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Q1 2024 Fuel Tech Inc Earnings Call

Participants

Devin Sullivan; Managing Director; The Equity Group Inc.

Vincent Arnone; Chairman of the Board, President, Chief Executive Officer; Fuel Tech Inc

Ellen Albrecht; Chief Financial Officer, Vice President, Treasurer; Fuel Tech Inc

Amit Dayal; Analyst; H.C. Wainwright & Co, LLC

Marc Silk; Analyst; Silk Investment Advisories

Presentation

Operator

Greetings. Welcome to the Fuel Tech Inc. First Quarter 2024 financial results conference call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to Devin Sullivan, Managing Director of The Equity Group. Thank you. You may begin.

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Devin Sullivan

Thank you, Sherry, and good morning, everyone, and thank you for joining us today for Fuel Tech's 2024 First 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, w. w. w. dot FTYK. dot com.
Our speakers for today will be Vincent Arnone, Chairman, President and Chief Executive 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-looking statements as defined in Section 21 E. I'm of the Securities Exchange 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, 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 and Fuel Tech's annual report on Form 10-K in Item 1A under the caption of 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 reasons. 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 only. Vince, please go ahead.

Vincent Arnone

Thank you, Dave, and good morning, and I'd like to thank everyone for joining us on the call today. Given that we last spoke, not that long ago in connection with our year-end results, I'll keep my commentary brief today. Although we've begun the year more slowly than anticipated in our APC and FUEL CHEM business segments. We expect that our performance for these businesses will show steady improvement as we move through 2024. In addition, we are very encouraged by the progress we are making at our Dissolved Gas Infusion or DGI. business initiative, and we ended the quarter in a very strong financial position with cash, cash equivalents and investments of over $32 million and no long-term debt.
Now let's discuss our results for the first quarter. In more detail as a general statement, our results reflected the impact of customer driven delays in the execution of existing contracts in our APC business segment, while performance in fuel cam was impacted detrimentally by historic warm weather across the U.S. that affected unit dispatch and by unscheduled plant outages for the APC segment. I remain pleased with our ongoing execution of existing projects and our team's current business development activities, which continue to reflect an increased focus on global emissions protocols across a variety of fuel sources. In 2023, we benefited from the continued adoption of our Ultra SCR, SNCR and FTC. emissions control solutions at natural gas and coal-fired units in the US, Europe, South Africa and the Pacific Rim. And I expect this to continue into 2024 and beyond. Independent of the potential impact of favorable regulatory outcomes, which I will discuss shortly. 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 bio carbon industry the continued emphasis on decarbonization on a global basis. And the focus on using our ULTRA systems has the safe source of ammonia for SCRs at hospitals and universities across the U.S. We are providing proposals to customers from both near and longer-term needs regardless of regulatory drivers. And we are currently watching the progress of $5 million to $10 million in EPC contract opportunities that could close in our favor before the end of the second quarter or shortly thereafter.
Now on the regulatory front, we continue to monitor monitor progress related to the adoption of the US EPA's cross-state air pollution control regulation to meet the Good Neighbor requirements of the Clean Air Act, which we believe can be a potential catalyst for APC growth in 2024 and for the remainder of this decade as utility and industrial customers explore ways to further reduce NOx emissions.
Over the past several months, we have received and responded to multiple multiple requests for budgetary proposals as customers prepare to address the upcoming compliance requirements. It's part of their capital budget planning for this year and beyond. As discussed on previous calls, the rule currently obligates 23 states to reduce emissions of nitrogen oxides from power plants and certain in certain industrial facilities to limit their impact on downwind states.
The ultimate timing of the effectiveness of the rule is uncertain because several up wind affected affected. States and sources have challenged the efficacy of EPA's proposed regulation in multiple courts and sales of the effectiveness of the rule have been issued for many up wind states in February of this year. Oral arguments were presented to the Supreme Court by both sides, and we are closely monitoring the potential impact of the Supreme Court's ruling on whether to stay the rule for all states when the physicians later this year.
In addition to the Good Neighbor rule we are also watching the progress of EPA's rules for large municipal waste combustor unit, which is independent of the Good Neighbor rule. This rule reduces the nitrogen oxide emissions requirements for large municipal waste combustor units. Fuel Tech 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 them in their compliance planning. The municipal waste combustor rule is currently in a public comment period with compliance deadlines expected sometime in the next three years.
Lastly, within the past few weeks, EPA has issued new stringent greenhouse gas emission standards that require 90% reductions for most new gas-fired plants and existing coal units by 2032. The same proposed rule tightens the Mercury and Air Toxics Standards requirement by 2028 waste 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 when there are projections of potential shortfalls in power generation over the next five to seven years in certain geographic regions in this country due to data center power demands and increases in computing power requirements resulting from the adoption of artificial intelligence. And we are in the process of evaluating as potential impact of these rules across our technologies and the power generation markets.
Now for the FUEL CHEM segment, revenues declined from the prior year first quarter due to due to a decrease in operational demand from our client base, resulting from warm weather across the US and to a lesser extent, unscheduled plant outages and closures compared to the same period in 2023. As mentioned on our last conference call, we have been pursuing multiple additional fuel CAM development opportunities, which could provide incremental incremental revenue contribution in the second half of 2024 for both coal and biomass fired boilers. I'm very pleased to say that we have received an order for our fuel come demonstration at a new coal-fired power generation site in the Western US. The demonstration is expected to commence later this month. And if it becomes a commercial account is expected to generate annualized revenue of approximately $1.5 million to $2 million for historic fuel from fuel can gross margins. And in addition to this domestic opportunity, we are in discussions with one additional coal-fired power generation facility.
Regarding a demonstration later this year, also in the Western US. And we are also pursuing an opportunity to address the concerns of a biomass-fired boiler operator with respect to international fuel come opportunities. We remain in discussions with our partner in Mexico to expand the provision of our chemicals and chemical technology in that country. We expect that the nation's upcoming presidential election in June will provide us with additional clarity on the likelihood of this opportunity as the favorite candidate candidate is an environmental engineer by background and could take a favorable position on the implement and implementation of environmental policy. We will provide more color on this opportunity on our next conference call.
As we move into the second half of 2024, we expect fuel CAM revenue to improve due to the increased power demand and associated unit dispatch that come that comes during the summer months and the contributions from the new coal-fired unit demonstration that will commence later this month.
With our DGI. initiative, our momentum continues. Last month, we executed an agreement to commence and complete a demonstration of DGIC. at a municipal wastewater site. In this instance, our DGI. solution will be used to reduce hydrogen sulfide and the wastewater, the oxygenation to reduce corrosion inside the wastewater lines this application will demonstrate DGI.'s capability to extend the lifecycle of aging infrastructure and eliminates the need for costly maintenance activities following the successful demonstration of our technology at a US shrimp farming facility last year, we are in discussions with the owners of that same facility to incorporate DGI. into their commercial scale plant stack Raceway system.
The client is expecting to have their aquaculture system functional functional by the end of the year. And we are in the process of providing a proposal for a DGI. system that will meet the precise needs of this ag environment. Additionally, for aquaculture, we are in discussions with potential new ag clients in the US that is considering incorporating DGI. into a greenfield fish hatchery site in the western states. There are many other target markets of interest for DGIN., including pulp and paper, food, food and beverage, chemical, petrochemical and horticulture, and we look forward to addressing these markets prospectively.
On the marketing front, we have been increasing our reference efforts to communicate the benefits of DGI. to targeted end markets and customers, and we will be present at additional conferences later this year based on our effective backlog today, the business development activities we are pursuing in our previously noted expectations for fuel Kim, we 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. And this base case outlook excludes any material contributions from EGI. as we are still in the early stages of commercialization, any significant contributions to ATC from the above referenced EPA regulations and the impact of material business development and business development activities for fuel come in closing, I want to thank the Fuel Tech team for their continued contributions to our business is their hard work, passion and dedication that drive our ability to be successful as a company.
Additionally, I thank our shareholders for their continued support. We continue to expect that 2024 will be an important year in the growth and development and evolution of Fuel Tech. And we look forward to keeping you apprised of our progress.
Now I'd like to turn the call over to Ellen.

Ellen Albrecht

Thank you, Vince, and good morning, everyone. For the quarter, consolidated revenues declined to $5 million from $7.3 million in last year's first quarter, reflecting declines in both the APC and FUEL com segments from the prior year period. Apc segment revenue decreased to $2.3 million from $3.6 million in the first quarter of 2023, primarily related to customer related delays and project execution. Yoakum segment revenue declined to $2.6 million from $3.7 million in the first quarter of 2023.
Due to a decline in electrical generation demand and unscheduled plant outages. Consolidated gross margins for the first quarter were fixed were 41% of revenues, an increase from 38% in the first quarter of 2023, reflecting an increase in APC segment gross margin to 38% of segment revenues from 27% in the prior year period due in large part to the mix of projects and services executed during the quarter.
Com segment gross margin declined to 43% from 49% in the first quarter of 2023. As a direct result of lower segment revenue. We expect fuel segment margins to return to historical levels as we continue throughout the year.
Consolidated APC segment backlog at March 31, was $6.2 million, down from a backlog of $7.5 million at December 31, 2023. Backlog at March 31, 2024 included $1.8 million of domestically delivered project backlog and $4.4 million of foreign delivered project backlog compared to $2.6 million of domestically delivered project backlog and $4.9 million of foreign delivered project backlog at December 31st. We expect that $6 million of current consolidated backlog for the APC segment will be recognized in the next 12 months.
Sg&a expenses increased slightly to $3.3 million from $3.2 million in Q1 of 2023, reflecting higher employee related expenditures. Given the decline in revenue, SG&A as a percentage of revenue in the 2024 first quarter increased to 68% from 45% and the same prior year period. Research and development expenses for the first quarter rose to $376,000 from $218,000 in the same period a year ago, mainly reflecting our ongoing investment in the development of new technologies to expand our product offerings into the water and wastewater treatment markets and more specifically, our DGI. systems.
Our operating loss was $1.7 million compared to a loss of $658,000 in last year's first quarter, reflecting a reduction in overall revenue, a shift in margin contribution from product mix and slightly higher operating expenses for the quarter, we continued to take advantage of the favorable interest rate environment and as of March 31, have invested more than $30 million in held to maturity debt securities and money market funds.
This generated $311,000 of interest income in the first quarter compared to $339,000 in the prior year period. Our net income for the quarter was $281,000 or $0.01 per share compared to a net loss of $414,000 or a loss of $0.01 per share in the same period one year ago. Net income for the first quarter of 2024 included an extraordinary other income amount of $1.7 million related to the recording of income associated with the expected receipt of the employee retention credit during the quarter as compared to an other expense of $90,000 in last year's first quarter.
For those of you not familiar with the employee retention credit, the CARES Act established by the U.S. government was enacted to provide certain relief as a result of the COVID-19 pandemic. This tax relief, along with other stimulus measured measures, allowed for employers to claim a refundable tax credit against the employer share of Social Security tax for qualifying periods in 2020 and 2021, subject to certain criteria under the provision of the CARES Act CARES Act, the company was eligible for refunds for a refundable employee retention credit, which was claimed in Q1 of 2024.
Adjusted EBITDA loss was $1.5 million compared to an adjusted EBITDA loss of $569,000 in the same period last.
Lastly, moving to the balance sheet, our financial condition remains very strong. As of March 31, we had cash and cash equivalents of $11.4 million and short and long-term investments totaling $20.7 million. Working capital was $27.7 million or $0.90 per share. Stockholders' equity was $44 million or $1.43 per share, and the company continues to have no outstanding debt.
To reiterate Vince's earlier comments, we remain confident in our ability to fuel our growth initiatives pursue new product and market opportunities and maintain our strong financial position, which we view as important as an important competitive advantage.
Given given ongoing ongoing macro economic uncertainties, we have a pipeline of supply of significant growth opportunities across the business segments that position us for positive growth in 2024.
I'll now turn the call back over to Vince.

Vincent Arnone

Thanks very much, Alan. I would like now to turn the call back to operator for questions.

Question and Answer Session

Operator

(Operator Instructions) Amit Dayal, H.C. Wainwright.

Amit Dayal

Good morning, everyone.

Vincent Arnone

Good morning.

Amit Dayal

So with respect to, you know, I know weather related issues, et cetera, have caused a little bit of weakness in 1Q, but overall, have we been adding Nucor so much? It looks like in the CAM segment, you may have added new customers just and then maybe if you could give us some color on how that part of the business is holding up in terms of new customer additions, et cetera.

Vincent Arnone

Right. I would say on in terms of adding new customers this year is really in terms of those types of opportunities. We're seeing more of them this year than we have in a little while, which is which is great for us to see at this point in time. As I mentioned, as part of my script, we just signed an order for a demonstration that will literally be starting in about two weeks' time. And so we're encouraged about that opportunity at the large coal-fired unit in the Western U.S., and we're in discussions with a second on coal-fired unit, a similar geographic location, coal-fired, as I said, and also a large unit and that possibly could start some time in Q3. And then on top of that, we've had some discussions with some some owners of biomass fire fired boiler units as well.
That also could be new business opportunities.
So I would say this year is really the 1st year in a while that we're seeing a larger scale of new business opportunity. We have not seen that in the past couple of years.
So it's a new outlook for us on it's driven by pressures for for those remaining coal-fired utilities to reduce their cost structure. It's driven by the need for some units to be available to run as support power for certain regions of the country and other drivers as well.
So I'm very pleased that we're seeing the the Camtek opportunities are coming our direction. They are very solid gross margin generating business opportunities. And I would love to be able to see our total revenue from Camtek kick back up to it was four or five years ago. I'm not saying it's going to get there, but any additional debt that we can bring on board right now, particularly in a coal-fired unit, is a nice benefit for us.
So long answer to your question.

Amit Dayal

Pultrusion business, you also more than usual. So the increase in electricity demand stemming from AI and data needs, et cetera. That is underway at a macro level. Again, you have a balance sheet. I know your immediate products may not directly cater to those opportunities. But are you thinking about any acquisition opportunities that brings you closer to those types of opportunities going forward?

Vincent Arnone

Nothing that we're looking at right now I mean when we when we talk about some of those macroeconomic trends and it ultimately is supporting some of the, I'll call it lengthening of the life of the utilization of a lot of the coal-fired units that in its own right, is going to hopefully mean additional business for Fuel Tech in our current technology suite. So we're looking at that macroeconomic trend in a favorable light as we sit here today, but we aren't necessarily pursuing any acquisitions that would provide us the ability to address other needs, if you will, that are driven by additional power demand, whether it be AI or data centers and the like. But those trends are generally favorable for Fuel Tech as are the trends in support of some additional environmental regulations.

Amit Dayal

Understood. Thank you. And just last one for me. On the DGI. side, it looks like you potentially could convert the pilot, generate a shrimp farm into a customer like how big should retain these order sizes can be when you when deploy no sort of a full system on full-scale offering for these types of per circuit prepared.

Vincent Arnone

To answer your question, yes, we are hopeful that we're able to go ahead and convert that demonstration, which was indeed successful to a commercial sale on.
We're looking at putting the configuration together for a DGIDGI. system that will meet the needs of a commercial scale system for for this spring farm owner, if you will, on it right now, I probably see this as a capital sale. I'm just going to give you a ballpark in terms of what this system would be to offer debt in. I'd say $0.5 million to $1 million in terms of a capital sale of EGI. system, just to give you a ballpark range.

Amit Dayal

Okay. And when these are deployed wins and do they also do attach sort of maintenance type of contracts or in additional revenues?

Vincent Arnone

To the extent we're able to build in support of aftermarket contracts, we will I still think we have a little bit to learn relative to the deployment of these systems at sites and the ongoing necessary maintenance that's going to be required.
We're not expecting that it's going to be extensive on our customer sites once it's up and running.
But to the extent that we can provide ongoing support on a quarterly basis or whatever is needed via a com contracts that support that activity, we'll definitely look to do so.

Amit Dayal

Okay. So that's elements and distinguish.

Vincent Arnone

I mean, thank you so much.

Operator

(Operator Instructions) Marc Silk, Silk Investment Advisors.

Marc Silk

Hi, Vince. Thanks for taking my questions.

Vincent Arnone

Mark, no problem. How are you doing?

Marc Silk

Fine, thank you.
On the APC delays, was that is that focus? Is that really basically because of the court issues or this is just a regular delay?

Vincent Arnone

I would say, more regular delays. Yes, not necessarily related to the core issues because with the business that we were expecting to pull into 2024 we really didn't factor in anything that was going to be regulatory driven.
That would be what I would call incremental business opportunity for us, and we'll know more about that a little bit later on this year.
So I would I would call the delays just normal delays in both project execution and in coming to contract with certain potential customers.

Marc Silk

Okay.
That's encouraging. And then, in your guidance, you're basically not dumb putting in there any positive court rulings?

Vincent Arnone

Correct.

Marc Silk

So that could be a risk rather than the upside. Okay. Directory on the fuel cam that so that's actually exciting that the that's coming to life a little bit is also you laid out really the reasons, but another one I want to know is it because also that not many other competitors anymore, but just because it's just not a growing industry?

Vincent Arnone

Actually for this particular technology application market, there really aren't any competitors for what we do specifically with fuel Cam, but it requires a specific customer need for us to be utilized and on our program is not inexpensive.
But if we offer a client, the ability to keep their units running during high demand times and by perhaps using a lesser quality coal or difficult to burn coal, say, recover the cost of our program very, very quickly.
So no one else does what we do with this technology, but the very specific need isn't necessarily out there at all coal-fired units.

Marc Silk

Okay. That's great. And then the I'm intrigued by this municipal wastewater side. Can you talk more of this? Like what are they looking for? What are you bringing to the table? That's the first question and then we'll go from there.

Vincent Arnone

Yes. So the site we're looking to demonstrate it is it's again, it's a music municipal plant. And in certain stages of the treatment process, there are areas whereby the of the wastewater becomes less than oxygenated ore has legs at less oxygen that it needs to go ahead and maintain what I would call good quality, water and went into this part of the application. When it doesn't have the oxygen needs, it actually create hydrogen sulfide and overtime hydrogen sulfide is going to erode the insides of those lines so the application we're working on specifically attempting to keep these these these fees lines as part of the wastewater treatment plant keeps them oxygenated at specific levels whereby they they don't create any detrimental effects to that piping system.

Marc Silk

So how do they find you by the way?

Vincent Arnone

How do these guys find that? That's a good question.
Actually. They these folks on actually were a contact of bill Decker bills. The gentleman we hired last year to, um, to help us support the development of EGI. So these folks on that we're working with our from our well established in the water and wastewater treatment industry. And hopefully they will turn out to be a good partner Fuel Tech's prospectively.

Marc Silk

So the interesting thing is we know in this apparel, these versus private industry is not a competitive, let's say, competition, right? So are you able to kind of work with them and say, listen, we want other municipalities to watch this much more of an open trial on just because it's going to benefit really any water miss any missteps, especially in the country?

Vincent Arnone

Yes, we're really we're taking this step-by-step, right? But what we need is a first success. And once we have the first success, then we'll be able to work with that are documented, science-based, data-driven results. And then we could if we could expand on on on that our documentation, if you will, with other valued municipalities. So I think we need to take the first step here and ensure we have a successful demonstration and then we move forward from there.

Marc Silk

Okay. And then I know last call someone was asking about insider buying. So hopefully it sounds like you're getting your ducks lined up. So hopefully we see some more insider buying and good luck going forward.

Vincent Arnone

Mark, thank you very much.

Operator

We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Noni for closing comments.

Vincent Arnone

Thank you, operator. I'd like to thank everyone that joined the call today. I'd like to thank the entirety of the Fuel Tech team for their support on Fuel Tech's activities. And as usual, thank all of our stakeholders, shareholders for their continued support of Fuel Tech.
Hi, everyone.
Have a great day and we'll talk to you again soon. Thank you.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time.
And thank you for your participation.