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Edited Transcript of FTEK earnings conference call or presentation 14-Aug-19 2:00pm GMT

Q2 2019 Fuel Tech Inc Earnings Call

WARRENVILLE Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Fuel Tech Inc earnings conference call or presentation Wednesday, August 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Devin Sullivan

The Equity Group, Inc. - IR

* James M. Pach

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

* Vincent J. Arnone

Fuel Tech, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Amit Dayal

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

* Peter Enderlin

MAZ Capital Advisors, LLC - Portfolio Manager

* William D. Bremer

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

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Presentation

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Operator [1]

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Greetings, and welcome to the Fuel Tech 2019 Second Quarter Financial Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you. You may begin.

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Devin Sullivan, The Equity Group, Inc. - IR [2]

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Thank you, Jessie, and good morning, everyone. Thank you for joining us today for Fuel Tech's 2019 Second 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. The speakers on today's call 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 in this call, except for historical information, are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended, which are pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect Fuel Tech's current expectations regarding future growth, results of operations, cash flows, performance and business prospects and opportunities as well as assumptions made by and information currently available to our company's management.

Fuel Tech has tried to identify forward-looking statements by using words such as anticipate, believe, plan, expect, estimate, intend, will and similar expressions, but these words are not the exclusive means of identifying forward-looking statements.

These statements are based on information currently available to Fuel Tech and are subject to various risks, uncertainties and other factors, including, but not limited to, those discussed in Fuel Tech's annual report on Form 10-K in Item 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.

With that said, I'd now like to turn the call over to Vince Arnone. Vince, please go ahead.

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

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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 Controller.

Our second quarter results did not meet our expectations, predominantly due to an extended period of sluggish new APC business awards that I will address in more detail in a few minutes.

Although, we did report a net loss from continuing operations of $843,000 for the quarter, our soon-to-be closed China operations were responsible for $540,000 of this operating loss. Absent China losses and onetime charges, the financial results from our core operations was a loss of $300,000, slightly larger than the $100,000 loss from operations we reported in the first quarter of this year.

We continue to make progress towards the suspension of our China operations, and we expect that the activities associated with this suspension will be substantially completed in the second half of the year.

As discussed on last quarter's call, 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 fieldwork activities at a few customer sites and on collecting the remainder of our outstanding accounts receivable.

We had strong cash collections from China during the second quarter. And our outstanding accounts receivable in China at June 30, 2019, declined by $2.4 million from March 31 of this year. As we wind down these operations, we will have removed approximately $2 million in annual operating losses from our profit and loss statement.

APC contract activity has been slower than expected as some of the contracts we had hoped to secure during the first half of the year have been delayed or canceled by the potential clients and in a couple of instances, lost to competing bids. Our sales pipeline still remains active. And in the aggregate, on a global basis, we are tracking approximately $80 million to $100 million in potential project work. We do expect to close on new contract awards during the third quarter and the remainder of the year.

On a more positive note, our FUEL CHEM business performed quite well during the second quarter with an increase in revenue and profitability versus the prior year. During the quarter, we successfully installed our FUEL CHEM program on 2 additional coal-fired units at a domestic utility, and this contributed to our solid second quarter performance.

With respect to the second half of 2019, we expect FUEL CHEM's performance to show a modest improvement over the first half of the year. We are continuing to pursue FUEL CHEM applications in geographies outside of the U.S.: 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 the primary source of fuel, power demand and related pricing is high, and where slagging and fouling is an issue.

Moving down the profit and loss statement. Our SG&A declined by approximately $300,000 from Q2 of 2018. The restructuring efforts completed over these past 3 years have provided us with an SG&A profile that will mitigate operating losses in times of weaker revenue generation or can be leveraged to generate operating income in periods where we have improved revenue generation.

Consolidated gross margin was approximately 44% in the second quarter of 2019, up significantly from Q2 of 2018, reflecting the mix between APC and FUEL CHEM revenues recognized during the quarter and to an improvement in APC gross margin to 38% from 25% in Q2 of this year.

Total cash was approximately $14.9 million at the end of the quarter, and we remain debt free. Our restricted cash balance is now reduced, reflecting our new credit agreements with BMO Harris and a reduction in outstanding letters of credit with existing customers.

Jim will discuss the details of this new arrangement, shortly. Now I'd like to take a few minutes to discuss our global APC platform as it is this area that has fallen short of our expectations thus far this year.

As mentioned previously, domestically, we have been negatively impacted by APC project delays, cancellations and by one project loss. We have been in the APC business now for 3 decades and none of the activities that we experienced in the first half of this year are unusual. They did, however, impact us at a time when we were expecting a general increase in overall business activity.

That said, gas turbine demands for SCR and ULTRA systems have steadily increased 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 cycle plant projects such as the combined heat and power upgrades in many universities and large hospital complexes.

Here, we are focused on building our relationships with package boiler suppliers, also to supply SCR and ULTRA systems. The combined heat and power opportunities also include industrial plants where processed steam is needed at a plant site 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 has been the steel industry where we are seeing a trending in this country, whereby demand for higher-quality metals is driving both greenfield projects in connection with new line and plant construction and retrofits for other entities that have 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-controlled technology on certain sources of emissions.

In Southern California, as an example, pursuant to recent directives from the South Coast Air Quality Management District, which includes portion of Los Angeles, Riverside and San Bernardino counties and all of Orange County, individual units may require modifications to existing SCR systems as well as new SCRs for smaller boiler applications. Effective sources include steel processing, refineries, waste incinerators and turbines for power generation.

With respect to our ULTRA system, we are now performing our second demonstration for a small ULTRA system in the Los Angeles area to replace existing direct urea injecting -- injection systems because of their poor performance.

In Europe, BREF, which is the best available reference technology, guidelines that were issued in August 2017, have a compliance time line through 2020. The guidelines reduced target NOx emissions from current levels. It is generally believed that this time line will be extended by 1 to 3 years as adoption is slow and dependent on funding sources, especially in Eastern European countries.

The level of new inquiries thus far in 2019 in the European market remains high and have generally come from clients in Western Europe pursuing projects both in Europe and internationally. The ULTRA inquiries have been limited to new units within and outside Europe and being supplied by European companies active in the supply of gas turbines and heat recovery steam generators.

We received an award for an ULTRA project earlier this year for delivery to Hong Kong. The SCR system inquiries have included new or upgraded industrial units, both waste energy and biomass and potential new units outside of Europe being supplied by European EPCA boiler companies and for upgrades to ammonia delivery systems on utility boilers. In the U.K., there is some uncertainty in compliance activity due to Brexit.

We continue to pursue opportunities associated with our licensing agreements in India. Although, as we have mentioned in prior quarters, the Indian government backed off from initial compliance time lines and prioritized remediation targets in order of importance. First, particulate matter; then SOx; and finally, NOx.

While we believe that this will present an opportunity for Fuel Tech to capitalize on our Flue Gas Conditioning technology in that marketplace and showcase it as a low-cost, highly effective particulate-control technology compared to ESP and bag filter hybrid systems, adoption of this technology will likely be slow.

The level of inquiry for SNCR systems has picked up in 2019 as technology demonstrations are now concluded at NTPC plants. If the Indian government maintains the requirement for pre-2016 units to attain a 300-milligram per normal cubic meter NOx target, we would expect to see RFQs for SNCR to commence before the end of the year.

Regarding our Dissolved Gas Infusion Water Technology business, we continue to advance conversations with multiple potential customers across a variety of industries, with a primary focus currently on the oil and gas industry and the pulp and paper industry.

In addition to our own discovery and selling efforts, we are looking to add subject matter experts on a consulting basis to aid in the identification of specific problems that our DGI system can address. Our overall investment in this venture has been modest thus far, however, incremental investment will be necessary to ensure that we move forward with pace.

The Permian Basin is now the largest oil production region in the world and the fate for produced water is either reused or -- 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.

The specific water issues that DGI can address include: total suspended solids; hydrogen sulfide and metals removal; along with keeping basins aerobic over time.

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 incorporating DGI technology as part of the customers' new water treatment facility, which is currently in the planning and engineering phase.

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, and we had $10.4 million in global cash at the end of the second quarter of 2018.

Additionally, we were uncertain as to the source of bookings for the remainder of 2018, and we were on the verge of taking the decision to wind down our operation in China.

Today, liquidity has stabilized. We ended the second quarter of 2019 with approximately $15 million in global cash, and our balance sheet remains strong. The wind down of our China operation has gone successfully thus far. We will have eliminated approximately $2 million in annual operating losses from our profit and loss statement, and we are likely to have $2 million to $3 million in cash available to repatriate.

We successfully installed FUEL CHEM at 2 new coal-fired units this year and, demand and weather permitting, these units will run for a good portion of the summer and winter months.

Lastly, in general, the U.S. economy remains favorable for the further expansion of business, and the U.S. regulatory landscape has become modestly more favorable for fossil fuels.

All of that said. We recognize and accept the near-term challenges that we have at our APC business, but we remain confident in the longer-term opportunity landscape.

For 2019, although our outlook for generating income from continuing operations this year has shifted as a result of our APC performance, the operating leverage that we have created via our restructuring efforts over these past few years, will enable us to weather our current delay in orders. Our goal as a company and as a team is the generation of sustained profitability and cash flow, and I remain confident that the Fuel Tech team will be successful in the achievement of this goal.

Now I'll turn things over to Jim for a discussion of our financial results. Jim, please go ahead.

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

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Thanks, Vince, and good morning, everyone. As Vince noted, our Q2 results were impacted by losses at our China operations, totaling $540,000 and slower-than-expected new APC award activity during the first half of this year. Excluding China, our consolidated loss from continuing operations was approximately $0.3 million.

With respect to the top line, second quarter revenues declined to $8.9 million from $11.8 million, reflecting a $3.6 million revenue decline at APC partially offset by a $0.7 million increase in revenues at FUEL CHEM as compared to last year's second quarter. Lower APC revenues were the result of a decline in backlog entering the second quarter and slower-than-expected new APC contract awards. As Vince note -- has noted and mentioned, we are pursuing several avenues for new APC business in the U.S.

Consolidated gross margin was 43.6% of revenues compared to 31.4% of revenues in Q2 2018, primarily due to mix in revenues between APC and FUEL CHEM. APC gross margin was $1.8 million or 38.1% of revenues as compared to $2.1 million or 24.7% in Q2 2018. APC results for Q2 2019 included no revenues from Beijing Fuel Tech and an operating loss of $0.5 million. In Q2 2018, revenues from Beijing Fuel Tech were approximately $0.7 million with an operating loss of approximately $0.6 million.

FUEL CHEM's segment revenues improved to $4.1 million from $3.4 million in Q2 2018, reflecting the addition of a new coal-fired unit during the second quarter that included an approximately $0.9 million order for equipment and installation that was recognized as revenue. Segment gross margin was 49.9% in Q2 2019 and $47.8 million (sic) [47.8%] in Q2 2018. For the full year 2019, we are targeting a blended gross margin of APC and FUEL CHEM of between 35% and 40%, excluding the impact of China.

We continue to focus on cost control, and our SG&A for Q2 reflects that. SG&A for Q2 of 2019 was $4.5 million, a decline of 6.5% from Q2 2018. We are on track to meet our full year 2019 objective of SG&A ranging between $15 million and $16 million, which includes China -- which excludes China SG&A and restructuring costs of approximately $1.4 million, which we expect to report as discontinued operations following the anticipated completion of the suspension of our APC activities in that geography.

R&D expenses of $0.2 million were slightly lower than last year's second quarter. R&D for 2019 is expected to be comparable to $1.1 million we reported in 2018, with higher spending driven in a large part by our development of the Dissolved Gas Infusion technology.

Our net loss from continuing operations was $936,000 or $0.04 per diluted share compared to a net loss from continuing operations of $1.7 million or $0.07 per diluted share in last year's second quarter. Net loss from continuing operations in Q2 2018 (sic) [2019] included a noncash intangible assets abandonment charge of approximately $317,000.

Excluding the impact of operating losses at Beijing Fuel Tech, Fuel Tech's net loss from continuing operations for Q2 2019 was $0.4 million or $0.02 per diluted share.

Given our cumulative net operating losses of $28.2 million at June 30, 2019, which covers several geographies, we continue to expect that our income tax expense for 2019 will be at or near $0. And this figure includes China NOLs, which we will maintain, given that we are preserving the legal entity in China.

Our balance sheet at June 30, 2019, remained debt free, and we had cash and cash equivalents of $14.9 million, including restricted cash of $3.3 million. During the second quarter, we entered into a cash collateral agreement with BMO Harris to facilitate the issuance of our standby letters of credit for our EPC business. This agreement requires us to provide cash collateral of 105% of the aggregate face value of our outstanding standby letters of credit.

Upon signing this arrangement, we reduced our JP Morgan Chase facility in half to $2.75 million, resulting in the reduction of the restricted cash during the quarter. We anticipate migrating the outstanding letters of credit with JP Morgan to BMO Harris during the third quarter, and we'll terminate our facility with JP Morgan.

The overall reduction of restricted cash since December 31, 2018, is a reduction of this new -- is a reflection of this new banking arrangement as well as reductions in our outstanding letters of credit with existing customers. Our working capital balance at June 30, 2019, was $21.2 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 June 30, 2019, down from $5.5 million of trade accounts receivable outstanding as of March 31. Receivables at June 30, 2019 are in offset by a valuation allowance of $1.1 million.

We reduced our trade accounts receivable balance in China by $2.4 million during the quarter, which in -- is comprised of cash collection activities, offset by invoicing activity on the remaining projects in that geography. 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 $1.32. Our tangible book value per share was $1.20, and our working capital per share was $0.88 at June 30, 2019.

In addition, we have approximately $0.69 per share in deferred tax liabilities 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.

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

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Thank you, Jim. Operator, let's please go ahead and open the line for Q&A. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Amit Dayal with H.C. Wainwright.

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

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So with respect to Air Pollution Control business, you highlighted various initiatives to, sort of, revive growth over here. What is the time line you think some of these efforts will take to begin reflecting either in the backlog or in the financials?

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

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Right. From a time line perspective, Amit, obviously, right now, we're in the middle of Q3 time frame, right? As I noted in my commentary, we are expecting some contract bookings to come our way here in Q3 and before the end of the year.

Difficult to project a dollar value on those items, but what we've seen largely is a push towards, what I would call, some of our larger dollar value contract opportunities, a push towards late this year or into early 2020 time frame. So we are going to see a little bit of a push of revenue generation from APC from 2019 into 2020 time frame. At least that's the way we're looking at it right now.

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

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All right. Understood.

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

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But the -- again, the opportunity landscape that we are seeing is still robust. So we're not concerned by some of the timing delays that we're seeing thus far. However, there are delays.

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

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Understood. And your comments regarding sort of losing certain bids. I mean how should we read into this? Is there sort of a more price-sensitive environment in the industry right now? Or are competitors, like, just trying to digest whatever margins they can and just to -- win on pricing basis? Like how should we read into some of these bids not coming through for you guys?

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

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Understood. And Amit, I would read it as not solely that issue. It's actually a little bit of a mix, what I would call, specifically to Fuel Tech. One example I'll give you is that one of the larger projects that we were actually targeting to win and to have significant impact on 2019 was actually a larger ESP retrofit project bid.

And ultimately, what transpired here was the plant owners ended up making a decision to go with a nonunion bid for a union plant as opposed to taking a union contractor bid for that union plant. And so it was completely, basically, a surprise to us in terms of how that ended up coming down because we were well aligned with the, what I would call, the primary union contractor for the facility, okay?

So it's not like we were going up on an apples-to-apples basis with competitor for this particular bid. It was a completely different choice in terms of how that customer chose to move forward with their selection of a contractor. So that was -- that's one example, but that's actually a larger contract value item.

In Europe, we have come across at least one situation whereby the competitive pricing issue was something that we had to address. And we found -- again, and in certain markets, you will find this, on certain bids you will find this. Whereby competitors in a marketplace solely to bring work in-house will put price points out there that are either at cost or below cost.

And we're not in a position here today whereby we're looking to go ahead and -- engaged at projects that are cost or below cost. It's just not worth our effort to pursue that sort of work.

So we'll take decisions on a project-by-project basis if we think a project is strategic to us relative to maintaining a long-term relationship with a customer or developing a new relationship with a customer. But just on a project-by-project basis, independent of a strategic reason, we're not going to be bidding at 0 or below 0 gross margin.

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

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Fair enough. I mean it makes sense. Yes. This $8 million in backlog, Vince. Is this to be recognized before the end of the year? Or what's the time frame on delivering this backlog?

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

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I would say, about 3/4 of that is going to come into 2019, Amit. And then obviously, we have to replenish.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [10]

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Right. And just finally on the FUEL CHEM side. This $4 million sort of run rate levels for the quarter, is this what we should expect? I know you've previously highlighted that that depends on consumption on the consumer -- on the customer side. But is this where you think, at least on a quarterly basis, around $4 million is a steady state for you now?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [11]

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Actually, the FUEL CHEM business is seasonal. We see better performance in Q3 and in Q1 just due to the temperature extremes, if you will. So generally speaking, what we saw as an annualized revenue run rate in that $17 million to $18 million range is what we would expect to continue with some higher revenue in Q3 and in Q1, slightly lower in Q2 and Q4, okay? So yes, we would expect to see, for Q3 as an example, we would expect to see a number larger than the $4 million number in Q3 versus what we experienced in Q2.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [12]

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Can you remind us how many customers on the FUEL CHEM side do we have right now?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [13]

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In terms of, what I would call, active feeding customers today, I'd say approximately 15 active feeding customers today.

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Operator [14]

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Our next question comes from Pete Enderlin with MAZ Partners.

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

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So the first question is, sort of simplistically speaking, why did it take so long to close the China operations? It's still not closed quite. And in another words, what would have been the downside of just basically, abruptly shutting it down? I'm sure there was some downsides, but can you explain that a little more?

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

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Absolutely, Pete. Obviously, Beijing Fuel Tech was an active, viable business. Full employee team engaging in sales, project execution and various administrative expenses. So our objective was to take a systematic way of winding down the business, whereby we still had to meet our customer requirements that were under contract, so we had to complete work there.

Point number two, we had been carrying a sizable accounts receivable balance for our China business for quite some time. So very important for us, not to strand those receivables there and put active effort for us to go ahead and collect as much as we can before completely looking to shut down the operation. And thirdly, ensuring that we did take care of our longer-term Beijing Fuel Tech employees in the proper way.

So 3 factors, but it wasn't as simple as saying, as of x date, we're going to look to close down the operations, shut down the legal entity because we had contract exposure, legal requirement to fill contract requirements, significant outstanding accounts receivable that we were not going to leave stranded. And so we wanted to ensure that we wound this down in the correct way. So that's why it's taken a little bit longer than one might think. Does that help?

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [17]

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Are those -- the remaining receivables, any of those at risk at this point?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [18]

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Of the $3 million that Jim mentioned that we have outstanding today, we actually do have a reserve on that $3 million of about 1/3 of that amount, okay? So net-net balance of what's outstanding is around USD 2 million.

Today, we have collection efforts in place that I had mentioned in my script, whereby we're looking to have, what I would call, excess or remaining cash in China of somewhere in the $2 million to $3 million range. So we're pursuing efforts to collect as much of that outstanding AR, including what -- some pieces of what we have reserved before we stop our efforts fully on the AR collection side.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [19]

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Yes. You lost some competing bids in the APC pipeline. To whom? Can you give us some explanation or details on that?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [20]

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Without giving specific names --

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [21]

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Why not? Why can't you give --?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [22]

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-- we have obviously -- we have multiple competitors for our different technologies. As I was just mentioning in my previous response to Amit's question on this ESP project award, we have 2 or 3 competitors that do ESP retrofit work in this country, and we see them on a recurring basis on bids. And sometimes they win, sometimes we win. So that's not unusual.

This particular bid that I was talking about was a little bit unique from our perspective in terms of how the bid ended up being awarded, okay? In Europe, there are a handful of companies that will provide SCR or SNCR technology to that customer base.

And so it's some of the same names. It -- and again, typically, it's a case whereby the awards will go back and forth across that competitive base. There aren't a large number of competitors. We have seen a reduction in the competitive landscape over this past 2, 3 years, generally, as the focus on fossil fuel has declined. So generally, it's a smaller competitive landscape, but we still have competition.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [23]

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Is it primarily or somewhat more in the ESP area rather than the emissions area, other than electrostatic?

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

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Generally in the U.S. I would say yes. Although, there is still competition for SCR and SNCR. In Europe, where -- we're apt to find, in general, a little bit more overall competition, in general.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [25]

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On the $80 million to $100 million pipeline, can you give a little -- sort of a overall breakdown or maybe even some detail on how that looks by verticals? Also between coal and gas? And maybe geographically as well? Anything you can give us that would help understand the potential out there?

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

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Right. So when we talk about pipeline, it's basically a list of project opportunities that will cover a -- that actually goes out to an immediate term to a sort of a 5-year landscape of opportunity. And it will still largely be a domestic U.S.-dominated pipeline of projects because still, the majority of our business is here. It covers all of our technology landscape and both power generation and a variety of industries as well, as we look out over this, call it, immediate term to 5-year time horizon. So difficult to give much more details than that, Pete.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [27]

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Okay. Can you help us understand the current state of play with respect to the clean air rules and modification by the EPA for power plants? You said there's some sort of easing going on, but -- expand on that a little bit?

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

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Yes. Generally speaking the -- what happened a couple of months ago was the former Clean Power Plan that was put in place was actually removed from being effective. New government is actually putting in regulation that is -- it's generally more fossil fuel favorable, generally speaking.

Now I can't say specifically that it's going to drive a material uptick in business. When I make the comment -- I make the comment to be able to say that, it's not going to detract us from future business opportunities, okay? So that's just the general trend, at least within this current governmental regime.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [29]

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And does it, in any way possibly, improve the prospect or decrease the rate of decline for coal as opposed to natural gas?

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

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Yes. That's a -- I wish I had a better answer, or a more specific answer to that, Pete. It's difficult to predict, right? Coal has gone through a very significant impact over this 5- to 8-year time horizon. And even though, there might be a, call it, a favorable regulatory landscape, that doesn't mean that there still isn't going to be pressure on coal specifically, right?

We've seen a significant fundamental change towards basically natural gas now being used at levels as a power generation source that were only seen by coal 5 to 8 years ago. Now natural gas is being used at that, call it, 45% fuel utilization rate for power gen. Coal is now back down to the upper 20s or around 30%, and the renewables are providing the remainder.

So we've gone through a fundamental shift already. Natural gas prices are still extremely low. Absent something that changes the outlook on natural gas from a pricing perspective, I'm not so sure we see anything change on the coal side, Pete.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [31]

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Okay. And then one last one. What would it take to dramatically accelerate the pace of development of your water technology? In other words, sort of like what is the main limiting factor right now?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [32]

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My perspective, Pete, it's having in our hands our first or second successful internal demonstration that we can use then as a basis for expanding into specific market applications.

Once we have in our hands and we better understand, call it, the application base, it'll give us the impetus to go ahead and look to invest more in the expansion of the proliferation of the technology across different industries, right?

Today, we're not trying to attack multiple industries. There's too much there for us to be able to focus on. So just focusing on pulp and paper, oil and gas, it -- that's a lot for us to handle today based on how we're structured.

But we took a -- took the approach with our investment in water that we were going to invest modestly. Particularly, given our -- the financial condition that we've been in here in the recent near term, but our investment has been modest. We have not hired outside individuals to go ahead and move this forward yet. We've purchased demonstration systems that will enable us to go to market and prove out technology, and that's all we've done thus far.

There are additional investments that we can make to help this move forward faster as well. I mentioned very specific industry-related subject matter experts that, we believe, will help us be more expedient in market penetration. Those we were looking at -- we are looking at right now, we're going to have 1 to 2 individuals onboard here that will be market specific by the end of Q3 or early in Q4, but they will help us expedite the penetration of markets.

We realize that we need to move water along more expediently, and we're going to do everything that we can, given our financial situation, to make that happen.

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Operator [33]

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And the next question is from the line of William Bremer with Vanquish Capital.

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William D. Bremer, Vanquish Capital Group, LLC - CEO of Vanquish Capital Management, Inc. [34]

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My first question, I'd like to get a sense of what percent of the backlog of that $8 million is from your direct sales force versus your distribution partners.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [35]

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It's all from our direct sales force from my perspective. We don't have -- our representative network is solely contact-based. Our direct sales force handles all of the sales execution activity and the relationship, ultimately. So I'd say, 100% of that amount is related to direct sales force, and that's the way we've operated, historically.

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William D. Bremer, Vanquish Capital Group, LLC - CEO of Vanquish Capital Management, Inc. [36]

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Okay. So given the bookings or, I should say, limited bookings at this point that we have seen for quite some time, what changes have you been making primarily on your sales force?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [37]

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As we sit here today, I have every confidence in the world that sales force we have in-house is going to be able to go ahead and bring in the bookings that we need to move forward and revitalize our backlog.

As we're sitting here today, we're looking at perhaps changing out a sales rep or 2 or adding a sales rep or 2 in specific areas. But relative to internal direct sales force, no changes planned.

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William D. Bremer, Vanquish Capital Group, LLC - CEO of Vanquish Capital Management, Inc. [38]

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Can you give us an idea of how many sales individuals at this time this company has?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [39]

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Okay. Off the top of my head right now, it's at -- the number I'm going to give you is 8. And that includes APC and FUEL CHEM sales. It's 7 or 8.

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William D. Bremer, Vanquish Capital Group, LLC - CEO of Vanquish Capital Management, Inc. [40]

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All right. You definitely need to pick it up as we've seen the figures and the stock is definitely reflecting that lack of initiative we need to close some deals here.

Next question is on the Dissolved Gas Infusion. Can you give us a sense of what on the technology side still needs to be done? And are we still at one trailer? Or do we have possibly another in fabrication? Give us an update there.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [41]

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Right. Today, we still have one demonstration trailer, okay, that's outfitted and ready to go. From a technology development perspective, Bill, from my viewpoint, the only thing incremental that we could be doing today, call it, in advance of actually getting customer business, would be to put our heads together on what would I -- what I would call, an upscaled system or upscaled systems. Systems that have significantly greater capacity to go ahead and service larger bodies of water, okay?

Prior to doing that, okay, we wanted to get that first demonstration done first. But our internal team is giving thought to how that upscaled system might look and function as well. So -- but technically, that's, what I would call, the next focus as we sit here right now.

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William D. Bremer, Vanquish Capital Group, LLC - CEO of Vanquish Capital Management, Inc. [42]

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Okay. And I'm assuming based upon larger bodies of water, you're going to need multiple modular units at different spots, correct?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [43]

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That is a correct statement. In most cases we will be modular, and we will have multiple units. However, to be cost conscious, as we do look at some of the larger applications which are more than likely to come our way based upon our discussions with current customer base opportunities, we are still going to have to upscale from what we have in hand today, and we'll be able to do that.

It will still be modular. We will still require multiple units, but the units will be just much larger than we have in terms of a setup versus our demonstration system today.

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William D. Bremer, Vanquish Capital Group, LLC - CEO of Vanquish Capital Management, Inc. [44]

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Yes, no. That's my point is that do we have sufficient in a demonstration and pilot stage at this time to really have proof of concept.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [45]

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We do. We believe we do.

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William D. Bremer, Vanquish Capital Group, LLC - CEO of Vanquish Capital Management, Inc. [46]

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Okay. Wouldn't it be advantageous for us to utilize the balance sheet and have multiple pilots proceeding almost immediately?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [47]

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If -- Bill, if we have a chance to move forward with a couple of customers that are willing to go ahead and do demonstrations, we can have another system fabricated and ready to go within an 8- to 10-week time frame. It's not going to hold us back. We're not going to let that hold us back. If we have the opportunity to spend money to do a demonstration, we're going to spend the money. We won't hesitate.

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Operator [48]

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(Operator Instructions) Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mr. Arnone for any additional concluding comments.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [49]

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Thank you very much. I'd like to thank everyone for joining on the call today and for your interest in Fuel Tech. As I mentioned in my closing comments, I would like to reiterate that yes, we have been through a little bit of a slower period in APC bookings, however, I have every confidence in this Fuel Tech team that we're going to rebolster our APC project backlog here in the near term. I said our goals were sustained profitability and cash flow, and I'm confident that we will achieve that. Thanks, everybody, have a great day.

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Operator [50]

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Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.