Fuel Tech, Inc.

Greetings. Welcome to the FuelTech second quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Devin Sullivan, Senior Vice President of the Equity Group. Thank you. You may begin.

Thank you, Alex. Good morning, everyone, and thank you for joining us today for FuelTech's second quarter 2021 financial results conference call. Yesterday after the close, we issued a copy of our results, which are available in the company's website, www.ftek.com. Our speakers for today will be Vince Arnone, President and Chief Executive Officer, and Ellen Albrecht, the company's Principal 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 21E of the Securities Act of 1934 as amended, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect FuelTech's current expectations regarding future growth, results of operations, cash flows, performance, business prospects and opportunities, as well as assumptions made by and information currently available to our company's management. FuelTech has tried to identify forward-looking statements by using such words 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 FuelTech and are subject to various risks, uncertainties, and other factors, including but not limited to those discussed in FuelTech's annual report on Form 10-K in Item 1A under the caption Risk Factors, and subsequent filings under the Securities Exchange Act of 1934 as amended, which could cause FuelTech's actual growth, results of operations, financial condition, cash flows, performance, and business prospects, and opportunities to differ materially from those expressed in or implied by these statements. FuelTech undertakes no obligation to update such factors or do 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, President and CEO of FuelTech. Vince, please go ahead.

Thank you, Devin. Good morning, and I want to thank everyone for joining us on the call today. We are continuing to emerge from the restrictions imposed by the COVID-19 pandemic, and our optimism for the balance of 2021 and beyond is strengthening. Although challenges remain, our fuel chem and air pollution control business segments are each making progress in their respective end markets. And our developmental wastewater treatment business that we call dissolved gas infusion, or DGI, is taking positive steps forward as well. Our financial position is the strongest it has been in our near-term history, having ended the second quarter with nearly $37 million in cash and no debt. We significantly narrowed our losses in the quarter and continue to pursue sustainable operating profitability. To that end, we continue to maintain a lean operating structure that will allow us to produce break-even operating results at an annual revenue range of $25 to $30 million, depending on project mix. Our second quarter 2021 revenues rose approximately 19% from the prior year, driven by a nearly 72% increase in net sales for our fuel chem business segment. This segment has continued to benefit from the operations of our current installed base, including new program installations that occurred in the fourth quarter of last year and an overall rise in demand for energy. Some of this demand is tied to the resumption of economic activity, and some is tied to increased seasonal power usage, specifically in the summer months. Through the first six months of 2021, FuelChem remains on pace to eclipse its full year 2020 performance when the segment generated $14 million of revenue and gross margin of $6.7 million. Although our results at APC continue to be impacted by pandemic-driven project delays and cancellations through the end of the second quarter, we are seeing some economic improvement in our end markets, and we were encouraged by the $4.5 million of new orders we announced at the end of July. We continue to pursue a global APC sales pipeline of 40 to $50 million. Although many of these opportunities will likely be tied to the pace of resumption of global economic activity, we do expect to see contracts awarded with an aggregate value of $5 to $10 million before the end of this year, which will enable us to end 2021 with a healthier backlog than we have seen since pre-COVID. Beyond our two base businesses, we made good progress at our dissolved gas infusion business during the second quarter. We continue to address multiple growth pathways, including the development of a large scale DGI delivery system, in-depth market assessment and research, and the pursuit of commercial opportunities. Regarding our DGI business development, during the quarter, we completed demonstrations of this technology at two locations in the United States. The first was at a pulp and paper facility in the northwest that is examining ways to increase its production capacity by as much as 80%. The second was at a municipal wastewater treatment facility on the west coast that was designed to show the benefits that could be derived from the delivery of supplemental dissolved oxygen by DGI during periods of high waste treatment volume for the municipality or potentially as a lower cost substitute to an expensive capital expansion. Both demonstrations were a success based on customer feedback and supporting data analysis, and we are now working with both customers to determine our next course of action. Regarding the development of our large-scale DGI delivery system, we had noted during our Q1 conference call that we were moving forward with the investment in the design and fabrication of a higher capacity DGI equipment delivery system. as we believe the increased capacity is necessary to address the needs of the majority of our end markets. This system is currently in fabrication and will be completed next month. We are excited to have this unit available for deployment out in the field. And lastly, regarding our DGI market assessment. In Q2, we engaged a firm to assist us with the evaluation of the market opportunity landscape for the DGI technology, including an assessment of competitive in class and out of class technologies. When this evaluation is completed by the end of Q3, we will be better positioned as a company to understand our addressable markets and our available market channels. With this information, we will then prepare our detailed development plan, including the resources necessary, both human and capital, to expediently bring this technology to commercialization. Now, I'd like to take a little bit of a deeper dive into our APC and fuel chem segments before turning the call over to Alan. For APC, we continue to pursue opportunities for our SCR and Ultra product offerings. SCR is the most widely used technology to reduce NOx emissions following the combustion of fossil fuels, and we remain actively engaged with turbine suppliers heat recovery steam generator manufacturers, rice engine suppliers, carbon black manufacturers, and municipal solid waste, biomethane, and pulp and paper facilities. We are also monitoring activities at the state level where new environmental guidelines, including compliance with the EPA's cross-state air pollution and regional haze rules, may produce opportunities to install best available retrofit control technology on certain sources of emissions. The $1 trillion infrastructure bill making its way through Congress may also provide FuelTech with opportunities that involve our emissions control technologies. As a company, we are watching the actions of the Biden administration very closely, especially with regard to nitrogen oxide emissions. The focus on climate change and greenhouse gas reduction may include options beyond traditional renewable energy from wind and solar. The interest in hydrogen as a fuel source option for utility and industrial units is growing since there are no greenhouse gas emissions, but this option would increase NOx emissions and require additional controls over time. As noted, we believe that the fuel chem segment will continue to produce strong results during the remainder of 2021. Domestically, we will continue to support utility industrial customers by applying our technology to allow them to burn lower cost, lower quality fuel, while mitigating the associated emissions and operational issues. Internationally, our primary upside potential lies in providing our solution to address the emissions created by the burning of high sulfur fuel oil in Mexico. which is being undertaken without the necessary environmental remediation and at the expense of the health of surrounding communities. We are continuing to support our partner in Mexico as they engage with local officials to advance this solution. The current Mexican government is in favor of utilizing indigenous fuel sources for power generation to ensure that they can move towards becoming energy independent And the power generation dilemma in Texas in the first quarter of this year further solidified their position that as a country, they do not want to be dependent on external fuel sourcing for power generation, such as natural gas coming from the U.S. There is currently a glut of high sulfur fuel oil in Mexico, as the international market for this product has been significantly reduced with the adoption of the new International Maritime Organization restrictions which prohibit the use of this fuel. We will continue to watch the development of this activity closely. However, we do believe that political pressure is building in favor of the implementation of our fuel chem program at additional facilities in Mexico, and our partner is currently in discussions with the state-owned utility, CFE, regarding application of this technology at several units at one plant sites. As we have discussed previously, with the financing that we completed in the first quarter of the year, we are in the best position in our recent history to find strategic solutions to return our base businesses to profitability, expedite the demonstration and further market discovery of our DGI technology, and to investigate other product and market opportunities. In closing, I want to thank the FuelTech team for their continued hard work and dedication as we continue to execute against our plan. And I would like to thank our shareholders, both long-term and short-term, for their support and patience as we continue on our path towards delivering long-term shareholder value. And with that said, I'll turn the discussion over to Ellen. Ellen, please go ahead.

Thank you, Vince, and good morning, everyone. Consolidated revenues during the quarter increased 18.6% to $5.2 million from $4.4 million in last year's second quarter, reflecting significantly higher revenues in our fuel-cons segment, offset by a revenue decline in our air pollution control, or APC, segment. Fuel-cons segment revenues rose $4.2 million from $2.4 million in last year's second quarter, primarily reflecting higher power demand, revenue attributed to the addition of new accounts, and recovery from the initial emergence of the COVID-19 pandemic, which significantly impacted results in the prior year period. Segment gross margins improved to 49.7% in the 2021 second quarter from 40% in last year's second quarter, as many customers returned to normalized run rates. APC segment revenues declined to $1 million in the second quarter from $1.9 million in the second quarter of 2020, primarily the result of timing of completion on current projects and delayed project awards related to the COVID-19 pandemic. APC growth margin in the second quarter of 2021 was $479,000, or 48.6% of revenue, compared to a negative gross margin of $383,000 in last year's second quarter that included a $1.1 million charge for warranty remediation. Excluding this charge, APC gross margins for the second quarter of 2020 was $700,000, or 39%. The increase in margin for the APC segment is attributed to product mix. Consolidated margin for the second quarter was 49.5% of revenues compared to 13.7% of revenues in last year's second quarter. Excluding the impact of the aforementioned $1.1 million charge for the APC segment, consolidated gross margins for the same quarter in 2020 was 40%. Consolidated APC segment backlog at June 30th, 2021 was 4.9 million, compared to $5.3 million at December 31, 2020. Backlog at June 30 included $4.6 million of domestic backlog as compared to $4.9 million of domestic backlog at the end of December. We expect that $2.8 million of current consolidated backlog will be recognized in the next 12 months. Backlog at June 30th did not include the 4.5 million in new contracts from customers in Korea, North America, and Europe awarded in July of this year. Despite an 18% rise in revenue, SG&A expenses increased by just 7% to 3 million from 2.8 million in the 2020 second quarter. This reflects higher administrative and employee expenses offset by a $500,000 reversal of a charge to be allowed for doubtful accounts recorded in last year's second quarter. As a percentage of revenue, SG&A in the 2021 second quarter was 56.7% compared to 62.6% in the 2020 second quarter. For full year 2021, we continue to expect SG&A expenses to range between $12 and $12.5 million. However, we will adjust our spending as necessary to reflect any material changes in business activity, including new contract awards or further developments in the application of our DGI technology. Research and development expenses for the second quarter were $315,000, a 16% increase from the prior year quarter of $271,000, which was primarily attributed to the continued efforts on the commercialization of our DGI technology. Operating loss narrowed to $689,000 from an operating loss of $2.4 million in last year's second quarter. Excluding the $1.1 million warranty charge from the second quarter of 2020, the operating loss for the same quarter in 2020 was $1.3 million. Adjusted EBITDA loss was $0.6 million in the second quarter compared to an adjusted EBITDA loss of $2.2 million in the same period last year. With respect to China, we continue to focus on our collection efforts, and as of June 30th, we are pursuing an estimated $500,000 to $750,000 of China receivables. Cash repatriated in the second quarter of 2021 was $850,000. Moving to the balance sheet, I'm happy to report that our financial condition remains very strong. As of June 30, 2021, we had cash and cash equivalents of $36.6 million, and our restricted cash has declined to $368,000. Working capital was $37.9 million, or $1.25 per share. Stockholders' equity was $45.9 million, or $1.51 per share, and the company has no debt. Cash provided by operating activities at June 30th was $229,000 compared to a use of cash of $3.4 million in the same period last year. I'll now turn the call back over to Vince.

Thank you, Ellen. Operator, please go ahead and open the line for questions.

Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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. Our first question comes from Sameer Joshi with HC Wainwright. Please proceed with your question.

Thank you. Good morning, Vince, Ellen. Good morning, Sameer. Just getting into the revenue for the rest of the year, the 4.5 million is new orders from Korea, North America, Europe. They're not included in your 2.8 million expectations for the next 12 months. But based on the timeline that was provided in the previous press release, it seems like the North American and the European orders are likely to be delivered during 2021. How does that impact the APC revenues over the next two quarters?

Right. I think that given where we are in the year right now, Samir, we are not going to have a great deal of revenue contribution from contract awards that are indeed part of the $4.5 million that we were awarded in the month of July. nor from anything incremental that would be coming our way, as I had noted, somewhere between 5 and 10 million possible new orders between now and the end of the year. We wouldn't expect a lot of revenue flowing into 2021 from those contract awards. As we look at the remainder of this year, total APC revenue will likely be at the same level as prior year, perhaps a little bit less, just based upon timing. But what we're looking to do right now is to indeed build a, call it a little bit more of a respectable, healthy backlog as we end this year and look to move into 2022. From the backlog that Ellen noted as of the end of the month of June, we're looking at around between, you know, $2.5 and $3 million that will roll into 2021's revenue line for APC. And then anything over and above that would come from the new orders that we were just discussing.

Understood. Thanks for that. And then just taking on revenues, Do you expect any additional FuelChem TFE installations during the rest of the year that could be incremental to the FuelChem revenue line?

As we sit here today, Samir, we are not forecasting anything incremental for the remainder of 2021. Do we have upside potential? We do. We talked about Mexico, but that timing is uncertain. And in all likelihood, the contributions that we would get here in 2021 would be minimal in nature just due to the timing that would be required to A, receive the contract award, B, go through the procurement and fabrication process for equipment that we would then need to have installed at a site for starting up our program. So I would not necessarily expect anything incremental for fuel chem this year. However, As we had noted on prior calls, our current run rate for FuelChem is nicely ahead of what we realized in 2020. So FuelChem, we are indeed expecting somewhere in the $15 million to $16 million range in revenues for full year, perhaps a little bit more, depending on dispatch rates, depending on also the weather for the remainder of this summer, which indeed also would impact utility facility dispatch rates and would require our units to run a little bit more frequently. So that run rate is as healthy as we see it here today.

Yeah, thanks for that. Those were going to be my couple of next questions about Mexico and the summer months. Thanks for that. And then to DGI, was there a third facility or third demonstration that was being planned, or is that going to be done only after the DGI scale-up is accomplished? Can you give us any insight into that?

Right, we actually did have a third demonstration that was actually started towards the end of 2020 and went slightly into 2021. That was also at a municipal wastewater treatment facility. That also did work very well from a customer receptiveness perspective. We don't have anything incremental on the table right now that we're planning for from a demonstration perspective, okay? What we are looking at in terms of our focus on DGI right now is finalizing the study that we're in the midst of with our third-party consultant and then going ahead and looking to put together a very specific development and commercialization plan for the technology. As you know, over this past couple of years, prior to our financing, We have not put a great deal of incremental funds into the development and commercialization of DGI due to our financial position. Now that we have the ability to invest further, we are going to look to move forward on incremental investment for DGI. But we need to be a little bit more specifically aware of the directions that we need to go in to capture the best opportunity for that business.

Understood. And I think maybe I have asked this question in previous calls, but the strong balance sheet, how do you intend to utilize it over the next few quarters in terms of expanded sales force, new product offerings? I mean, DJI is part of that development, but also maybe some kind of M&A activity. Can you give us what your thoughts are?

Right. Right now, Samir, the focus is very strongly on BGI. We'll get, call it, our indicative results from our study here on or around the end of Q3. Once we have that in hand, we'll be better positioned to better understand how much we're going to need to invest in BGI, and then relative to what we think that is, be able to then take decisions in terms of where else we could go for further development activities over and above DGI. But today our focus is indeed DGI.

Understood. Great. Thanks for the continued recovery and speak to you later. Thanks. Okay. Thanks, Amir.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Pete Enderlin with MAZ Partners. Please proceed with your question.

Good morning, Vince and Ellen. Thanks for taking my question. Our pleasure.

Thank you.

Can you quantify in any way the project delays that you've talked about in the APC area? Just give us any sense of the size of what has been delayed or canceled.

Yeah, I'll give you a range, Pete, and it has been a combination of delays and and some cancellations just due to lack of financing and or funding for projects. But I tell you right now that it's $10 to $15 million at a minimum.

And some of that presumably will come back at some point, and that's included in your perspective pipeline, I suppose.

Definitely from a delays perspective, yes. Cancellations, those, I mean, those, again, they would need to develop new life in and of itself depending on the project owner and whether or not they decide to continue to pursue those opportunities. But the delays, absolutely so. And some of the projects that indeed were delayed, we are including as part of our sales pipeline here for the near term.

And that $40 million to $50 million pipeline, roughly how does that break down by geographic regions?

It's still dominantly U.S.-based in terms of where the contracts would originate from. So I'd say 75% of that sales pipeline is indeed domestic.

Well, yeah, which is maybe even a little more international than the current mix of business. So this shows there's some potential to expand overseas as well, I guess.

There is. And keep in mind that, as an example, the contract that we announced at the end of the month of July, one of the contracts are, I should say, the most material contract. It's a contract with FuelTech here in the United States, but the actual project is located out in China. So, again, there are opportunities whereby we'll work through engineering organizations or OEMs that do business on a global basis. The projects themselves won't necessarily be here in the U.S., but the contracts may come through the U.S.

Right. For FuelChem, do the existing arrangements have any sort of like a – that would mean that the long-term outlook would show some kind of a phase-out or anything that would limit the life of the new streams of fuel cap revenues in the foreseeable future? In other words, is there anything to keep them from just being ongoing long-term contracts for an indefinite period of time?

Understood. There aren't sunset provisions specifically, Pete. However, given what we know about coal-fired units and given what we've seen happen over the past decade, in particular here in this country, there is no guarantee that any of the customers that represent our base of customers will take chemical next month. There are no guarantees along those lines. So it is something that we watch. day in, day out, month in, month out, as economic activities develop on a regional basis here in this country, that could indeed impact our base accounts. There aren't sunset clauses, but given the direction that we have seen the impact of environmental regulation and pressure on coal-fired units has been going, we anticipate it will indeed continue. there is likely an endgame in mind for fuel chem at some point in time. Also, hence our focus on trying to get another business unit up and running as quickly as we can, because there is some uncertainty there.

Well, yeah, understood. But as it stands now of the existing fuel chem installations, you don't know of any where that particular utility is located. scheduled or even contemplated to shut down.

Is that fair to say? There is at least one unit that we are aware of today that is likely going to shut down in 2022. If it impacts half a million to a million dollars or so, But that planning evolves on a recurring basis, Pete. So, again, we are watching it closely. Fortunately, as we look at the remainder of this year, our outlook is very positive and very strong. And we will look to the extent we have opportunities to add additional units where the opportunities could come our way. As you know, we've had the good fortune to be able to add units at two facilities in over this past year and a half that have been contributing nicely based upon their specific economic drivers for their region.

Great. Thank you. And just one last one. Vince, you mentioned green hydrogen. I guess you're talking about green hydrogen and how that process or some aspects of that would produce NOx emissions. Can you elaborate a little bit on that and where you would apply your technology in that process?

Yeah, it wouldn't be the actual, call it, manufacturer of the hydrogen itself, Pete, not as part of that process. But if hydrogen is used as a fuel source to generate power, That's where there's the likelihood that incremental nitrogen oxide emissions would result, and there could be some opportunities there. But that would be on, call it, larger-scale operations where an entity would choose to utilize hydrogen as the fuel source itself for power generation.

Okay, so not for fuel cells or hydrogen-operated vehicles and things like that.

Correct. Correct.

Okay. All right. Thanks for that clarification, and good luck. Thank you. Thank you, Pete.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now take my call over to Vince Arnone for closing remarks.

Thank you very much, Alex. I would like to thank everyone for joining us on the call today. Again, thanks for the support of our shareholder base. And thank you to the FuelTech team for their continued contributions. And we look forward to talking with everyone again on our third quarter conference call in the month of November. Thank you. Have a great day, everyone.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.