Devin Sullivan - SVP, Equity Group Vincent Arnone - President & CEO David Collins - SVP & CFO.

Greetings, and welcome to the Fuel Tech Inc. 2016 Fourth Quarter and Full Year Financial Results Conference 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, Mr. Devin Sullivan, Senior Vice President of the Equity Group. Thank you. You may begin..

Thank you Audrey. Good morning, everyone, and thank you for joining us for Fuel Tech's 2016 Fourth Quarter and Full Year Financial Results Conference Call. Yesterday after the close, we issued a copy of the press release, which is available on the company's website at ftek.com.

The speakers on today's call will be Vince Arnone, President and Chief Executive Officer; and Dave Collins, Senior Vice President and 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 in this call, except for historical information, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward-looking statements.

The factors that could cause results to differ materially are included in the company's filings with the SEC. The information contained in this call is accurate only as of the date discussed, and investors should not assume that statements made during the call remain operative at a later date.

Fuel Tech undertakes no obligation to update any information discussed during this call. And as a reminder, the call is being broadcast over the Internet and can be accessed at the company's website www.ftek.com. With that said, I'd now like to turn the call over to Vince Arnone, President and CEO of Fuel Tech. Vince, please go ahead..

Thank you, Devin. Good morning, and thank you, everyone, for joining us on the call today. The year ended December 31, 2016, was the most difficult year on our recent history.

Challenges associated with the pace of legislation, declining energy demand and a continuing shift in favor of low-cost natural gas from higher priced coal created an environment that led to lower revenues from both of our operating business segments, $6.5 million in non-cash and other charges, expanded losses and a year-end backlog of only $8 million.

Those of you who have been following Fuel Tech for some time now know that over the last few years, we have been proactive in our approach to addressing the current operating environment and we continue to operate under two primary mandates - first, the achievement of positive cash flow and from our base business segments via leveraging our technology globally in order to maximize revenue opportunities while optimizing our rationalized SG&A infrastructure and second, continuing to invest in technologies that we believe will define our future.

We have refined our operating strategy, pursued business development in new and complementary ways, dramatically cut costs and despite our difficult headwinds have maintained a strong financial position.

With respect to perspective revenue, I am very pleased to say that the first quarter of 2017 was among the best quarters in our recent history for signing new contracts. Thus far in Q1, we have announced more than $17 million in new orders.

Adding these contracts to our year-end backlog figure of $8 million produces a pro forma backlog as of today of greater than $25 million.

Our year-to-date bookings and further expectations for 2017 suggest that our revenue for the year will be derived from all of our geographies where we do business and from many of our technology solutions platforms, most notably, our SNCR, SCR, ULTRA and ESP solutions.

We are pursuing a number of additional APC opportunities of various contract values and expect to announce these new engagements throughout 2017. Today, our sales pipeline of opportunities exceeds $150 million on a global basis consisting with activity levels in prior years.

We have aligned our cost structure with the revenue-generating capabilities of our businesses, but without sacrificing client service. During 2016, we reduced company-wide SG&A by $5.3 million or 17% from 2015 level. Since 2014, SG&A has declined by $9.9 million or 28%.

In 2017, we will realize the full year impact of the actions that we took in 2016 and expect an incremental reduction of $5 million from 2016 level. This $15 million reduction in SG&A while very difficult for the company has enabled us to better-prepare for our future without impacting our ability to service our chosen markets and customers.

It is important to understand that although we are benefiting now from lower SG&A, the new contracts we have announced thus far in 2017 will not materially impact our top line until the second half of this year due to the timing of project execution.

While we expect the first two quarters of this year to be difficult, we believe that we are poised for overall improved performance for the full year 2017 with higher APC revenue, lower FUEL CHEM revenue and a return to operating profitability by Q4 of this year.

Of utmost importance is that we will also preserve our strong balance sheet which included cash and cash equivalent of $17.8 million or $0.76 per share at December 31, 2016 and no debt.

Our working capital stood at almost $27 million at December 31, 2016 and our goal for 2017 is to manage that number for the year bearing in mind that we do expect some fluctuation associated with the timing of project awards and related execution in particular during the first half of 2017.

Now, let's review our business segment performance in more detail. In the air pollution control segment, domestically, we continue to pursue opportunities focused on MATS, boiler MACT and maintenance drivers for ESP upgrades, ULTRA and SCRs for industrial applications and SNCR for units requiring compliance with the latest round of CASPER.

While we do not expect significant impact from regulatory drivers in 2017, I would like to comment on a couple of items that will likely impact our future. On the Clean Power Plan, the Supreme Court of the United States stated this regulation in February of 2016.

A DC circuit court heard arguments in September 2016 and is expected to rule in the next 30 days. ETA is believed not likely to appeal if they lose. 49 gigawatts of coal-fired generation were projected to be retired if the Clean Power Plan was enacted. If the clean power plan is eliminated, many marginal coal units could avoid retirement.

However, the pressure on coal units based on natural gas prices today is still expected to limit the recovery of coal unit capacity factors. President Trump's regulatory executive order requires a 2-for-1 rule making policy that removes two regulations for every new one that is proposed and this includes the EPA.

The executive order calls on the Office of Management and Budget to cramp guidance on how to implement that mandate including procedures for calculating the cost of each individual rule for purposes of the budget. Rule is that EPA is required by [indiscernible] issue may not be subject to the 2-for-1 order.

At a high level, the impact of these two items is continued regulatory uncertainty in the near term. That said, we are very pleased with the project bidding activity in contract awards over the past few months and industrial project activity is encouraging.

We will continue to capitalize on the increasing deployment of natural gas fire turbines being used for industrial applications with our SCR and ULTRA Technologies.

And we are establishing strategic business relationships with multi-national industrial end users and partnering with companies that require our technology portfolio to complete a broad bid package.

In China, we have generated $4 million of new contracts thus far in 2017 and seen improving sales trend for the balance of this year when compared to 2016. Regarding the market in China, it is important to note that existing power plant utilization is less than 50% in some areas, causing a dramatic slowdown in new plant construction.

In fact, 100 coal-fired projects in 11 provinces representing greater than 100 gigawatts of power were canceled in January of 2017. These cancellations occurred after $60 billion had already been invested in their construction.

That said, China continues to promote more stringent NOx reduction standards which will require upgrade to the existing SCR systems including parallel upgrades to the ammonia production and delivery technology tied to those SCRs.

For Fuel Tech, this presents an opportunity to convert our large install base of ULTRA systems to higher capacity systems as well as coupling our SNCR systems with the existing SCR systems in order to meet these more ambitious reduction standards.

Based on our current analysis, SNCR implementation on utility boilers will continue for at least the next two years. While the market is competitive, we believe that we will win our share of this work. Lastly, we are closely watching the timing of emission compliance for the industrial sector.

This will present the next market opportunity for us in China. In Europe, the European Union Industrial Emissions Directive, which requires phased in implementation base beginning this year continues to drive compliance behavior. Opportunities exist in the UK for the remaining coal-fired fleet and for units that are converting to biomass.

Additionally, through the use of strategic partners with local presence and project execution capability, we are also continuing to strengthen business ties with local entities in Spain, Turkey, Poland and the Czech Republic to take advantage of project opportunities in these geographies.

Thus far in 2017, our European office has been awarded almost $5 million in contracts covering our SCR and ULTRA Technologies and also utilizing our expertise in ammonia-rich [ph] delivery systems. We continue to pursue opportunities associated with our various licensing arrangements.

We are excited about the long term prospects of our exclusive licensing agreement for our SNCR technology with ISGEC Heavy Engineering Limited, one of India's leading engineering and construction companies. Currently, the cement industry is moving towards SNCR implementation and we will assist ISGEC in this market.

We currently expect the Indian government to back off of the aggressive compliance targets originally set for the power generation industry due to the high associated cost of compliance. They are now considering a phased-approach considering particular matter first, then Redox [ph] and finally NOx control.

We will push to demonstrate our low capital cost flue gas conditioning solution as a means to address articulate issues. The demand for urea to ammonia convergent systems, similar to that scene in China for the past 10 plus years is expected to grow in India.

Now for our FUEL CHEM business segment; revenues and associated gross margin declined both in the fourth quarter and for the full year versus prior year periods. The results of reductions in coal-fired generation driven by the abundance of low-priced natural gas and resulting coal-to-gas conversions.

Although margins have remained consistent with historical performance, we do expect that revenues will decline in 2017 compared to 2016 as there is simply less demand for our products in our traditional end markets. In response, we continue to pursue a variety of avenues to introduce our traditional chemical technologies to new customers in the U.S.

and overseas and we have been focused on the expansion of our chemical technology portfolio. For 2017, we foresee a quarterly revenue run rate that approximate the revenue realized in Q4 of '16 with margins approximating 50%.

In the U.S., we continue to introduce that new technology to utilities to assist them in adapting to a new operating paradigm, marked by reduced low profiles that affect the manner in which they operate.

We are also looking to support operators that utilize coal blending as a cost reduction strategy as in many cases, blending can cause unwanted slagging and fouling in the boiler and our program can assist in these instances.

In Europe, we are excited about the opportunity to offer FUEL CHEM to the operators of biomass fired units and municipal solid waste units - both of which are known to have severe and costly slagging and fouling issues.

We received a purchase order for one biomass fired unit in the first quarter of this year and the demonstration will start early in the second quarter. Additionally, we are currently performing modeling for work for a municipal solid waste operator with the intent of having a demonstration starting late of the second quarter.

On a worldwide basis, we are expanding our industrial reach into the pulp and paper industry where FUEL CHEM - more specifically our proprietary recovery chem technology - can address the issue of slagging and fouling and black liquor recovery boilers.

In the U.S., we have completed a technology demonstration with a large multi-national company that we believe will build well for expanding the technology on a commercial basis with that customer and with customers in that market on a global basis.

In terms of order of magnitude, generally, we would expect revenues from this technology application to be in the range of $300,000 to $600,000 per unit on an annualized basis. We are currently assessing the addressable market for this technology application on a global basis.

Back in the third quarter, we announced the signing of an exclusive agreement under which Fuel Tech has licensed its proprietary Recovery CHEM technology to Amazon Papyrus Chemicals Group, a leading supplier of specialty chemicals to the pulp and paper industry in the Asia.

Amazon currently manufactures and sells a variety of industry-specific chemicals to greater than 350 pulp and paper unit on that continent. It is our goal to have a successful technology demonstration in Asia before the end of the third quarter as a springboard towards accelerating business activity thereafter.

We have currently solidified our chemical supply in the region and we are evaluating three to four possible demonstration candidates. Now, before I turn things over to Dave, I wanted to update you about the latest developments for our Fuel Conversion business segment.

As explained previously, our Fuel Conversion initiative started in late 2014, converts low-cost carbon-based feedstocks into high value engineered carbon products. During the fourth quarter, further progress was made in the commercialization of the Fuel Conversion business.

Our focus continues to be on advancing the engineering design details, equipment selection and build out plans of the initial Fuel Conversion facilities for our potential customers.

We have advanced our development efforts to include two targeted plant build out sites and are in the process of executing a variety of site development tasks to facilitate the goal of ultimately operating Fuel Conversion systems on those sites. As reported last quarter, we have been specifying in selecting equipment for the initial site build out.

During the fourth quarter, we purchased a major piece of production equipment that is a critical proponent in the Fuel Conversion system and that equipment is being modified by the original equipment manufacturer to meet the specifications of the proprietary Fuel Conversion process.

These upgrades are expected to be completed within the next few weeks and it will then be transported to a site for installation. We have had meetings with relevant EPA staff and the environmental permit application for the first Fuel Conversion system was submitted early in the first quarter of 2017.

It is our current expectation that this permit will be awarded in the second quarter. Concurrent with the environmental permitting process, we will be focusing on the planning for the site preparation and [indiscernible] installation work.

We continue to meet with our expected initial customers and have worked closely with them to define initial test quantities as well as long term requirement that would be fulfilled under future supply agreements. These customers remain interested and engaged and we expect to report more about our commercial development activities on future calls.

Lastly, we continue to work with state economic development authorities and to solicit various other alternative sources of project financing, which will assist in the further development of this initiative. In closing, I want to mention that research and development has been an important factor in Fuel Tech's historical growth and evolution.

We still remain committed to investing for our future and are looking at technologies and business that will guide our forward path. In addition to our investment in Fuel Conversion, we are investigating technology applications in the water treatment and renewables market.

While I can't speak to specifics on these areas today, I hope to do so in the near term. 2017 will be a pivotal year for our company. We have realigned our infrastructure to match our base business segment revenues, we are poised to bring Fuel Conversion to commercialization and we are working on some exciting new business areas for our future.

We have weathered two very difficult years and are now better-positioned for successful future. I can't emphasize enough how very proud I am of our Fuel Tech team. I will now turn the conversation over to Dave Collins. Dave? Thank you..

Thanks, Vince, and good morning, everyone. 2016 is closed and we are moving forward into 2017 with new APC bookings and optimism for additional orders. We have a full pipeline of bids and with some successful closure of a couple of larger orders expect to return the positive EBITDA in the second half of 2017.

Over the past two years, we have removed over $15 million of cost from our company infrastructure while remaining focused on retaining the core capabilities and experience necessary to respond to market opportunities. We have managed our balance sheet closely and remain debt-free with a cash balance of $17.8 million.

Now for a short discussion of 2016 results and some outlook comments for 2017. Revenues for the full year 2016 were down 25% from $74 million in 2015 to $55 million in 2016. This reduction in revenue was noted in both segments with our APC technology segment, revenues decreasing 22% and our FUEL CHEM segment revenues decreasing 30%.

For the current quarter, we likewise reported a reduction in revenue of 47% from $18 million in 2015 to $10 million in 2016. This reduction was again noted in each segment with our APC technology segment revenues decreasing 60% and our FUEL CHEM segment revenues decreasing 20%.

As Vince noted previously, we have started 2017 with the highest APC segment quarterly booking amount in the past three years. We are encouraged by this upward trend and look forward to additional order announcements in 2017.

The timing of orders impacts our revenue recognition and since we carried a low backlog figure of $8 million into 2017, we expect our first two quarters to be in-line with our Q3 and Q4 2016 revenue amounts. We should see a pickup in the third and fourth quarters of '17 as the equipment orders for the new 2017 projects are placed.

Our FUEL CHEM revenue outlook for 2017 is expected to see another decline on a percentage-basis consistent with 2016 as we are continuing to reset our customer list and market segment opportunities based on the reduction in demand for our traditional FUEL CHEM business.

We are looking at some new customer and market opportunities which we are hopeful about and we'll continue to pursue. When we have a better handle on outlook for these projects, we will update everyone on our future earnings calls. Our gross margin percentage was 34% in 2016 compared to 39% in 2015.

This was due primarily to a change in product mix in APC and FUEL CHEM and charges that reduce gross margin by approximately 300 basis points. For the current quarter, our gross margin percentage declined from 38% in 2015 to 19% in 2016.

Our quarterly results were likewise impacted by the charges noted above and removing this would have increased our gross margin to 35% for the quarter. We expect to report a blended gross margin between 35% and 38% in 2017. For the full year, our selling, general and administrative expenses declined 17% from $31 million in 2015 to $26 million in 2016.

This reduction was due to various restructuring and cost reduction initiatives that have resulted in over $10 million of costing eliminated from our expense structure during the past two years. Expense reductions were made in a variety of areas including employee-related cost, professional and consulting cost, travel and other administrative.

For the current quarter, our SG&A expense declined 20% from $7 million in 2015 to $6 million in 2016. This reduction reflects the same full year adjustments discussed above. For 2017, we expect to see an increment of $5 million decrease in our SG&A cost as we realize the full year benefit for cash reductions implemented during the past two years.

Our research and development cost in 2016 totaled $4.5 million which reflect the continued funding and development for our Fuel Conversion business and ongoing research and development activity. This spending level is consistent with 2015.

For the current quarter, our research and development cost was $970,000, which again is consistent with our 2015 spending level. We continue to believe it is important for us to support new product development and we'll continue to pursue ways to diversify our products and markets to our R&D efforts.

During 2016 and 2015, we incurred asset impairment charges of $2.1 million and $1.4 million respectively, related to specific long-live intangible assets reported in our APC segment. We have now fully impaired all intangible assets reported in the APC segment, which based upon the valuation methodologies have carried a higher risk of impairment.

We still carry intangible assets in our FUEL CHEM and Fuel Conversion segments and additionally some corporate assets that will continue to be subject to impairment analysis, while we have concluded these assets are not currently impaired, we will need to continue monitoring their utilization and cash flow forecast for indicators of impairment.

During 2016, we recorded a tax expense of $1.2 million related to the establishment of a full valuation reserve for our deferred tax assets in China. We have now recorded a full valuation allowance on all of our deferred tax assets and therefore will not incur any additional charges related to the establishment of the valuation allowance.

As of year-end 2016, we have tax net operating losses in the U.S. of $9 million and $4 million in Italy. This net operating loss carry forwards are available to offset future taxable income. The release of our valuation reserve for deferred tax assets will depend on our underlying business achieving profitable operations for sustained periods of time.

Cash and equivalents at December 31 totaled $18 million and we remain debt-free. Our working capital balance is $27 million, which we believe is sufficient to support our continuing business needs. Now I'd like to turn the call back over to Vince..

Thank you very much, Dave. Operator, let's now open up the call to our professional investors. Thank you..

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of George Gaspar [ph], private investor. Please state your question..

Hello?.

Hey, good morning, George..

Hello, George. This is Vince and Dave.

How are you?.

Good morning. I got a question on carbon development that you have going forward and R&D.

Does this have implications of possibilities with what the beverage industry is needing to accomplish moving from ammonia glycol? I understand there are some rules out that there's a definite push to make a transfer and is there any application of what you're working on that would solve some of this problem? There are some concern about the carbonate coming out of the processing area that is going to require new rules to be drawn..

Thank you for the question, George. The area that you mentioned actually is not one that we're familiar with today, but that's something that we'll definitely take a look into.

Our Fuel Conversion technology application, it's truly focused on creating a higher value carbon feedstock for use in a variety of manufacturing processes for industrial materials. But I do appreciate the insight and that's something that we'll take a look into..

Is your application possible in the carbon capture that seems to be being pursued more by the oil industry and exploration and development activity in the process of acquiring the oil from the production system? Or am I way out on that, too?.

George, I'm not going to say that you're way out by any means. In fact, maybe you're teaching us some things at this point in time. But as we look at Fuel Conversion right now, that's not on our application for this technology either..

Okay, all right. I followed your company for a long time and I'm very impressed with your ability to consolidate your company and make transition and get in a position to really rebuild this company off of where it is now. I wish you all best possibilities of accomplishing this going forward through 2017..

George, thanks very much for your comments. We appreciate that..

At this time there are no further questions. That does conclude our question-and-answer session. So I will turn it back to management for closing comments..

I'd like to thank everyone for joining us on the call today and for being supporters of Fuel Tech. Our primary goal today is to reverse the trends of our past couple of years of recent history and to once again generate value for our many shareholders and supporters. Thanks very much for your time today and have a great day..

This concludes today's conference. Thank you for your participation, you may disconnect your lines at this time..