Devin Sullivan - Senior Vice President, 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 Second Quarter Financial Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I’d now like to turn the conference over to Devin Sullivan, Senior Vice President of The Equity Group. Thank you. Please go ahead..

Thank you, Brenda, and good morning everyone. Thank you for joining us today for Fuel Tech's 2018 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 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 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..

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. Overall, our Q2 results continue to reflect the themes of our ongoing operational improvement program.

Our focus has been on increased revenue generation from our core business segments while leveraging the significantly improved SG&A profile that we've worked so hard to create with our cost-containment initiatives over these past three years.

Our financial performance in the second quarter was unfavorably impacted by several items and I will discuss those in detail here shortly. On a overall basis, the business activity over the past few months since we last spoke is positive. As example's, first for our FUEL CHEM business segment.

We recently added a new coal fire unit to our customer base for the first time in four years. This is the second unit as existing customer site and our program began hitting chemical just after July 1.

When this unit runs at full capacity, it could generate between $200,000 and $250,000 in incremental revenue per month at our historic gross margin of approximately 50%, and we are very excited about this expanded business.

Additionally, with the increased temperatures around the country during these past couple of months, coal fire dispatch is improved. And as a result, we currently expect good performance in the third quarter for our FUEL CHEM segment.

Lastly, as of the beginning of July we completed a successful RECOVERY CHEM demonstration with our licensed fee Amazon Papyrus at a client site in Indonesia. With our program, the boiler ran for an excess of 160 days before we shut down for operational maintenance not related to the efficacy of our program.

This customers previous longest running campaign was 60 days. The customer is now officially a commercial account, and we are looking to optimize the dosage of our chemical program. We will immediately begin to use this site as a reference account as we look to market and expand the RECOVERY CHEM program in Asia and other parts of the world.

For our APC segment, while our bookings have been slower than we have expected in the first half of the year, we are in various stages of negotiation with potential clients that in the aggregate represent approximately $10 million to $15 million of contract awards and we expect to close during the quarter ended September 30 covering all geographies.

We are pursuing additional contract opportunities beyond this which we expect to close prior to the end of the year. And finally regarding our water treatment technology development, we continue to advance our entry into the water treatment space via our previously announced exclusive licensed agreement with NanO2 LLC.

We have had productive conversations with several of our existing clients and remain encouraged by the long-term opportunities offered by this technology.

We are now in the process of securing demonstration scale and lab scale equipment which will enable us to rapidly respond to technology demonstration requests and enable the FUEL TECH team to study the capabilities of the existing technology as we look to possibly address additional customer needs.

Based on these activities and are expectation for executing new contracts, I am pleased to say that we remain on track for a significant improvement in operating performance for the full year in 2018 specifically increased revenue when compared to 2017 and the generation of operating income and positive cash flow for the full year 2018, which would be the first full year for such results since 2014.

Now let’s discus our performance in the second quarter of 2018 in more detail. Revenues rose 22% to $11.8 million from $9.7 million in last year's second quarter which reflected the timing of project execution on new orders realized in 2017 and 2018. Our backlog at June 30 was $14.4 million.

Although down from recent quarters we are confident that we will rebuild our backlog commencing in the third quarter. SG&A declined 19.6% to $4.8 million from $5.9 million in the second quarter of 2017, a reduction being the result of our previously announced cost reduction initiatives over the past few years.

We reported an operating loss from continuing operations of $1.6 million which narrowed significantly from an operating loss from continuing operations of $5.6 million in last year's second quarter.

Net loss from continuing operations for the second quarter was $1.7 million or $0.07 per diluted share compared to a net loss from continuing operations of $5.6 million or $0.24 per diluted share in 2017.

And lastly, we reported an adjusted EBITDA loss of $1.1 million for the second quarter down from a loss of $2.2 million in the same period last year. Our operating loss for the quarter was impacted by the following factors.

First, we experienced customer driven delays in the execution of projects under contract that shifted revenue and gross margin from the second quarter of this year into the third quarter of this year. As a result, approximately $600,000 to $700,000 in APC gross margin will now benefit the third quarter of the year as a result of these delays.

Second, we incurred certain SG&A expenses earlier than planned that will not recur in the second half of 2018 which included primarily consulting service fees and charges related to cost reduction activities for our operation in Beijing.

As a result of these expenses, the SG&A expense run rate for each of the third and fourth quarters will be approximately 5% lower than the level of experience in the second quarter.

Third, we experienced margin erosion on lower margin projects being executed in four geographies resulting from incremental costs required to complete - contract currently under contract. We believe that we have adequately addressed the issue and do not expect further erosion on these projects in the second half of the year.

And lastly, we incurred approximately $300,000 for a non-cash abandonment charge associated with certain patents that we do not expect to provide value to the company in the future years.

This actions is consistent with our continuing efforts to maximize cash flow and to ensure that all of our resources in both human and capital are focused on value-added activities. Now let's review our business segment performance in a little more detail.

Our APC and FUEL CHEM business segments continued to perform in line with both our expectations and the global business landscape. For APC as I noted previously, we are pursuing a solid pipeline of contract opportunities particularly in the domestic marketplace.

Many of these APC opportunities will focus 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 units 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.

As well you can note that the manufacturing expansion in this country is leading to the use of natural gas fire turbines has either the primary or backup source of power generation for use of these newly developed sites.

Our ultra and the SNCR technologies are well suited for use in conjunction with natural gas turbines and we endeavor to become a preferred supplier for these applications.

To that end, we continue to establish strategic business relationships with multinational industrial end -users and to partner with companies that require our technology portfolio to complete a broad bid package.

As stated in the past few conference calls, we do not expect significant impact positive or negative from specific 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 third quarter earnings conference call.

With respect to China, the project bidding activity for our SNCR and ULTRA technologies is bit slower than the prior years.

As we expect, there are primary utility markets 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, process 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 SRC system applications to reduce nitrogen oxide.

In Europe, we continue to market our technologies in the wake of both the European Union's Industrial Emissions Directive, and BREF which is known as Best Available Reference Technology guidelines. 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 continue to pursue opportunities associated with our various licensing arrangements, including our exclusive licensing agreement for our SNCR technology with ISGEC Heavy Engineering Limited.

As discussed in previous quarters, 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 up slower than originally anticipated, this approach presents an opportunity for Fuel Tech to demonstrate our Flue Gas Conditioning technology in the marketplace.

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

For our FUEL CHEM business segment, revenues declined to $3.2 million from $4.2 million in the second quarter of 2017. The revenue reduction was due primarily to June discrete events.

First, one of our regular customers have their units shutdown for more than six months to replace the bottom edge collection system, and secondly we had another one of our customers units off-line for our material period of time in the second quarter to enable the customer to address the safety issue not related to Fuel Tech FUEL CHEM program.

In both cases, the units has been brought back up and are running thus far in the third quarter. As I mentioned in my opening comments, with the addition of an incremental coal-fired unit at the beginning of the quarter and with all of the base units currently running, we are expecting an improved third quarter for our FUEL CHEM business.

For our RECOVERY CHEM program in Asia as I noted previously, I am very pleased to say that we now have a successful demonstration with our licensee and partner Amazon Papyrus Chemicals, our leading supplier of specialty chemicals to the pulp and paper industry in Asia.

With this success, we will be working with Amazon Papyrus to identify all means to expand the technology application to additional units and the geography using the marketing program based on the supporting documentation and data from the successful demonstration.

With our entry into the water treatment space, the discussion is that we have had with potential clients are encouraging. We expect that we will need to demonstrate this technology to improve efficacy in end markets and to that end we are investing in two systems which we believe are necessary to develop business traction.

First, we are investing in a lab scale system that we will use to perform technology capabilities assessments for market applications. And second, we are developing a demonstration system that we can use to rapidly respond to technology demonstration requests from our customers.

We currently expect the lab scale system and to be completed before the end of the third quarter and we expect to have a demonstration scale system available for use early in the fourth quarter. The capital required for this system is modest.

While we do expect that 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. In closing, I want to thank you once again for your ongoing interest in Fuel Tech.

Our second quarter results did not meet my expectations nor do they meet the expectations of any member of the Fuel Tech team but I am confident that based on the many positive business developments that I noted, that we are going to have a strong second half of 2018 that will lead to the generation of operating profit and positive cash flow on a full year basis and that the immediate goal of our company.

Now, I’d like to turn the conversation over to Jim. Jim, please go ahead..

Thanks Vince, and good morning everyone. Revenues for the second quarter of 2018 totaled $11.8 million reflecting a $2.9 million revenue increase for APC offset by a $0.8 million revenue decline at FUEL CHEM as compared to the second quarter of 2017.

APC backlog to revenue conversion remains strong through the second quarter based on our capital projects backlog at June 30, 2018 of $14.4 million, as well as promising pipeline of additional contract opportunities with potential customers of $10 million to $15 million which we expect to close by the end of the third quarter.

We expect this conversion to continue throughout the remainder of 2018. Gross margin declined to 31.4% from 37.2% in Q2 2017 due to the revenue mix between APC and FUEL CHEM, as well as to the margin erosion on lower margin projects in our foreign geographies.

APC gross margin was $2.1 million or 24.7% as compared to $1.4 million or 26% in the second quarter of 2017. FUEL CHEM segment gross margin was $1.6 million or 48% as compared to $2.2 million or 52% for the second quarter of 2017.

The FUEL CHEM segment gross margin declined as a result of certain international project demonstration costs incurred during the quarter. For the full year of 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 $4.8 million or 38.9% of revenues from $5.9 million or 61% of revenues in last year's second quarter. On a sequential basis, SG&A declined from $4.9 million reported in Q1 of 2018.

On a year-to-date basis SG&A declined by $1.4 million while revenue have increased by $6.4 million. For the second half of 2018, we expect increases in revenues and declining SG&A as compared to the first half of 2018. For the full year 2018, we expect SG&A to range between $17.5 million and $18.5 million.

R&D expenses were just under 300,000 for both the second quarter of 2018 and 2017. We are continuing to support new product developments and exploring ways to diversify our products and markets through our R&D efforts.

We continue to expect that R&D spending in 2018 will increase slightly from our 2017 spending levels because of these initiatives including our recently announced entry into the water and wastewater treatment market.

We reported a net loss from continuing operations of $1.7 million or $0.07 per diluted share compared to a net loss from continuing operations of $5.6 million or $0.24 per diluted share in last year's second quarter.

As Vince noted results for Q2 2018 included a $0.3 million non-cash international cash abandonment and charge while Q2 2017 total charges of just - were just under $3 million.

The international patent charge is a result of not renewing and maintaining patents on certain international geographies where we do not foresee significant market opportunities and will allow us to reduce our overall operating cash flow and expense going forward.

We used approximately $3.5 million in cash from operating activities during the second quarter which reflected the overall timing of receipt of payments of accounts receivable, the timing of payments made for accounts payable, and accrued liabilities as evidenced by an overall declining current liabilities from $15.7 million at December 31, 2017 to $14.2 million at June 30, 2018 and the operating loss from continuing operations of $1.8 million for the first six months of 2018.

As of June 30, 2018 we have cumulative net operating losses in several geographies in which we currently do business which will allow us to offset future taxable income to reduce our overall income tax exposure. To that end, we have approximately $13.1 million to offset future U.S.

taxable income, $4.7 million to offset future taxable income in Italy, as well as $4.7 million to offset future taxable income in China. As a result, we continue to expect our income tax expense for 2018 will be at or near zero for the remainder of 2018.

Our balance sheet at June 30, 2018 remain debt-free and we had cash and cash equivalents of $10.4 million or $0.43 per share including restricted cash of $6.5 million. The decline in cash from the $12.2 million at March 31, 2018 was zero and net operating loss from continuing operations for the second $1.6 million.

While we are watching our liquidity very closely on all of our geographies, we remain cautiously optimistic for positive operating income in cash flow for the second half of 2018 based on the anticipated contract opportunities in our pipeline.

Our working capital balance at June 30, 2018 was $22.2 million which will continue to support our ongoing operating needs of the business.

With respect to our restricted cash position, the ability to generate positive operating income in cash flow prospectively allows us the possibility 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 a $1.34.

Our tangible book value per share was a $1.20 and our working capital per share was $0.92 at June 30, 2018. In addition, we have approximately $0.53 per share in deferred tax assets which has 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..

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

[Operator Instructions] Our first question comes from the line of Pete Enderlin with MAZ Partners..

First congratulations on the continued good progress on the calls front, especially on the SG&A obviously. First question I have is related to this new coal-fired installation, that's obviously really good news and it can be very significant.

The question is, is that sort of an unusual circumstances and a one-off kind of thing, or could it possibly lead to significantly more of those kinds of new installations..

Pete, I would - as we sit here right now, I would have to call it a one-off just to give you candied. The new coal-fired unit to our base at this point in time given the - just the negative influences on coal utilization is actually, it's quite accrue for the Fuel Tech sales team, I have to say.

We have excellent relationships with this particular customer on both sides of our business both APC and FUEL CHEM and we were feeding on one unit at this particular customer site already, and we had been watching the potential need for our FUEL CHEM program on the additional unit and it came to a realization.

So yes, we actually installed the equipment on the unit in the month of June and came up and running in the month of July, and so it was just a nice incremental benefit for the FUEL CHEM business at this point in time.

And I will add that again, a coal unit capacity factors in general are still way down from what they were some years ago, and our FUEL CHEM program revenue generation is still tied to how these units are going to be dispatched, until it's really as simple as that.

I am very pleased with the additional unit but to answer your question, I call it more than one-off today as we look at the marketplace..

Talking about the potential for orders, and I know there are no high clear guarantees, but you did say these are various stages of negotiation the 10 million to 15 million.

Does that mean that there could be some potential slippage and when you get those orders? In other words, do you expect to close them in the third quarter but it's sort of question of whether it's early or late in the quarter..

And the answer would be yes. The timing in terms of when we are actually able to get under contract always have some variability to it, and that works with every contract that we negotiate with the customer. So we always try to speak in general terms Pete as you know in terms of timing on some of these events.

What doesn't necessarily change sometimes is the requirement for a deliverable at a customer site, and so depending on when that deliverable is on a customer site, we try to work back and try to determine what needs to get accomplished between data contract and that deliverable date and that gives us an indication as to what our revenue and margin flow could be over a periods of time.

So yes, there is some variability in that time frame but we have some good potential contract activity that we're working on right now that we're very pleased with and that we feel pretty confident about..

And then you mentioned additional opportunities for the fourth quarter.

Can you give us some sense of magnitude of those opportunities, would that be roughly comparable to what you're looking out for the third quarter or something else?.

Could be and actually has the potential to be perhaps a little bit higher but we have a variety of contracts call it in our near-term sales pipeline and then obviously as we look at our total sales pipeline which will cover the next couple of years, that’s going to be a larger possible scope of contract work but - before the end of this year, we're looking at some potential larger scale orders to come our way, and if that works out for us, yes, Q4 could we have a similar anticipation that we have for Q3..

You mentioned with regard to NanO2 technology that you're talking to existing clients.

Which group of clients and what's the relevance of water technology to your existing clients?.

Couple of comments there, our existing - first of all our existing customer base is quite broad. We have both obviously utility customer base and industrial customer bases as well. We have many long-standing relationships across utility and industrial marketplaces.

There are water needs and water treatment you can say a more specifically all over a utilities like power generation plant site, whether they would be processed for a utilization uses, or otherwise and at the same thing at industrial clients site, whether it would be cleaning sludge ponds or other source of water treatment uses or basically finding out that there could be applications in all of those market segments.

We are looking at some potential opportunities in oil and gas as well. They may not be our direct customers today with our current business segments but they could be potential uses for the water treatment solution in the future.

So we’re finding that there are water treatment needs across all of our market segments where we've done business previously and our task has been to uncover where this existing technology could be applicable..

And then just one quick balance sheet question if I may.

Are there accrued liabilities on the balance sheet which is a pretty big numbers, what are the main pieces of that?.

So you're looking at both employee compensation and then the other accretive 2.9 million, lot if it is project accrual. So if you think about that, we have projects whereby we've got receipt of cash prior to execution of the work that would show up in other accrued liabilities is an item that we would have to provide for.

So that's going to be most of the bulk of that is existing contracts that we have to execute on..

[Operator Instructions] Our next question comes from the line of George Gaspar, Private Investor..

Just a question ongoing on this potential build-up and backlog going forward.

Could you breakdown - you've got a 14.4 million backlog and how much of that was domestic versus international?.

One moment we are checking on this, but numbers right now it will - it is phenomenally domestic as we see it here right now. The great majority is domestic..

And then looking at the potential build-up in the third quarter here is 10 million to 15 million you're talking about.

Can you just equate of that what's potentially domestic versus international?.

We largely follow the same ratios George. It will sub largely be more domestic than international yes..

George to answer your question about 75% of the backlog at June 30 is domestic, the other 25% international..

75% is domestic, okay.

All right, and while it was a good overview, just can you confirm your next presentation - is that going to be the ideas that was in Chicago here at the end of the month?.

Yes, it will George. In my closing comments I'll note that we’re going to presenting here in the near term but thanks for publicizing that, I appreciate it..

This concludes our question-and-answer session. I would now like to turn the floor back over to management for any closing comments..

Thank you, Operator. I would like to thank everyone for their time today and for your continued support and interest in Fuel Tech. As George just mentioned, Fuel Tech is scheduled to present at a Three Part Advisors Midwest IDEAS Conference on August 30 here in the Chicago area, and we would hope to see some of you there.

Thank you again for your support. We are looking to drive value for all of our shareholders and we look to speaking - we look forward to speaking with all of you again very, very soon. Thank you very much..

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation..