Fuel Tech, Inc.

Greetings and welcome to the FuelTech Incorporated Second Quarter 2024 Financial Results Conference Call. 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, Managing Director of the Equity Group. Please proceed.

Thank you, LaTanya. Good morning, everyone, and thank you for joining us today for FuelTech's 2024 Second Quarter Financial Results Conference Call. Yesterday, after the close, we issued a press release, a copy of which is available at the company's website, www.ftek.com. Our speakers for today will be Sarah Loney, Chairman and President and Chief Financial Officer, and Ellen Albrecht, the 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 look statements as defined in Section 21 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 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. FuelTech 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 FuelTech and are subject to various risks, uncertainties, and other factors, including but not limited to those discussed in the company's annual report on Form 10-K in item 1A under the caption of risk factors and subsequent filings under the Securities Act of 1934 as amended, which could cause FuelTech's actual growth, results of operations, financial condition, cash flows, performance, 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 to publicly announce the results of any forward-looking statements reflect future events developments or change circumstances or for any other reason investors are cautioned that forward-looking statements involve risks and uncertainties including those details in the company's filings with the sec with that said i'd now like to turn the call over to vince arnoni vince please go ahead thank you devin good morning and i'd like to thank everyone for joining us on the call today as expected

Our performance in the second quarter was much improved over Q1 of this year. Following a slow start to the year, our APC and Fuel Chem business segments each exhibited double-digit revenue growth and gross margin expansion during the second quarter. We remain very encouraged by the progress toward commercialization made with our Dissolved Gas Infusion, or DGI, business initiative, and we ended the quarter in a strong financial position. with cash, cash equivalents, and investments of over $30 million and no debt. Additionally, we were pleased to report the incremental $5 million in new APC contract bookings yesterday, which provides us with an effective backlog of just under $10 million as of this date. Now, let's discuss our results for the second quarter in more detail, starting with FuelChem. Our performance this quarter was highlighted by a 52% increase in revenue as compared to the same quarter of the prior year. After a slower than expected first quarter, this performance puts us at the same level as the prior year on a year-to-date basis. This result was driven by several positive factors. First, we had two customers that had largely been dormant over the past two years return to service to address higher regional power demand in a cost-efficient and dependable manner. Second, as discussed on our last call, we realized a modest contribution from a recently initiated demonstration in the western U.S. of our chemical technologies program at a new coal-fired unit. These demonstration-related revenues will be more pronounced in the current third quarter. If this becomes a commercial account, It is expected to generate annualized revenue of approximately $1.5 to $2 million per year at historic fuel chem gross margins. In addition to this domestic opportunity, we are in discussions with one additional coal-fired power generation facility, also in the western U.S., regarding a demonstration later in the year or early in Q1 of 2025. We are also pursuing an opportunity to address the concerns of a biomass-fired boiler operator and this could also materialize into an additional demonstration as we move into next year. With respect to international fuel chem opportunities, we remain in discussions with our partner in Mexico to expand the provision of our chemical technology in that country. Following the election of President Claudia Sheinbaum, who takes office on October 1st, we are still waiting to gain additional clarity on the likelihood of this opportunity. We would expect her to act favorably toward implementation of environmental policy, given her background as an energy engineer and her long-term advocacy on matters of energy efficiency, sustainability, and the environment. With the combination of customers returning to service from scheduled and unplanned outages, the increase in power demand and associated unit dispatch that historically comes during the summer months and the incremental impact of known demonstration revenue. We expect fuel chem revenue to improve significantly in the second half of the year versus the first half of the year, and we expect a year-on-year revenue improvement for the third quarter. Domestic and international opportunities that we are currently pursuing could provide additional upside. Turning to our APC segment. The 15% growth compared to last year's second quarter reflected the timing of successful project execution. As I mentioned previously, we were pleased to announce $5 million in new contract awards yesterday, and based on ongoing discussions with our potential customer base, we expect to close additional new APC orders during the second half of this year. In 2023 and 2024 thus far, We've benefited from the continued adoption of our Ultra, SCR, SNCR, FTC, and ESP emissions control solutions at natural gas and coal-fired units in the U.S., Europe, South Africa, and the Pacific Rim. I expect this to continue throughout the second half of 2024 and into 2025. Independent of the potential impact of regulatory drivers, we are well positioned to take advantage of current industrial market trends, which include plant capacity expansion across several industries, the incentivized use of small turbines to replace traditional less clean power generation, the development of the biocarbon industry, the continued emphasis on decarbonization on a global basis, and the focus on using our ultra systems as the safe source of ammonia for SCRs at hospitals and universities across the U.S. Now on the regulatory front. On June 27th, the Supreme Court granted states and industry applicants request to stay the good neighbor rule while the case proceeds in the D.C. Circuit Court. As we had discussed on previous calls, the rule required 23 states to reduce emissions of nitrogen oxides from power plants and certain industrial facilities to limit their impact on downwind states. This decision temporarily halts the implementation of the rule pending the disposition of the applicant's petitions for review in the U.S. Court of Appeals for the D.C. Circuit. We will be definitely closely monitoring the status of this case to better understand the impact and timing of the final decision making. In addition to the Good Neighbor Rule, we are also watching the progress of EPA's rule for large municipal waste combustor units, which is independent of the Good Neighbor Rule. This rule reduces the nitrogen oxide emissions requirements for large MWC units. FuelTech has had a long history of assisting this industry in meeting its compliance requirements, and we have had discussions with customers in this segment to support their compliance planning. The MWC rule was proposed in February of this year. and is currently being finalized by EPA after the public comment period. The final rule is expected in November, with compliance deadlines expected sometime in the next three years. Lastly, in April of this year, the EPA issued a new stringent greenhouse gas emission standard that required 90% reductions from most new gas-fired plants and existing coal units by 2032. This same proposed rule includes tightening the mercury and air toxic standards by 2028, wastewater discharge limits for coal-fired power plants by 2029, and ash handling and disposal from coal-fired power plants over the next several years. This combined rule comes at a time where there are projections of potential shortfalls in power generation over the next five to seven years in certain geographic regions due to data center power demands and increases in computing power resulting from the adoption of artificial intelligence, and we are in the process of evaluating the potential impact across our technologies in the power generation market. As previously mentioned, opportunities related to these regulatory requirements would be incremental to our current expectations. Now, shifting to our DGI technology. Ongoing business development initiatives continue to gain momentum. We expect to commence the demonstration late in the third quarter or early in the fourth at a fish hatchery site in the western U.S. to highlight the capabilities of DGI for this aquaculture application. Should this demonstration prove successful, we would expect that DGI would be integrated into this customer's greenfield project specifications for a large facility that is expected to be completed by late in 2025. We are also progressing in discussions with one of the largest food processors in this country to utilize DGI to provide dissolved oxygen for the wastewater treatment facility at a food processing plant that they own and operate. The timing of this demonstration is currently unknown, but is likely to occur towards the end of the year. There are multiple other end markets of interest that we are pursuing for DGI, including pulp and paper, food and beverage, petrochemical, and horticulture, and we look forward to addressing these markets prospectively as we continue to advance towards commercialization. On the marketing front, we continue to increase our efforts to communicate the benefits of DGI to targeted end markets and customers, and we will be attending the WESTEC Conference, also known as Water Environment Federation's Technical Exhibition and Conference in New Orleans in October of this year. Based on our effective APC backlog, the business development activities we are pursuing across business segments, and our previously noted expectations for fuel chem. We continue to expect that total revenues for 2024 will exceed the total revenues recognized in 2023 of $27.1 million, and we will provide further guidance as we move throughout 2024. This base case outlet excludes any material contributions from DGI as we are still in the midst of commercialization. In closing, I want to express my thanks to the FuelTech team for their contributions to our business. We are encouraged by the contract landscape for APC, by the resilience and potential growth of our FuelChem segment, and the opportunities we are pursuing at DGI. I thank our shareholders for their continuing support and reiterate to you our focus on delivering long-term shareholder value. Now I'd like to turn the call over to Ellen.