enterprise

Edited Transcript of FTEK earnings conference call or presentation 14-Nov-19 3:00pm GMT – Yahoo Finance


WARRENVILLE Dec 6, 2019 (Thomson StreetEvents) — Edited Transcript of Fuel Tech Inc earnings conference call or presentation Thursday, November 14, 2019 at 3:00:00pm GMT

* James M. Pach

Fuel Tech, Inc. – Principal Financial Officer, VP, Controller & Treasurer

* Vincent J. Arnone

Fuel Tech, Inc. – Chairman, CEO & President

H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Technology Analyst

* William D. Bremer

Vanquish Capital Group, LLC – CEO of Vanquish Capital Management, Inc.

The Equity Group, Inc. – SVP

Greetings, and welcome to the Fuel Tech 2019 Third Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you. You may begin.

Devin Sullivan, The Equity Group, Inc. – SVP [2]

Thank you, Diego. Good morning, everyone, and thank you for joining us today for Fuel Tech’s 2019 Third Quarter Financial Results Conference Call. Yesterday, after the close, we issued a copy of the release, which is available at the company’s website, www.ftek.com.

Our speakers for today will be Vince Arnone, Chairman, President and Chief Executive Officer; and Jim Pach, 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 during 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 Fuel Tech’s current expectations regarding future growth of results — future growth and 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.

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 1A 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 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 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.

Having said that, I’d now like to turn the call over to Vince Arnone, Chairman, President and CEO of Fuel Tech. Vince, please go ahead.

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [3]

——————————————————————————–

Thank you, Devin. Good morning, and I want to thank everyone for joining us on the call today. I am here today with Jim Pach, our Principal Financial Officer and Control.

Our third quarter results continue to reflect the impact of the extended period of sluggish new APC business awards that we have faced since the beginning of 2019. APC contract booking activity has been slower than expected. However, we believe that we are beginning to see a resurgence in order flow. While the $2 million of new project awards that we announced last week, represents a small dollar value relative to our sales pipeline, on a global basis, we continue to track approximately $80 million to $100 million in potential project work for SCR, ULTRA, SNCR and ESP offerings. We expect to close on additional new contract awards before the end of this year.

While the impact of these delays has had a significant impact on 2019 financial results, the overall result has been mitigated by 2 factors. First, our strong financial position, which includes $15.3 million in total cash and no debt; and second, the operating leverage that we have created as a result of our domestic and international restructuring efforts over these past few years. In that regard, the suspension of our underperforming China operations is nearing completion. And as expected, the associated losses narrowed significantly in Q3 2019 to approximately $150,000. The wind down of these operations is expected to be completed by the end of 2019, and should result in the removal of approximately $2 million in annual operating losses, the full benefit of which we will realize in 2020. We are no longer originating project work from our Beijing office. Our primary office has been closed, and we have retained 3 individuals that are focused solely on completing field work activities at a few customer sites and are collecting the remainder of our outstanding accounts receivable.

Our cash collections from China remained strong during the third quarter and post quarterly close. Our outstanding accounts receivable in China at September 30, declined by approximately $400,000 from the end of the second quarter of 2019, and we have collected an incremental $500,000 since the close of Q3. Receivables are down by approximately $3.1 million from December 2018. We expect to have $2 million to $3 million in cash available to repatriate once the suspension activities are completed.

Our FUEL CHEM business generated revenues of $4.6 million in the third quarter, with a gross margin of 49%. Although, revenue and gross margin in the third quarter of 2019, declined slightly from the prior year period, year-to-date performance has been positive with higher revenue and stable gross margin of 49% compared to the first 9 months of 2018. Based on these year-to-date results, we expect FUEL CHEM’s performance to show a modest improvement during the second half of 2019, when compared to the first half of the year.

It is important to note that we are continuing to see pockets of opportunity for the FUEL CHEM business segment in the U.S. As we had discussed earlier this year, we successfully installed FUEL CHEM at 2 new coal-fired units at a utility in the Southeast; and weather and power demand permitting, these units will run for a good portion of the winter months. I’m pleased to note that early in Q4, we received a purchase order to install FUEL CHEM on 1 more utility unit in the Southeast. This is a unit that will run our FUEL Chem program on an intermittent basis until its planned conversion to natural gas. These pockets of opportunity are arising in the U.S. utility sector, as they adjust their asset base to accommodate their desired future mix of power generation in terms of fuel source. We expect that we may see additional such opportunities as we move into 2020 and beyond.

Additionally, at the end of this last month, we met with our partner in Mexico regarding a resurgence and interest in that country to burn high sulfur fuel oil which is a byproduct of the petroleum refining process to generate power. There are 2 factors driving the development: First, the IMO or International Maritime Organization, effective as of January 1, 2020, will enforce new emission standards, designed to significantly curb pollution produced by the world shipping industry. It is no longer allowing ships to use the heavy sulfur fuel oil as a source of fuel. Mexico had been selling the majority of their heavy sulfur fuel oil for use in maritime transport and is now going to have a glut of this fuel. Secondly, Mexico’s current government is supporting the use of all indigenous resource to generate power as opposed to encouraging increased reliance on foreign sources, such as natural gas from the United States. This development will likely be slow, but the opportunity for our FUEL CHEM program to be used to mitigate pollutants generated from the burning of high sulfur fuel oil is potentially significant.

We are continuing to pursue FUEL CHEM applications in geographies outside of the United States. In Europe where we are focusing on biomass and municipal solid waste opportunities; in Southeast Asia, via our partner, Amazon Papyrus, for the pulp and paper industry, where we are using our RECOVERY CHEM program; and in other southeastern Asian countries, where coal is a primary source of fuel, power demand and related pricing is high and where slagging and fouling is an issue. Lastly, we are working with a partner in South Africa, but today predominantly for APC opportunities.

Moving down the profit and loss statement. Our SG&A declined by approximately $300,000 from the third quarter of 2018, which is approximately 8%. As we head into 2020, we will benefit from the elimination of approximately $2 million in operating expenses from the suspension of our China operations. This, combined with our previous restructuring efforts, which were largely domestic, leaves us with a dramatically improved SG&A expense profile. Together, these efforts will be leveraged to generate operating income in periods when we have improved revenue generation.

Consolidated gross margin was 44.6% in the third quarter of 2019, up from 33.7% in last year’s third quarter, reflecting the mix between APC and FUEL CHEM revenues recognized during the quarter and to an improvement in APC gross margin.

Now I’d like to take a few minutes to add some context and color to our global APC platform. While we have had a setback in 2019 from a business generation perspective, the near-term APC project landscape of opportunity remains active and viable. Our goal is to establish a solid backlog of business as we close 2019 in support of an improved financial year in 2020. SCR and ULTRA for natural gas applications in industrial markets continue to provide our best opportunity. This is being driven by permits for new units and retrofit regulatory requirements. We are actively involved with the turbine suppliers, the heat recovery steam generator manufacturers and overall system integrators in an effort to capitalize on this market trend.

We are also seeing a consistent flow of new small-to-medium gas turbine combined settled plant projects such as the combined heat and power upgrades at universities and large hospital complexes. Here, we are focused on building our relationships with package boiler to suppliers also to supply SCR and ULTRA systems. The combined heat and power opportunities also include industrial plants, where a process team is needed at a plant and locations where distributed generation is used for improved energy efficiency. We are continuing to pursue work with various industries in this country that have benefited from recent term favorable economic conditions. One example continues to be the steel industry, where we are seeing a trend in this country, whereby demand for a higher quality metals is driving both greenfield projects in connection with new line and plant construction, and retrofits for other entities that are committed to modernizing their plants. We have had great relationships with the steel industry historically and expect to leverage these relationships for new project development.

Another trend that we are seeing is that certain states are establishing new regulatory guidelines that will require expedited implementation schedules to install best available retrofit control technology on certain sources of emissions. In Southern California, pursuant to recent directives from the South Coast Air Quality Management District, individual units may require modifications through existing SCR systems as well as new SCRs for smaller boiler applications. We are now under contract for a small ULTRA system in the Los Angeles area to replace a competitor’s existing direct urea injection system because of poor performance.

Additionally, on the East Coast, New York and New Jersey have filed a lawsuit against EPA under Section 126 of the Clean Air Act. These states are have difficulty complying with their 2015 ambient ozone requirements, and they attribute this to transportive emissions from up to 360 industrial and utility sources in Midwestern States, all the way from Illinois to Pennsylvania. This 126 provision allows down wind states to petition EPA to force up wind states to meet the good neighbor requirements of the Clean Air Act. EPA denied the petition in October of 2019, and the DC circuit court sided with the states, leading to the lawsuit. Maryland, Delaware and Connecticut are also pursuing 126 actions to require up wind sources to reduce NOx emissions. We believe this will drive a number of opportunities over the next several years.

In Europe, BREF, which is also known as Best Available Reference Technology guidelines were issued in August 2017, with a compliance time line in 2020. The guidelines reduced target NOx emissions from current levels, and it is generally believed that this time line will be extended as adoption is slow and dependent on funding, especially in Eastern European countries. The level of new inquiries thus far in 2019, remains very high with both ULTRA and SCR technologies being of greatest interest. And they have generally come from clients in Western Europe, pursuing projects in both Europe as a whole and also internationally. We believe that BREF will drive APC demand in Europe for at least the next 3 to 5 years.

We will continue to pursue opportunities associated with our licensing agreement in India. Although, as we have mentioned in prior quarters, the government-backed off from initial compliance time lines and prioritize remediation targets in order of importance. First particular matter in SOx and then NOx to come later. While we believe that this will present an opportunity for Fuel Tech to capitalize on our Flue Gas Conditioning or FTC technology in the marketplace, which is a more cost-effective particulate control technology compared to ESP and bag filter hybrid solutions, adoption of this technology has been slow. Additionally, it is important to note that the local regulatory environment has turned unfavorable for SNCR in India for pre-2016 power generation units as the state-owned power generation company, known as NTPC, has pressured the government to relieve a 300-milligram per normal cubic meet meter NOx target. As a result, SNCR will continue to be an opportunity for industrial applications, but the larger market opportunity has been delayed at this point in time.

Regarding our Dissolved Gas Infusion Water Technology business, I have the following comments. After 1.5 years under our license agreement with NanO2, this technology has been assimilated into our company, and we believe that our first demonstration is close to becoming a reality. We continue to advance conversations with multiple potential customers across a variety of industries, with the primary focus today currently on the pulp and paper industry and on the oil and gas industry.

Additionally, recent discussions with other water treatment suppliers interested in advanced aeration using DGI are gaining momentum. Our investment in this venture has been modest thus far and has included the purchase of R&D and demonstration systems for less than $200,000. However, we realized that an incremental investment was going to be necessary to ensure that we move forward with increased pace towards the demonstration. In these past few months, in addition to our own discovery and selling efforts, we have added 2 subject matter experts on a consulting basis to aid in the identification and diagnosis of specific problems that our DGI systems can address, one each in support of the pulp or — pulp and paper and oil and gas industries. These individuals are paying dividends already, as they are opening doors to customer opportunities and providing technical insights on water treatment issues that will expedite our DGI development activities.

With respect to pulp and paper, we are actively engaged in data analysis and application review for a midsized paper production facility in the Midwest U.S. And we are also engaged with a long-standing customer of ours in the same industry, where we are focused on the possibility of incorporating DGI technology as part of the customer’s new water treatment facility which is currently in the planning and engineering design phase.

Lastly, this past week, we received an inquiry from a third pulp and paper site that requires assistance with their wastewater treatment plant, and we will be following up immediately.

Regarding oil and gas, the Permian Basin is now the largest oil production region in the world, and the faith for produced water is either reuse for fracking, disposal wells or recycling. It is important to note that disposal wells are becoming more difficult to permit due to seismic considerations and transportation costs, either via truck or pipeline to more remote disposal wells are becoming a severe economic issue for the region. The specific water issues that DGI can address include total suspended solids, hydrogen sulfide issues and metals removal, along with keeping basins aerobic over time. We are working closely with our oil and gas subject matter experts to identify the optimal customer with whom to demonstrate our DGI technology.

In closing, I want to thank you once again for your ongoing interest in Fuel Tech. One year ago, we were struggling financially. Our available operating cash was diminishing as we had only $10.7 million in global cash on our balance sheet at the end of the third quarter of 2018. We were uncertain to the source of bookings for the remainder of 2018, and internally we were on the cusp of taking the final decision on the line down in China.

Today, liquidity has stabilized, and we ended Q3 of 2019 with more than $15 million in global cash and no debt. The wind down of the China operation has gone successfully, and as a result, we will likely have $2 million to $3 million in cash available to repatriate, along with the benefit of $2 million and eliminated operating losses commencing in 2020.

Our FUEL CHEM customer base remains stable, and we are managing to uncover new business opportunities. Despite the shortfall in bookings in 2019 thus far, I remain confident in our APC opportunity landscape as we move towards 2020. We also expect to continue to benefit from an overall strong economy in this country and a modestly more favorable U.S. regulatory landscape for fossil fuels.

For 2019, although our outlook for generating operating income from continuing operations this year has shifted as a result of our APC performance, our long-term goal as a company and as a team is the generation of sustained profitability and cash flow. While our complete turnaround as a company has been delayed a year, we still have the resiliency and ability to complete the process that we commenced in 2015. And I remain confident that the Fuel Tech will be successful in achieving this objective.

I’ll now turn things over to Jim Pach for a discussion of our financial results. Please go ahead, Jim.

——————————————————————————–

James M. Pach, Fuel Tech, Inc. – Principal Financial Officer, VP, Controller & Treasurer [4]

——————————————————————————–

Thanks, Vince, and good morning, everyone. As Vince noted, our Q3 results were impacted by slower-than-expected new business awards, and to a much lesser extent, losses at our China operations.

With respect to the top line, third quarter revenues declined to $6.5 million from $16.1 million, primarily reflecting a $9 million revenue decline at APC. Lower APC revenues were the result of a decline in backlog entering the third quarter and slower-than-expected new APC contract awards.

As Vince has mentioned, we are pursuing several avenues for new APC business in the U.S. and have secured approximately $2 million in new contract awards subsequent to the close of the third quarter.

Consolidated gross margin was 44.6% of revenues compared to 33.7% of revenues in Q3 2018, and this is primarily due to the mix in revenues between the APC and FUEL CHEM business segments.

APC gross margin was $600,000 or approximately 33.2% of revenues as compared to $2.8 million or 25.4% in Q3 2018. APC results for Q3 2019 included no revenues from Beijing Fuel Tech and an operating loss of approximately $123,000. In Q3 2018, revenues from Beijing Fuel Tech were approximately $1.1 million and the operating loss was approximately $435,000.

FUEL CHEM’s segment revenues were $4.6 million compared to $5.2 million in Q3 2018, reflecting soft electric demand market and low natural gas prices, which leads to fuel switching, unscheduled outages and combustion units operating at less than capacity. This segment will likely continue to be affected by these factors going forward. Segment gross margin was 49% in Q3 2019 and 51.1% in Q3 2018.

For the full year 2019, we are targeting a blended APC and FUEL CHEM gross margin of between 40% and 45%, excluding the impact of China.

We continue to focus on cost control, and our SG&A for Q3 reflects that. SG&A for Q3 2019 declined by 8% to $3.8 million from $4.1 million in Q3 2018. SG&A for the first 9 months of 2019 was $12.7 million, and remain on track to meet our full year 2019 objective of SG&A ranging between $15 million and $16 million, which excludes China SG&A and restructuring cost of approximately $1.5 million.

R&D expenses of just over $300,000 were higher than last year’s third quarter due to our continued focus and efforts on the development of Dissolved Gas Infusion Technology. We continue to expect that R&D for 2019 will be comparable to the $1.1 million we invested in 2018.

Net loss from continuing operations was $1.3 million or $0.05 per diluted share, compared to the net income from continuing operations of $1.1 million or $0.04 per share in last year’s third quarter. Excluding the impact of operating losses at Beijing Fuel Tech, Fuel Tech’s net loss from continuing operations for Q3 2019 was $1.1 million or $0.05 per diluted share. Given our cumulative net operating losses of $29.4 million at September 30, 2019, which covers several geographies, we continue to expect that our income tax expense for 2019 will be at or near 0. This figure includes China NOLs, which we will maintain, given that we are serving the legal entity in China.

Our balance sheet at September 30, 2019, remained debt-free, and we had cash and cash equivalents of $15.3 million, including restricted cash of approximately $2.5 million. $3.5 million decline in restricted cash from December 31, 2018, reflected our new banking agreement with BMO as well as reductions in our outstanding letters of credit with existing customers.

Our working capital balance at September 30, 2019 was $20.1 million, which will continue to support our ongoing operating needs of the business.

In China, we currently have $3.1 million of trade accounts receivable outstanding at September 30, 2019, down from $3.5 million at June 30, 2019, and $5.5 million of trade accounts receivable outstanding as of March 31. This reduction is comprised of cash collections activity, offset by invoicing activity on existing projects.

Total consolidated accounts receivable at September 30, 2019, are offset by an allowance of approximately $1.2 million.

We continue to actively pursue cash collections in China through a variety of means with our recently announced suspension in that geography.

With respect to valuation, our book value per share was $1.27, our tangible book value per share was $1.11 and our working capital per share was $0.83 at September 30, 2019.

In addition, we have approximately $0.73 per share in deferred tax assets for the U.S. and Italy, which have been fully reserved and are not included in any of the per share amounts quoted above.

With that, I would like to turn the call back over to Vince.

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [5]

——————————————————————————–

Thank you, Jim. Operator, before we open up the call for questions for those online, I would like to respond to 2 questions that we received via e-mail, okay?

The 2 questions are as follows. First of all, for the current year’s APC bookings, have we been able to generate business with new customers as part of those bookings? And answer to that question, the answer is yes. And the example that I’ll give is, as part of my commentary, I mentioned the ability to do business with package boiler suppliers, particularly for smaller applications. And 1 application, in particular, that we were actually able to garner new business is for our ULTRA solution and for a packaged boiler supplier that was actually having difficulty with the technology provider that they had originally been using for their scope of supply. So we were asked to come in to assist this packaged boiler supplier with diagnosing the issues that they were heading on site, but then ultimately providing them with our ULTRA solution to go ahead and meet the end customers’ needs. So the ability to generate new business with new customers is still there, and we take advantage of every opportunity that we can to generate these business relationships, okay?

Question #2 is regarding India. And the question is with regard to technology demonstrations that were performed in that marketplace. The question is, regarding the demonstrations that were done for NTPC, were these on multiple fuel sources or on units with similar fuels? And did the demonstrations meet the requirements of NTPC, okay? NTPC, particularly for the NCR — sorry, SNCR scope of supply did require certain companies to do demonstrations to prove that their technology was going to be viable for application in the marketplace, and these demonstrations were solely done on coal. Fuel Tech, because of our long-term history in providing SNCR solutions globally, we did not have to perform a demonstration to be qualified with NTPC in India. So we weren’t basically on the hook to be able to go ahead and perform that work. As I noted in my commentary, however, SNCR work for the utility base, if you will, out there for the pre-2016 units is likely be delayed because of the pressure that NTPC is putting on the government to go ahead and delay implementation. So those are my answers to those 2 questions.

And with that, operator, let’s go ahead and open the call for additional questions from those online.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) Our first question comes from Amit Dayal with H.C. Wainright.

——————————————————————————–

Amit Dayal, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Technology Analyst [2]

——————————————————————————–

Just on the overall macro environment, Vince. It looks like there are some headwinds, but also opportunities remain, at least in the near term. So just trying to get color on whether there is some challenge in converting some of these bids into orders? Are you trying to sort of maintain margins, and that’s where you may not have been successful from a pricing or cost perspective and winning some of these. Are — there’s any color on sort of how this can bounce back for you? Yes, I’ll stop there.

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [3]

——————————————————————————–

Understood. And Daya, thanks for the question. Margins haven’t generally been an overall consideration for us as we’ve looked at winning some of the work that’s put in front of us. We have certain margin targets that we maintain and they’re a little bit different by geography because the competitive landscape is a little different by geography. But generally speaking, the delays that we’ve had over this past several months on bookings has not been margin-based, if you will. The pipeline of opportunities that we have in front of us right now and that we’re discussing as a team, I would not expect to have different margin profiles than what we’ve seen in the past. However, as I’ve always mentioned, if there is a strategic opportunity for us to enter a new market space or to be aligned with a specific customer base that could provide a larger landscape of opportunity, we will engage in some strategic pricing that will involve possibly some impact on margin. I mean, that’s — from our perspective, that’s just good business. But as we sit here right now, we’re not looking at a change in our margin profile prospectively for the pipeline of work that we see in front of us.

——————————————————————————–

Amit Dayal, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Technology Analyst [4]

——————————————————————————–

Got it. So then how — what are some of the challenge — the delays are driven by just some of these macro headwinds? And do you think sort of even looking into the fourth quarter, are we expecting a similar performance relative to the third quarter? Or do you anticipate some improvements?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [5]

——————————————————————————–

I do expect us to have bookings between now and the end of the year. Difficult to say what that dollar value will be. I mean, as we sit here right now. And so from that perspective, it’s not something that I can give you an approximation on, but I’m very confident that we are going to see some project bookings between now and the end of the year. And then we’ll see how it transpires from there. But there are, again, a slate of projects that we are in bid processes on or will be in bid processes on as we move through the end of this year and into Q1 of next year, which gives me confidence that the — again, that broader landscape of opportunity is still there for us. It is not like we are seeing a complete dry up of all opportunities for the APC technology base. That is not the case at all. In fact, it’s quite the opposite, as I sit here right now, and that applies to both what we’re seeing in the U.S. and for the European space as well. So that’s the commentary that I can provide right now. But my level of confidence for bookings between now and the end of the year is high.

——————————————————————————–

Amit Dayal, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Technology Analyst [6]

——————————————————————————–

Got it. Just moving on then to the water treatment side of the business. It looks like you are investing a little bit more resources towards this effort to accelerate things. Is there — I just want to confirm, there’s only 1 demo unit in the market right now, right?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [7]

——————————————————————————–

Yes. We just have 1 demo unit that we’ve actually constructed right now and is ready for deployment to a demonstration site. So yes, we just have that 1 demo resource available for our customer site.

——————————————————————————–

Amit Dayal, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Technology Analyst [8]

——————————————————————————–

Got it. So if you had a couple more of these, would it accelerate development and commercialization efforts? Or would that not make much of a difference at this stage?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [9]

——————————————————————————–

At this stage, we don’t believe it would make that difference relative to having an impact on acceleration. We stand ready to very, very happily to invest those incremental dollars on demonstration systems once we have that specific customer demand coming our way. So we won’t let those investment dollars prohibit us moving forward with pace, once we’re ready to actually move forward with pace.

——————————————————————————–

Operator [10]

——————————————————————————–

Our next question comes from Pete Enderlin with MAZ Partners.

——————————————————————————–

Peter Enderlin, MAZ Capital Advisors, LLC – Portfolio Manager [11]

——————————————————————————–

You’ve given us a very thorough rundown, Vince. And I actually just have one question. And that is, you know, you mentioned the IMO regulations beginning in January 2020 regarding high sulfur bunker fuel for ships. And then that resulting in some excess availability of high sulfur fuel in Mexico or maybe other places. So the question I have is, can you expand on what you mentioned about the — how your technology, your opportunity to address the use of high sulfur fuel, maybe for electrical generation and potentially for the marine market as well would play out? And which of your technologies can actually apply to those opportunities?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [12]

——————————————————————————–

Yes. Will do, Pete. That sounds good. Thanks for the question. The application that I’m specifically referencing is the actual burning of this is high sulfur fuel oil for power generation in the Mexican market, okay? And it’s — we are now looking to address, call it, pollution control on ships as we sit here today. That’s a different subject matter altogether. So relative to Mexico, approximately 10, 11 years ago, we actually installed our FUEL CHEM application at a site down in Mexico that was actually located very near a port and resort area. What was happening was heavy sulfur fuel oil was being burned at the local power plant, and it did not have any pollution control on the back end of this unit. And what was being generated was the equivalent of acid rain. Because SO3 was being created as part of that burning process and acid rain was effectively coming down on the local community and obviously causing some issue. And so we successfully installed our technology back then on a unit. And then a couple of years after that, we were able to actually install our technology at a second site in Mexico for similar reasons. The development in terms of growing that business stopped due to the change in governmental regime and the focus being on selling that heavy fuel oil into international marketplaces and focusing much more heavily on burning imported fuels, such as natural gas from the United States. That regime has been in place for the better part of the — in the past 8 years plus or so. But coming into 2019, the regime has changed. New regime is focusing on using indigenous resources where necessary to go ahead and become more energy independent. And so that’s what’s driving a little bit of the resurgence in this application.

And I’ll also note, Pete, is that we’ve been running our FUEL CHEM program at those 2 original units for the past years, it hasn’t stopped. So the benefits that we’ve shown are indeed real benefits in our partner that we work with down in Mexico is working with Mexican government, Mexican national utility to basically ensure that our technology application, if indeed, they look to burn this heavy fuel oil on more generation sources that they will need to use our technology. So that that’s a little bit — I’m sorry, Pete, please go ahead.

——————————————————————————–

Peter Enderlin, MAZ Capital Advisors, LLC – Portfolio Manager [13]

——————————————————————————–

I was going to say, it’s a sort of a special situation at this point, but it could become more widespread. And I wonder if you could just to summarize how much of a reduction in the SO2 emissions that technology managed to accomplish?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [14]

——————————————————————————–

Well, I can tell you that without quoting numbers. I mean, when we were first investigating the site that was burning the heavy fuel oil, you were actually able to see a light blue plume of smoke covering over the marina area, and which was basically SO3 being emitted from the smokestack. The plume was completely eliminated. And I know that the actual percentage of emissions reduction was indeed significant in terms of the reduction that we actually did achieve. Unfortunately, Pete, I just don’t have those specific numbers in my hand to share that with you, but I certainly can do so publicly in the future.

——————————————————————————–

Peter Enderlin, MAZ Capital Advisors, LLC – Portfolio Manager [15]

——————————————————————————–

Okay. And do you think that this is going to become very widespread in Mexico? Or is it just sort of a few plants to take off the excess?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [16]

——————————————————————————–

It’s — you know what, it’s difficult to say, Pete, and it’s something that we’re just going to watch it closely. I mean, they were on 2 units right now that from a power generation perspective, generally speaking, if we were to go from these 2 units to all of the units that could burn heavy sulfur fuel oil, it would be a magnitude of increase of 5 to 10 from what we’re doing right now, at least. They have quite a few sites that are capable of burning heavy fuel oil — heavy sulfur fuel oil. And so we just have to watch to see how that pans out. It’s political obviously, and so we mentioned it because it is a potential opportunity. But as I note, it’s going to develop slowly. And I just hope it develops because the opportunity for us is quite nice.

——————————————————————————–

Operator [17]

——————————————————————————–

Our next question comes from [George Gaspard].

——————————————————————————–

Unidentified Analyst, [18]

——————————————————————————–

Well, a tough quarter on revenue stream, but the technology developments are impressive. And the key is going to be to implement them going forward. In the interim, with the stock having backed off and you’re recapturing $2-plus million out of China, maybe some of the cash flow coming back and should go to stock purchases — repurchasing and take a couple, 3 million shares out of the market. That’s one thought, I get. The others, on the water treatment side, I strongly recommend that you approach some of the operators developing in the Powder River Basin in Western Wyoming. This is an area that has been regenerated in the last 6 months. It was formerly 30, 40 years ago, one of the first basins that was drilled in Wyoming. And then it kind of descended along the way because of what has happened in Texas in the Permian Basin and other basins. But there is some very impressive result coming out of the Powder River Basin, which is in Western Wyoming. And I think that there’s — you’re stepping in on the water treatment side, would be very interesting there. And you might be able to get ahead of some other operators in water treatment. The additional is the gas flaring volumes that are taking place, and particularly in the eastern part of the United States, where tremendous gas drilling is underway in Ohio and east from there into West Virginia and Pennsylvania. These gas flaring volumes, it just seems to me that some of your technology would be adaptable for capturing and reducing this flaring situation that’s evolving. And it’s becoming very enormous, of course, in the Permian, which is the other side of what you were talking about, Vince, on the water side. But I think that with the technology that Fuel Tech has in utilization of carbonization and elimination, it would be advisable to maybe spend a little R&D time or whatever, and seeing if you could come up with a system of capturing the flaring that’s going on in some of these areas? I don’t know if you’ve got any comments on any of this that I said?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [19]

——————————————————————————–

Let me take your comments one at a time, George. But thanks for the comments. First of all, on the stock repurchase. Throughout our history, we’ve engaged in that activity at least once, perhaps a couple of times. It’s a something that, as a Board, we do discuss on a recurring basis. As we sit here today, and as you well know, we’ve been watching our operating cash balances very, very closely over this past 3 to 4-year time frame. And as we sit here today, we will continue to watch our operating cash balances very, very closely. Until we move to a point whereby, we’ve established a sustainable level that we just feel comfortable with as a company as a whole, that’s going to support our business opportunities prospectively. So as we sit here today, I think the likelihood of a stock repurchase is probably pretty remote. I think we, as a company, we prefer to see our performance generates any impact on stock price. And I do believe that, that will happen. But your point is noted. And as I said, on a recurring basis, we do discuss that at board level. So that’s point number one.

PRB. Thanks for the insight there. We’re definitely familiar with that region just because of the source of coal that’s there and the fact that we’ve done a good deal of business applying our technologies on PRB coal. But relative to opportunities for water treatment of this out there, that’s something that I’ll just make a note for our team to assess. And then on your last point, gas flaring is — it’s happening quite a bit, to your point and it’s due to excess in certain areas. It’s due to price points being varying wildly depending on where the availability of that extra gas is. It’s due to lack of infrastructure in some ways to get that gas where it needs to be. Some years ago, we did look at some gas flaring technology and you have to have the space, if you will, and we have found that there appeared to be, call it, enough players in that space that would address the flaring concerns or issues from an environmental perspective adequately at that point in time. But that doesn’t mean we can’t take a relook as a company as a whole because it is happening more and more often and in greater volumes than ever before in history. So it’s just something that we can take a look at. So — thanks for the insight.

——————————————————————————–

Unidentified Analyst, [20]

——————————————————————————–

All right. And then one other question, if I could, just seek a comment from you. The opportunity in the natural gas generator market is vast. And it appears as though you’re on the verge of making some real inroads there, with the emphasis with basically being on the United States. But I think you maybe made some alternative comment on that in Europe and so on. It looks like there’s going to be a larger push internationally and going to gas turbine also in certain areas, and that could definitely offer an opportunity?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [21]

——————————————————————————–

Agree with you on that. Absolutely, George.

——————————————————————————–

Operator [22]

——————————————————————————–

(Operator Instructions) Our next question comes from William Bremer with Vanquish Capital.

——————————————————————————–

William D. Bremer, Vanquish Capital Group, LLC – CEO of Vanquish Capital Management, Inc. [23]

——————————————————————————–

I’m going to go back to my previous question on our former conference call and to see, has anything changed in terms of your sales personnel? You’re absolutely right, we need definitely the sales, more bookings per quarter. And this is something that the Board, I feel truly needs to make some changes. I would encourage an investment in further sales, improving sales personnel versus any other type of capital infusion at this point. I just wanted to hear your take on that.

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [24]

——————————————————————————–

Yes. We’ll do, Bill. And yes, we did have a discussion on that point on our last conference call. Today, we — as a company, we have about the equivalent of 18 to 20, call it, sales-related invoice — sales-related personnel, if you will, 7 internal salespeople, about 10 manufacturing representatives that we use for the APC business more specifically, and then we have 2 salespeople over in Europe as we sit here today. And we have — as I mentioned on the last conference call, we have some of the most experienced people for these business applications that we would ever want to find. And it’s as simple as that. And their track record historically has been proven out.

And so as we sit here today — again, to the same comment on stock buyback, as we sit here today, we talk about organizational structure and design and personnel at Board level every time we get together as a Board, and that will continue in the future. But as we sit here today, we have not made any changes on our approach to 2 marketplaces. And I don’t have, the Board does not have any immediate plans to change the approach today. I mean, I would ask that you — let this next period of time pan out. And I believe in our sales team, I believe in the opportunities that lie in front of us. Just because we’ve gone through a little bit of a slower phase, it doesn’t mean that our resource base is not performing as well as they should or can because if I thought that was the case, it would be a different story completely, but that applies to every functional area of our company. So as we sit here today, Bill, again, believe me, no one better understands the concern than myself and the Board, as we sit here today. We know we need to generate incremental business, and it has to start to happen here in this near term. So that would be my commentary, Bill.

——————————————————————————–

William D. Bremer, Vanquish Capital Group, LLC – CEO of Vanquish Capital Management, Inc. [25]

——————————————————————————–

No, I agree with that wholeheartedly. I think there is definitely a tremendous amount of fatigue in the name with a lot of the shareholders as well as the institutional shareholders, okay. I think, definitely some changes need to be made as we proceed forward. I’d like to get an update on the waterfront, the DGI in terms of technicalities, has there been progress in that? And how soon do we feel as though we have a unit that potentially could go modular and to really start to ramp that? I mean we’ve been talking about this for quite some time. We’re getting there. Has there been changes to the origination of it? And if so, how close do we feel as though we are in terms of really having a model that we feel we can roll out?

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [26]

——————————————————————————–

Understood. And good question. The interesting point that actually relates to your question is that, as we’ve been talking with potential customers relative to demonstration and application opportunities, what we are finding that the system size requirement in terms of the size of system to generate the volume of oxygen that’s required to make an impact, the system size is going to have to be larger than the, call it, the demonstration system that we have today, right? So what we have been doing is developing a platform for the ability to dramatically upsize and further modularize this system when we do need to go to site with, call it, larger volume capability, okay? We haven’t had to do that yet, right? So the only thing we’ve done is we took the demonstration system from our licensor which was at a certain, call it, size and capability of system. We upsized that system on our own to be able to generate a larger volume of dissolved oxygen. We feel confident, just based upon our engineering experience, our ability to modularize equipment for deployment to sites, that we are going to be able to be effective in upsizing this system for deployment for larger applications. So as we sit here today, Bill, I’ll tell you that, that’s not on, what I would call a higher risk area profile for us. More so is identifying those specific applications that are going to require that system and then moving forward from there. I’m less concerned today about — yes, I’m less concerned about our ability to upsize and modularize just based upon our engineering experience as a company.

——————————————————————————–

William D. Bremer, Vanquish Capital Group, LLC – CEO of Vanquish Capital Management, Inc. [27]

——————————————————————————–

Good color. And finally, I do agree with you in terms of the allocation of cash to the core business right now versus buying back stock. That being said, when bookings consistently are running at over 1.2x per quarter, at that time, then I think it’s advantageous. But I would like to see more insider buying, not just from yourself and maybe 1 or 2 others in the company, but more broad-based. And I think that needs to resonate through the whole, through the Board, through the managers, through the financial department as well as personnel needs. If they believe in this company at this point, where we are, given the core value here, they need to step in and align themselves with the shareholders that have been with you for many, many years. That’s all I have to say.

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [28]

——————————————————————————–

Got it, Bill. No. Thanks, and of course, I appreciate that commentary as well. And to your note, we have had some insider buying by employees and by directors as well. But there’s nothing like larger volumes insider buying to show confidence in the company’s future. So I agree with your point.

——————————————————————————–

Operator [29]

——————————————————————————–

Ladies and gentlemen, there are no further questions at this time. I’ll turn the floor back to Vincent Arnone for closing remarks. Thank you.

——————————————————————————–

Vincent J. Arnone, Fuel Tech, Inc. – Chairman, CEO & President [30]

——————————————————————————–

Thank you, operator. I want to thank everyone for taking the time today for our third quarter earnings conference call. As I noted on the call and in Q&A thereafter, I still remain highly confident in the Fuel Tech team’s capability to complete this turnaround that we started as a company back in 2015. And I look forward to speaking to everyone once again in the future. And have a good day, everyone. Thank you.

——————————————————————————–

Operator [31]

——————————————————————————–

Thank you. This concludes today’s conference. All parties may disconnect. Have a great day.



READ SOURCE

Leave a Reply