Fuel Tech, Inc. (NASDAQ:FTEK) Q4 2023 Earnings Call Transcript
Fuel Tech, Inc. (NASDAQ:FTEK) Q4 2023 Earnings Call Transcript March 12, 2024
Fuel Tech, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Fuel Tech, Inc. Fourth Quarter and Full Year 2023 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Devin Sullivan, Managing Director of the Equity Group. Thank you. You may begin.
Devin Sullivan: Thank you, Melissa. Good morning, everyone, and thank you for joining us today for Fuel Tech's 2023 fourth quarter and full year 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 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 21E 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 in 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 conditions, 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.
Vince Arnone: Thank you, Devin. Good morning, and I'd like to thank everyone for joining us on the call today. We were pleased with our business progress along several fronts in 2023. Total revenue of $27.1 million was within our previous guidance range and represented our highest annual revenue level since 2019. Our APC business segment performed well, reflecting more than $8.3 million of new project awards during the year, and we ended the year with a backlog of $7.5 million at December 31, 2023. Further, we were pleased to announce the additional $2.1 million in new contract awards yesterday. We completed a successful trial of our dissolved gas infusion technology in an aquaculture setting, and we believe that we are well positioned to commercialize DGI in 2024.
And lastly, we continue to maintain a conservative cost profile, with SG&A expenses up modestly from 2022 levels and ended the year in a strong financial position with $33.4 million in cash and investments and no long-term debt. We are most heartened by the progress we have made in our DGI business initiative in 2023. Last month, we announced the publication of a white paper that details the benefits of deploying DGI for oxygen injection at a shrimp farm in the United States. As a reminder, our DGI technology involves the efficient transfer of high concentrations of gas into a body of water through a patent saturator and a patent-pending injection array to drive chemical or biological reactions, such as for wastewater treatment, odor control and PH adjustment, or for process improvements in industrial applications, or in this case, aquaculture.
Specifically, the use of DGI this location increased shrimp production compared to traditional aeration methods, and contributed to likely health improvements. Demand for shrimp is increasing globally, and inland shrimp farming is an important source to help meet the growing demand in a safe and sustainable manner, while reducing over fishing of the marine environment and lowering the overall carbon footprint by reducing transportation costs. By deploying DGI, producers now have an opportunity to improve stock health and yields while achieving more efficient operations immediately adjacent, to their customer locations. At present, we are utilizing DGI to deploy oxygen into bodies of water. However, we believe that DGI can be applicable for other gases as well such as, CO2 and Ozone.
DGI's benefits include the precise control of dissolved oxygen levels, for all process applications and ability to extend plant capacity without major capital expansion or capital outlay odor reduction, and minimal bubble formation for extended residence time. We believe that DGI can be applied across several end markets including pulp and paper, food and beverage, chemical or petrochemical, water and wastewater treatment, horticulture and aquaculture. As a follow up, to the publication of our DGI white paper, we presented our technology and favorable findings from our aquaculture demonstration at the Aquaculture America 2024, conference last month. This annual conference provides members and participants, with the opportunity to stay current with technical advancements and inspect the latest in products and services, in the aquaculture industry.
In recent months, in part driven by the interest generated after publishing and presenting our demonstration results, we have received a notable increase in inquiries regarding our DGI technology, from potential customers in multiple end markets including, municipal odor control, pH control, for -- municipal and industrial applications, agricultural applications and additional aquaculture applications. We are currently in negotiations, with potential customers regarding on-site demonstrations of DGI and we are targeting to sign our first commercial contract for DGI in 2024. Lastly, to further expedite the introduction of DGI into end markets, we have recently hired a former water and wastewater treatment executive on a consulting basis. This individual is well experienced in the application of Dissolved Gas Technologies and we look forward to his contributions over these next several months.
Let's now, please spend a few minutes discussing our FUEL CHEM and APC business segments. As we had expected, revenues for our FUEL CHEM segment declined from 2022 levels, due to the effects of warmer weather across the US, which impacted overall demand and related unit dispatch. However, segment gross margin was essentially unchanged for the year, and remain at historical levels. Our base FUEL CHEM unit count, remains intact as we enter 2024, and for the first time in a few years, I'm very pleased to say that we are currently pursuing multiple additional FUEL CHEM development opportunities, which could provide incremental revenue contribution in 2024 and beyond. These opportunities are for both coal and biomass fired boilers. For 2024, excluding any material incremental revenue from new business development activities, we would expect that FUEL CHEM revenue would remain at parity, with 2023.
With respect to international opportunities for the FUEL CHEM segment, we continue to follow the opportunity to expand the provision of our chemical technology in Mexico, be our partner in that country, to address the emissions created by the burning of high-sulfur fuel oil, which is being undertaken without the necessary environmental remediation, and at the expense of the health of surrounding communities. In 2023, we executed a two year extension to the program that we currently have in place at one facility. With the upcoming presidential election in Mexico in June of this year, we believe that political pressure is building in favor of our implementation of our FUEL CHEM program at additional facilities in this country. Our partner is currently in discussions with the state-owned utility CFE regarding the application of our technology at several units.
Now turning over to our APC segment. We benefited in 2023 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, independence of the potential impact of favorable regulatory outcomes, which I will discuss here shortly. We remain well positioned to take advantage of current industrial end market trends, which include plant capacity expansion across several industries, the incentivized use of small turbines to replace traditional less clean power generation, the development of the biocarbon industry, the continued emphasis on the decarbonization on a global basis and the focus on using our ULTRA System as a safe source of ammonia for SCRs at hospitals and universities across the US.
On the regulatory front, we continue to monitor progress related to the adoption of the US EPA's Cross-State Air Pollution Control rule 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. We have in fact received and responded to several requests for budgetary proposals, as customers prepare to address the upcoming compliance requirements as part of their capital budgeting requirements for 2024 and beyond. As discussed on previous calls, the rule currently obligates 23 states to reduce emissions of nitrogen oxides from power plants and certain industrial facilities to limit their impact on downwind states.
The ultimate timing of the effectiveness of the rule is uncertain because several upcoming effective states and sources have challenged the efficacy of EPA's proposed regulation in multiple cohorts and stays of the effectiveness of their – of the rule have been issued for many upwind states. Last month, oral arguments were presented to the Supreme Court by both parties and we will closely monitor the potential impact of the Supreme Court's ruling on whether to stay the rule for all states when it is issued later this year. In addition to the Good Neighbor rule, we are also watching the progress of EPA's rule for large municipal waste combustors, 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 their 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. Based on our effective backlog at year end, the business development activities we are pursuing and our previously noted expectations for FUEL CHEM, 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. This base case outlook excludes any material contributions from DGI, as we are still in the early stages of commercial commercialization, any significant contributions to APC from the above referenced EPA regulations and the impact of material business development activities for FUEL CHEM.
Now in closing, I want to take – to thank the Fuel Tech team for their contributions to the improvement of our business in 2023. It is their continued hard work, passion and dedication that drive our ability to be successful. Additionally, I thank our shareholders for their continued support. We expect that 2024 will be an important year in the growth and evolution of Fuel Tech and we look forward to keeping everyone apprised of our progress. With that said, I would now like to turn the call over to Ellen to talk about our financial statements. Ellen, please go ahead.
Ellen Albrecht: Thank you, Vince, and good morning, everyone. The primary takeaways from 2023 were improved total revenue, margin maintenance, a continuing focus on cost containment within the larger framework of building out our DGI business and a remarkably resilient balance sheet that allowed us to enter 2024 in a strong and secure financial position. We accomplished all of this while navigating some industry headwinds in our two primary business segments. I'll start off today by reviewing our fourth quarter results. For the quarter, consolidated revenues declined to $6.3 million from $7 million in last year's fourth quarter, reflecting declines in both the APC and fuel chem segments from the prior year period. APC segment revenue marginally decreased to $2.8 million from $2.9 million due primarily to the timing of execution on projects and services during the quarter.
The fuel chem segment revenue declined from $4.1 million to $3.6 million, mainly due to an expected decrease in dispatch electrical generation demand from the very high levels experienced in 2022 and changes in product and fuel usage. Consolidated growth margins for 2023 fourth quarter was 51% of revenues, a significant increase from 43% in the fourth quarter of 2022, reflecting increased APC segment growth margin of 55%, up from 35% in the same quarter a year ago. This higher growth margin for APC can be attributed to a change in project and product mix. Fuel chem segment growth margin remained essentially unchanged at 48%, consistent with historical performance. Consolidated APC segment backlog on December 31, 2023 was $7.5 million, up from a backlog of $5.6 million at September 30, 2023, and down slightly from backlog of $8.2 million at December 31, 2022.
Backlog on December 31, 2023 included $2.6 million of domestically delivered project backlog and $4.9 million of foreign delivered project backlog as compared to the $3.7 million of domestic project backlog and the $4.5 million of international project backlog at December 31, 2022. We expect that $7.4 million of the current consolidated backlog will be recognized in the next 12 months. SG&A expenses increased to $3.7 million from $3.1 million in last year's fourth quarter, reflecting the timing of employee and employee-related expenses. As a percentage of revenue, SG&A in the 2023 fourth quarter increased to 58% from 44% in the 2022 fourth quarter. Research and development expenses for the fourth quarter rose to $367,000 from $179,000 in the same period a year ago, mainly attributed to continued investment in water treatment technology and more specifically, our DGI technology.
Our operating loss was $801,000 compared to $250,000 in last year's fourth quarter, reflecting a reduction in overall revenue, a shift in margin contribution from product mix, and higher operating expenses for the quarter. We continue to take advantage of the favorable interest rate environment and as of December 31, 2023, have invested more than $30 million in held to maturity debt securities and money market funds. This generated $322,000 of interest income in the fourth quarter and $1.3 million of interest income for 2023, up from just $200,000 in 2022. Our net loss for the quarter was $539,000 or $0.02 per share compared to a net loss of $402,000 or $0.01 per share in the same period one year ago. Adjusted EBITDA loss was $646,000 compared to an adjusted EBITDA loss of $263,000 in the same period last year.
Moving to results for the full year 2023, consolidated revenue rose to $27.1 million from $26.9 million in 2022, reflecting a 27% increase in our ATC segment revenue offset by a 17% decline in the FUEL CHEM segment. As previously mentioned, the increase in APC segment revenue is attributed to the timing of project execution and new orders, and a 50% increase in our ancillary product line. Revenue fuel can segment revenue decreased for the year was driven by decreased unit dispatch demand and unforeseen plant outages experienced in the second quarter of 2023. Consolidated gross margin remained flat at 43% compared to last year, reflecting an increase in the APC segment gross margin offset by a slight decrease in the FUEL CHEM gross margin. APC segment gross margin was primarily -- growth was primarily due to product and project mix.
SG&A expenses for 2023 increased by 4% to $12.8 million from $12.3 million in 2022, which fell within the low end of the forecasted range. We continue to prioritize our strategic investments in resources to support current and upcoming business initiatives while maintaining prudent cost controls. For 2024, we expect SG&A expenses today it's between $13 million and 13.5 million. Research and development expenses were $1.5 million for 2023 compared to $895,000 in 2022. As Vince discussed, our investment in commercializing our DGI technology is a primary focus for the company. Strategic expenditures in this area will continue throughout 2024. Operating loss was $2.7 million for the 2023 compared to a loss of $1.5 million in 2022, reflecting the change in mix of segment revenue and higher operating expense.
Net loss for 2022 was $1.5 million or $0.05 per diluted share compared to a net loss of $1.4 million or $0.05 per share in 2022. Adjusted EBITDA loss was $2 million in 2023 compared to an adjusted EBITDA loss of 909,000 in 2022. We generated nearly $700,000 in cash from operations in 2023 as compared to a use of cash of $4.1 million in 2022. Lastly moving to the balance sheet. Our financial condition remains strong. As of December 31, 2023, we had cash and cash equivalents of $17.6 million and short and long-term investments totaling $15.8 million. In 2023, our largest use of cash was the incremental investment of $6 million in debt securities to drive a sustainable long-term financial profile. Working capital was $32.6 million or $1.8 per share.
Stockholders' equity was $43.7 million or $1.44 per share. And the company continues to have no outstanding debt. 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. To reiterate Vince's earlier comments, we are pleased with our results and remain optimistic about our opportunities in 2024 and beyond. I'll turn the call back over to Vince.
Vince Arnone: Ellen, thank you very much. Operator, I think it's time to open the line for calls now. Thank you.
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