Devin Sullivan - SVP, The Equity Group Vince Arnone - Chairman, President, and CEO Jim Pach - Principal Financial Officer.

Pete Enderlin - MAZ Partners.

Greetings, and welcome to the Fuel Tech 2018 First Quarter 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.

It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you. Mr. Sullivan, you may begin..

Thank you, Doug, and good morning everyone, and thank you for joining us today for Fuel Tech's 2018 first quarter financial results conference call. Yesterday, after the close, we issued press release, a copy of which is available at the company's Web site www.ftek.com.

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 the 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 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 the 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.

These 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, Chairman, 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. I am here today with Jim Pach, our Principal Financial Officer, and Controller.

It has been less than two months since we last spoke on our fourth quarter 2017 conference call, so we will look to keep our commentary brief this morning with a specific focus on what has transpired during this short period of time.

We are very pleased to report that our first quarter financial results are in line with our internal projections for 2018. And we remain on track for a significant improvement in operating performance for the full-year 2018 versus our recent financial performance.

In the past couple of months, we have gained further confidence that we will be able to meet our full-year financial target for 2018. And concurrently, we have made some good progress on our market discovery and technology development efforts for our new strategic venture directed at providing environmental solutions for water.

To start, let's discuss our performance in the first quarter of 2018 in more detail. Revenues rose 15.6% to $12.8 million from $8.5 million in last year's first quarter which reflected the timing of project execution on new orders realized in 2017 and 2018. Our backlog at December 31, 2017 was approximately $22 million.

And we expect great majority of this amount to be recognized as revenue in 2018. SG&A declined to 4.5% to $4.9 million from $5.2 million in the first quarter of 2017; the reduction being the results of our previously announced cost reduction initiatives over the past three years.

We reported an operating loss from continuing operations of $184,000 which narrowed significantly from an operating loss from continuing operations of $1.8 million in last year's first quarter.

Net loss from continuing operation for Q1 was $191,000 or $0.01 per diluted share compared to a net loss from continuing operations of $1.8 million or $0.08 per diluted share in Q1 of 2017. Lastly, we reported positive EBITDA of $31,000 compared to an EBITDA loss of $1.9 million.

At March 31, 2018, we had cash balance of $12.2 million as compared to $14.4 million at December 31, 2017; the decline being due to the timing of execution of projects in progress and the related milestone payments for our customers and suppliers. We expect cash flow to improve as we move through 2018 particularly in the second half of the year.

Shareholder's equity was $34.7 million or $1.44 per share. And the company had zero long-term debt. Now, let's review our business segment performance in more detail. As a general statement for both our APC and FUEL CHEM segments on a global basis, our operating landscape has not changed dramatically over the past two to three years.

The technologies embodied within our base business still have relevance in all market that we do business, and we intend to continue to capture our shares of market in order to ensure a revenue run rate that generates profitability. For our APC business segment, thus far in 2018 we have realized approximately $6 million in new orders.

Domestically we are pursuing a solid pipeline of contract opportunities, many of them focused on ULTRA and SCRs for industrial applications. And we expect orders for these technology applications to represent the majority of our contract bookings in 2018.

With respect to our wider product portfolio, SNCR technology remains applicable on an as needed basis for unites requiring compliance with the latest round of CSAPR, regional haze, and state-specific requirements for reasonably available control technology or RACT, while ESP upgrades are being driven primarily by maintenance requirements, and on a case-by-case basis where increased particulate loading from dry sorbent injection systems have been installed to help units meet MATS and Boiler MATS requirements.

We also continue to establish strategic business relationships of multinational industrial end users and to partner with companies that require our technology portfolio to complete a broad bid package. As stated in our conference call earlier this year, we do not expect significant impact from regulatory drivers for the remainder of this year.

And as such, I'll hold off on further regulatory-related commentary until we talk again on our second quarter earnings conference call. With respect to China, the project bidding activity for our SNCR and ULTRA technologies remains consistent as utility boiler operators look to satisfy the implementation of super-low emissions targets.

As we expect that our primary utility market will reach full compliance within this next couple of years, we continue to shift our focus to compliance for industrial units, which includes municipal solid waste, processed industries, and the petrochemical industry.

Lastly, we continue to monitor a trend in China towards the elimination of aqueous ammonia as the reagent for use with SCR system applications to reduce NOx, although this trend is moving slowly.

In Europe, we continue to market our technologies in the wake of both the European Union's Industrial Missions Directive and BREF, also known as Best Available Reference Technology. This latter guideline reduces target NOx emissions for current levels and includes the regulation of mercury for the first time.

Countries such as Poland and the Czech Republic which rely heavily on coal will need to upgrade their current de-NOx systems, as well neighboring countries in the Balkans and Turkey. We are pursuing these markets via strategic partners with local presence.

We are also pursuing opportunities associated with our various licensing arrangements, including our exclusive licensing agreement for our SNCR technology with ISGEC Heavy Engineering Limited, one of India's leading engineering and construction companies.

As discussed in March, the Indian government has backed off of the aggressive compliance targets originally set for the power generation industry due to the high associated costs, and are now operating under a phased approach prioritizing particulate matter first, then SOx, and finally NOx control.

While the demand for our SNCR systems will build more slowly than originally anticipated, this approach presents an opportunity for us to demonstrate our flue gas conditioning technology in the marketplace.

FGC is a low-cost highly effective particulate control technology that could be used in some cases to meet particulate emissions requirements, particularly when compared with the high capital cost of ESP and bag filtered solutions. We will continue to report on progress in this market in the future.

For our FUEL CHEM business segment revenues declined to $4.2 million from $4.5 million in the first quarter of 2017. With a slight reduction in gross margin due to product demonstration expenses related to our RECOVERY CHEM demo in Asia, which I will discuss further in a few minutes.

The revenue reduction was due primarily to an extended outage for our key utility customer.

As our traditional coal-driven revenues have declined, we have continued to pursue a variety of avenues that leverage our FUEL CHEM technology solutions; first, working with utilities to assist with boiler optimization as they adapt to an environment of reduced load profiles; second, supporting operators that utilize coal blending as the cost reduction strategy, which as a consequence can cause unwanted slagging and fouling in the boiler; and lastly, pursuing opportunities for biomass-fired units in the industrial sector and municipal solid waste units.

In the U.S., we are providing our program on two biomass units. And in Europe, we are currently providing our program on one biomass-fired unit and two municipal solid waste units in Italy. The results for all programs are favorable, and we look to continue to develop this market.

As of today, we are approximately 90 days into our 120-day demonstration of our RECOVERY CHEM process in Indonesia, a technology that we licensed to Amazon Papyrus Chemicals Group in 2016.

A leading supplier of specialty chemical to the pulp and paper industry in Asia, Amazon Papyrus currently manufactures and sells a variety of industry-specific chemicals to greater than 350 pulp and paper units in their continent.

Thus far, the demonstration results have been favorable, and we look forward to converting this client to a commercial account.

We're already working with Amazon Papyrus in planning for the expansion of the technology application to additional units and geography in conjunction with a marketing program utilizing the supporting documentation and data from the current demonstration.

In the past two months, we have commenced a number of activities related to our recently announced exclusive license agreement with NanO2 LLC to market and sell NanO2's dissolved gas technology. As noted previously, this represents a new strategic business for Fuel Tech, environmental solutions targeted at water.

As a reminder, the agreement is for a term equal to the life of the underlying patents, and provides exclusive rights for Fuel Tech to market the technology in specified end markets throughout North America with provisions to extent exclusivity to other territories and applications.

So far we have completed a technology transfer session and a sales-focused training session for the appropriate members of the Fuel Tech team. Each session was two days long, and the technology is being well embraced by the Fuel Tech team.

On the technology development side, we are on the process of executing a plant to, first, construct an in-house lab for water treatment technologies which will enable us to fully analyze the basic characterization of the injector operating parameters and to perform oxygen studies.

Second, as Computational Fluid Dynamics appears to be an unutilized discipline in applied water treatment, we are using our long-standing expertise in CFD to develop models that will aid in the optimization of the injection technology and in the treatment of bodies of water.

And lastly, we are performing technology benchmarking by industry to determine competitive system capabilities and process means. From a market investigation and development perspective, we have laid out a specific action plan for sales discovery on a market-by-market customer-by-customer basis.

And we have begun to make calls to our best friends in our existing channels. Our first calls have focused predominantly on the utility market and on the oil and gas patch. And we will make called into additional industrial markets next.

The results of these first calls have been promising as we have begun to better understand the water treatment issues of these markets. The initial calls are leading to follow-up face-to-face meeting and multiple clients.

We are finding that our customers are interested in the benefits that the NanO2 technology could possibly bring to their existing water treatment platform. Our objective as a company is to have a demonstration of the technology up and running as quickly as possible. I look forward to speaking with you more about this venture in the near-term.

In closing, I want to thank you once again for your ongoing interest in Fuel Tech. We are pleased with our financial results to begin the year, and remain confident in our operating outlook for 2018. We expect to report higher total revenues driven primarily by our APC business. We also expect to operate profitably, and to generate positive cash flow.

While we do not expect our water treatment technology venture to have a significant impact on 2018 results, we do look forward to it being a significant contributor in future years. Now, I'm going to turn the call over to Jim. Jim, please go ahead..

Thanks, Vince, and good morning everyone. Revenues for the first quarter of 2018 totaled $12.8 million reflecting a $4.6 million revenue increase for APC, offset by a $200,000 revenue decline at FUEL CHEM as compared to the first quarter of 2017.

APC backlog-to-revenue conversion remains strong through the first quarter, and we expect this conversion to continue throughout the rest of 2018. Gross margin declined to 39.3% of revenues, from 43.8% in Q1 2017 due to the revenue mix between APC and FUEL CHEM as well as certain product demonstration expenses.

APC gross margin was $3 million or 34.8% as compared to $1.5 million or 37.5% in the first quarter of 2017. FUEL CHEM segment gross margin was $2 million or 48.5% as compared to $2.2 million or 49.5% for the first quarter of 2017. For 2018, we are targeting a blended gross margin of between 35% and 40%.

Selling, general and administrative expenses continue their downward trend coming in at $4.9 million as compared to $5.2 million in last year's first quarter.

With our three-year cost savings plan substantially completed for 2018, we expect SG&A to be between $17 million and $18 million with research and development costs of between $1.3 million and $1.4 million. R&D expenses were just under $300,000 for both the first quarter of 2018 and 2017.

We are continuing to support new product developments and exploring ways to diversify our products in market for our R&D efforts. We continue to expect R&D spending in 2018 will increase slightly from our 2017 spending level because of these initiatives including our recently announced entry into the water and wastewater treatment market.

We reported a loss from continuing operations of $184,000 down significantly from a loss of $1.8 million in the first quarter of 2017. As Vince noted, this was in line with our projections and primarily reflected APC project timing.

We used approximately $2.5 million in cash during the first quarter which reflected an overall timing of payments of accounts payable and accrued liabilities as evidenced by an overall declining current liability of $15.7 million at December 31, 2017 to $13.6 million at March 31, 2018.

Again as Vince had alluded to, we are projecting a positive cash flow for 2018. As of March 31, 2018, we have cumulative net operating losses in several geographies and what we currently do business, which allow us to offset future taxable income to reduce our overall income tax exposure. To that end, we have $12.6 million to offset future U.S.

taxable income, $4.1 million to offset future taxable income point in Italy and $4.1 million to offset future taxable income in China. As a result, we continue to expect that our income tax expense for 2018 will be at or near zero similar to 2017.

Our balance sheet at March 31, 2018, remains debt-free and we had cash and cash equivalents of $12.2 million or $0.50 per share including restricted cash of $6.5 million.

Our working capital balance at March 31, 2018 was $18.5 million which will continue to support our ongoing operating needs of the business, working capital does not include $5 million restricted cash that was reclassified under balance sheet to long-term during the second quarter of 2017 as a result of our two-year renewal of our cash secured U.S.

domestic credit facility. The company remains hopeful through continued improved operating performance on a consistent basis that we may be able to renegotiate our domestic credit facility to remove the cash securitization restriction on our operating cash availability.

With respect to valuation, our book value per share was $1.44, our tangible book value per share was $1.28 and our working capital per share was $0.77 at March 31, 2018. In addition, we had approximately $0.51 per share and deferred tax assets 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..

Okay, thank you, Jim. Operator, let's go ahead and open up the line for calls. Thank you..

Thank you. [Operator Instructions] Our first question comes from the line of Pete Enderlin with MAZ Partners. Please proceed with your questions..

Thank you. Good morning, Vince and Jim..

Hey, Pete.

Good morning, how are you doing?.

Congratulations on the positive trends in the quarter.

The backlog was down a little, orders were as you said roughly $6 million, can you give us some sense of the outlook for the pipeline in the APC segment, and how you see that order pattern trending over the rest of the year?.

Sure, Pete. Thanks for the question. Yes, the orders to date perhaps a little bit lighter than we had expected thus far for 2018, but we are not concerned by that.

We have a handful of projects as we sit here today that are on the process of - let's call it, it's ongoing cycle of us bidding the project going through discussions with customers and then finally coming to contract award.

So I'm expecting to have some contract awards come through here in the near-term, but largely speaking, Pete, I think we are looking at a call more of a second-half of this year loaded project award cycle, if you will, which is not necessarily uncommon. Backlog, as you noted is down little bit, but it's still at a good level right now.

And so we have some good contract revenue to go through our profit and loss statement, but generally speaking, I would expect to see a little bit of a second-half of 2018 load in terms of new contract awards. But as I said, we are expecting some new contract awards here in the very near-term..

And I think there was a comment that there's especially good potential in the U.S, but what about some of the international markets.

Could you see a pickup there too?.

I wouldn't necessarily see a pickup from decent trend right now for the international markets where we're looking at what I would call, more status quo, but we are as you noted the U.S. market is showing a nicely increased trend from what we've seen in this past, call it, year and year-and-a-half time frame. So we are excited about that..

And product demo expenses put some pressure on gross margins, is that mainly that [technical difficulty] in Asia, can you expand a little bit?.

I can, yes. Yes, we've been talking about the demonstration for the recovery [indiscernible] technology for couple of quarters now. And during the first quarter of this year, we had in excess of $100,000 in product demonstration expenses for that demonstration in Asia.

And that's negatively impacting the FUEL CHEM gross margin on the quarter, but that simply our investment and what we think is a wonderful opportunity that could come our way in the future with success at this demonstration and then hopefully a nice expanded rollout to other customers in that geography..

Okay, thank you. And in the press release you said that the trend in the FUEL CHEM segment should be about like 2017. Does that mean - well, it could mean a few different things, like the fourth quarter which was down a little bit, the full-year which was down, or maybe a run rate similar to the fourth quarter.

I'm not quite sure how to interpret that statement of regarding the total revenues for 2018?.

Right, we were looking at revenues for 2018 to be similar in nature or to approximate what we achieved in 2017 year-on-year for the full-year..

Full-year, okay. Yes. Thank you.

And then, you have - the breakdown of the revenues and assets between domestic and international shows a lot more international assets proportionally to the revenues, and I know that's total assets and lot of working capital, and that sort of thing, but is there any other reasons for that? Do you have any plans to try to adjust that that balance between domestic and international assets?.

Yes, the primary driver there, Pete, is some of the larger accounts receivables balance that we actually carry in the China geography. Timeframe for collection there are typically a little bit longer in nature. So we'll carry a larger balance for an extended period of time as opposed to other geographies.

That's really the only driver that I can point too..

And are there any efforts to try to change that flow a little bit or is that just kind of the way it is?.

We've been trying to change the flow for about 10 years now. Actually I think we've done a pretty good job. It's the focus of the company on a week-in, week-out basis.

But doing business in China is unique, it's something that we've experienced again over the past decade, and we do our best day in and day out to ensure that we get our cash in hand as quickly as possible..

And then one last nitpicking kind of question, you have almost zero interest income with $12 million in total balances.

Is there any particular reason why it shouldn't be a little higher than that?.

The available rates of interest on holding money and our cash accounts is really to minimize I wish there was something they knew about that but unfortunately just that just be related today.

Just in something that over time when we've had more expensive cash balance we would have had an opportunity to perhaps said aside cash in other call it highly secured short-term investments but our cash balance right now is something we manage very closely on a global baiters.

And we want all of that cash available in our operating account just to ensure that we can need business needs..

Okay, again congratulations on the quarter and thank you for the good work..

Thank you very much, Peter, will talk to you soon..

Our next question comes from the line of George Gaspar, a Private Investor. Please proceed with your question..

Yes, good morning Vince and everyone else there..

Hey, good morning George..

Vince, good morning again, and that's the last question or comment at the beginning, congratulations on the great work you're moving forward and cleaning up situations in the last year to two years and I mean this company set to really and then several fronts and my perspective is that as you look at the broadening perspective at the international market that you're attempting to penetrate and what would be the one, two, three how would you set them up is most where the expectation level would be for success by countries or whatever if you could answer that please?.

We'll do, George. I think right now as the company we're most excited about what we're doing with the RECOVERY CHEM demonstration out in Asia, actually this demonstration is in Indonesia at a plant there. The success of this demo is really important to us to go ahead there and expand their technology and their geography.

We do have our agreement as license and implementation agreement with Amazon Papyrus, so we're going to be receiving a royalty fee, once we are successful but if we were we'd be very happy to have a handful or more successful installations out there which will just generate and drive some very nice cash flow for the company from that region, so I'd say we're most excited about that opportunity internationally as we sit here today the Mainland China marketplace for our existing technologies that we have put in play in that marketplace today.

I think as I had noted previously with more status quo in terms of what we're looking to generate from a revenue flow at this point in time that as for our current products that we're offering to that marketplace and in Europe again we're watching some of the call it coal-based countries look to make their move them from technologies Poland, Czech Republic and the like Turkey as well.

And so we were following and tracking project opportunities in those countries as well which could provide a nice benefit to us in the future also, so prioritization I would go with RECOVERY CHEM and the deployment of that technology secondarily expansion of air pollution control technologies and more the coal in European countries and then geography for existing products I just call that status quo right now..

Okay, all right.

Thank you and then just more comment on from you on the water treatment prospects it's, I think it's a very strategic positive move that you're making and do you, I know it's really for you to try to put your finger on the logical cap maybe one or two areas that you want to attack but I would think that you mentioned looking at the oil and gas area and the expense of that market is so broad and necessary going forward.

Do you think that you will really try to put some effort into that?.

We definitely will, George, some of our initial discussions have been with again some of our friends in that market space and we believe based upon what we know today that there should be an opportunity for the deploying this technology that marketplace will all we'll know more as we have the detail sit downs with a handful of customers in that space but there is a space that we are going to look to attack.

Yes..

Okay, all right. And then one last one on the backlog it was down and that's understandable and you had mentioned going forward the prospectus for accelerating the order flow in the second half of the year.

And I don't know if you want to answer that question but do you think that going into the end of the year 2018 your backlog could be at least as good as where was at the top of early this year?.

It obviously it's a difficult question to answer based upon the timing of bookings but I'll say that I think we have a good opportunity to be at that level or a higher. If certain project opportunity come our way.

We again we have an underneath portfolio of opportunities that we're looking to address in the remainder of this year and some of them are larger dollar value in nature. And so, but I would say yes that there is the opportunity for us to have any a larger backlog at the end of 2018 than we did at the end of 2017..

Okay, all right well thank you kindly and good luck going forward..

Thank you, George. Have a good day..

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to management for closing comments..

Thank you, Operator. I'd like to thank everyone for their time today and for your continued interest in Fuel Tech. For everyone's information we are scheduled to present at the LD Micro Conference on June 5 in Los Angeles, California and we hope to see some of you there.

As the final comments many of you knew or as met our former Chief Financial Officer Dave Collins is for great sorrow that I report that Dave passed away last week after a battle with cancer. As a company, we are grateful to have known Dave and our thoughts and prayers are now with Dave's family.

I'd like to thank everyone for their time today, and everyone have a great day. Thank you..

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day..