouldn't call it a material number as I see it today.
A couple of $300000 on an annualized basis relative to how it how it would roll out an impact 2024 somewhere in that range as we would look to add a couple of individuals throughout the year.
We'd be looking at some field resources, perhaps some sales resources as well to support that business development.
Is it fair to think of it as success based store success based with maybe a.
A couple of months lag.
I would say, it's very fair yes.
Okay. Okay, Great and then my last question is can you discuss the maturity of your investment portfolio.
Just broad brush are you are you extended out a long period of time or is it.
All at 18 to 24 months for.
Yes.
We understood when we first started putting our portfolio in place we had.
<unk> the investments.
From a minimum of 90 days maximum of 36 months.
So as they've expired, we reinvested, but trying to keep a a.
A similar call it range of exploration window.
Some of the earlier material maturities that we had obviously we're at.
When we put them in place originally were at some of the lower rates, but we replace them with some.
Maturities coming at this point in time.
Yes, the averaging 5% or a little more than 5% on some of those items as well. So today, we're probably a weighted average of somewhere in the.
4%, maybe a little bit more range.
But as we as we have some of those early maturities start start to drop off.
I think that our weighted average is going to pop up.
As we move throughout 2024.
And with the recent decline in long term rates.
Do you have to mark to market any of those or as long as you.
<unk>.
Indicated they're going to be held to maturity you don't have to mark them to market.
Held to maturity is basically how we're accounting for these that we do not mark to market.
Alright fantastic.
Fantastic. Thanks, a lot appreciate it Jim.
Got it.
Yeah.
This concludes our question and answer session I would like to turn the floor back over to Vince Arnone for closing comments.
Thank you Kat.
I'd like to thank everyone for joining us on the call today.
We were pleased with our third quarter performance here in 2023 looking forward to hopefully going to be a strong end to 2023 and an excellent excellent beginning to 2024 since we won't have our next conference call until approximately early in March of 'twenty four.
And thank everyone for joining to our shareholders and investors other stakeholders, a good holiday season to everyone and thanks.
Thanks for your support fuels I appreciate it thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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