Fuel Tech Inc (FTEK) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Fuel-Tech fourth quarter and year-end results conference call.

At this time, all participants are in a listen-only mode. My name is Kevin, and I'll be your conference coordinator today.

If at any time during the call you need assistance, please press star followed by zero on a touch-tone telephone, and the coordinator will be standing by to assist you.

I'd like to remind all parties on line that today's call is being recorded for replay purposes.

Now I'd like to introduce your host, Miss Tracy Krumme. Please go ahead.

Thank you, Kevin.

Welcome to Fuel-Tech's fourth quarter and year-end conference call. By now, all of you should have received a copy of today's release. If you have not, please call us at 203-425-9830, and we'll be happy to send you one.

Joining me on the call this morning is Ralph Bailey, Chairman and CEO, who will be available for the Q&A session; Steve Argabright, our President and COO; and Scott Schecter, Chief Financial Officer.

As a reminder, the matters discussed in this conference 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 these results to differ are included in our filings with the SEC. Additionally, the information contained in this call is accurate only as of the date discussed, and investors should not assume that the statements made in this call remain operative at a later time.

We will take under - Fuel-Tech undertakes no obligation to update any information discussed in this call. And as a reminder, this conference call is being broadcast over the Internet, and can be accessed at our Web site, www.fueltechnv.com.

With that said, I would like to now turn the call over to Steve. Steve, please go ahead.

Thank you, Tracy. Good morning and thank you all for joining us today to review our financial and operating results for the fourth quarter and year end.

As we reported, earnings per share were six cents per diluted share for the fourth quarter, and 14 cents per diluted share for the year. This compares to a net loss of two cents and a net loss of nine cents per diluted share for the fourth quarter and year-end 2001, respectively.

We reported net sales for the quarter of $11.4 million, a 103 percent increase over the same period last year, and net sales for the year of $32.6 million. We are very pleased with our performance, especially in light of the difficult environment we have faced.

Demand for power is still low, and as we've said before, many utilities are operating under significant financial constraints, which has slowed our momentum somewhat by delaying capital spending and negatively impacting willingness to spend money on new technologies.

During the year, we saw significant growth from our air pollution control business. Revenues for this business were up 145 percent for the year and up 124 percent for the fourth quarter.

These increased revenues were primarily due to the SIP Call mandate, which requires significant NOx emission reductions from utilities and industrial units. Looking forward, we expect these revenues to continue to grow through 2005 and 2006, beyond the deadline for the SIP Call, as utilities look for low capital solutions to reduce NOx.

As we mentioned on the last call, there have been several cancellations or postponements of high capital cost, selective catalytic reduction projects, which will result in the need for NOx to be reduced in another manner. Reliance on acquiring allowances in the NOx allowance trading market to bridge short-term compliance deficiencies is growing as an option.

This has caused the price of NOx allowances to increase to close to $8,000 for 2003 tons in the Northeast, and to over $5,000 per ton for 2004 and 2005 vintages in the SIP Call region. We believe that the price of NOx tons will continue to stay at high levels, making them a less viable financial solution. Excuse me.

As a result, we have taken a fresh look at the way we are marketing our NOxOUT technology, and are now using a return on investment approach. With this approach, in many cases, customers can recoup their capital investment within two to three years by selling excess credits or allowances generated.

We have sent letters to all utilities affected, and our sales reps are diligently following up with each one of them.

We are pleased to say that we have been successful in this approach, and as a result, we are now in discussions with four utilities whose revenue potential could amount to $20 million, some of which should be realized this year. We are confident that this list will expand in the near future.

We continue to penetrate the NOx reduction market by adding new customers and converting previous orders for design engineering services into full contracts.

In 2002, we experienced record bookings, in excess of $24 million. Year-over-year, bookings were up in the fourth quarter, as well, in excess of $7 million.

During the year, we received our largest sale ever - a single utility contract for $10 million for the turnkey installation of our NOxOUT process. Also, we select - excuse me - we successfully completed a NOxOUT technology demonstration on the largest unit we've done to date - 750 megawatts.

In addition, we have been successful in introducing our NOxOUT ULTRA product, our technology for the on-site conversion of urea to ammonia for use as a reagent in the SCR process.

We sold the unit for use on two combustion turbine systems. And going forward, we expect two additional orders for use on large coal-fired units in the first half of the year.

Additionally, we have developed substantial interest in Europe, and we will continue to aggressively market this product, both domestically and abroad.

Turning to our non-regulatory driven operations, we continue to be very optimistic about the growth opportunities available to FUEL CHEM, our fuel treatment chemicals business. While our fourth quarter revenues were up 45 percent from last year, the year fell short of our expectations.

Several factors impacted these revenues during the year. First, high oil prices and political unrest in the Middle East caused some customers who burn oil to switch to gas. Second, our large coal-fired utility customers' quality of coal from their primary source improved, temporarily alleviating the need for our process. Third, the economic situation faced by the utilities has caused them to cut back on spending for new technologies.

While we are addressing these factors and view them as temporary, they unfortunately have had the result of putting our business behind the year.

We mentioned on the last call that we were in discussions with 10 different utilities about the implementation of our targeted in-furnace injection technology. I am pleased to report that we have already received a purchase order from one of those utilities, and we feel two or three more are imminent.

It is also important to note that the order received includes a new enhancement of the technology we feel will provide even more benefits to our customers.

As I said before, these single unit demonstrations would be worth $10 to $15 million on an annualized basis, with a total potential estimated to be in excess of $50 million. We're very excited about this opportunity, and expect significant business to be gained during the first half of the year.

We are also in late stage discussions with major coal suppliers about possible joint marketing relationships. Tremendous synergies exist here, and strategic partnerships would benefit both parties. Our credibility would be enhanced, and we would benefit from new contacts and market intelligence. And we can help their customers utilize certain coals more effectively.

We have been diligently working to expand our interest internationally, and I'm happy to say that we have made considerable progress.

During the quarter we received a purchase order for our preliminary design engineering for a coal-fired unit in Italy, and our first significant FUEL CHEM order from China, for treatment of heavy fuel oil fired combustion turbines.

Additionally, significant opportunities exist in Mexico, and we have prioritized our efforts to enter that market as soon as possible.

On the software side, we have made a great deal of progress in 2002. First, we recently changed the name of our computational fluid dynamic visualization software from VIRTUAL ADVANTAGE to ACUITIV. We did this to increase our target market to include the entire CFD visualization market, rather than that associated with virtual reality alone.

The new name, ACUITIV, is a combination of the words acuity and intuitive. Acuity, of course, means acuteness of perception or vision, while intuitive means seeing clearly, as in easily understood. We feel this best describes our new product, as it truly offers great potential for designers and engineers to perfect processes and improve products.

During the year, we commercialized the product, and just last month, we upgraded the software to our latest version, 3.2. This new upgrade made the software available for use with Windows 2000, in addition to Unix and Linux operating systems.

It also allowed for the product to work the same on all platforms, from a laptop or desktop to a high-end system with no need for custom programming. This was a significant accomplishment, as we were the first to deliver to market a visualization software product that truly meets this requirement.

This also meant we weren't attached to a niche market, but rather to a mainstream market that serves laptops and desktops.

We continue to target the following verticals: automotive, aerospace and chemical processing, as well as the scientific, medical and power industries. Looking forward, we expect increased penetration in these markets as we continue to grow the business, as well as look for alliances and strategic partnerships to broaden our opportunities.

We have made significant interest abroad, and have hired a distributor who is covering Germany, Austria, Switzerland, the Netherlands and Luxembourg. And we are in discussions with several others in Europe and Asia.

We expect more upgrades of the product in the future as we continue to listen to our customers and further develop the software with the new features and functions requested.

I will now turn this call over to Scott for the financial review - Scott.

Thanks, Steve, and good morning.

We're very pleased with our results this quarter and during the year, especially given the tough environment we've been operating in.

Our fourth quarter growth was driven by strong air pollution control revenues, which were up 145 percent from last year. This is the result of the pending deadline of the SIP Call, requiring significant NOx reductions from utility and industrial units in 19 states by May 2004.

As we said, we anticipate that these revenues will continue to grow through '05, '06, beyond the SIP Call deadline.

In the fourth quarter, our FUEL CHEM revenues were up 45 percent from last year, yet behind our expectations. This, as Steve said, was a result of several factors, primarily the attrition in the oil-fired business, as well as PacifiCorp's Hunter station using a quality of coal that required only intermittent treatment.

Nevertheless, we continue to make progress in our goal to penetrate the coal-fired electric utility industry, which we consider to be our largest market opportunity for FUEL CHEM.

As we further penetrate this business, we expect our financial results to be less affected by the relationship and prices of oil and natural gas. Oil-fired business, though important, is dwarfed by the size and market potential of the coal-fired business.

I'm pleased to report that our net sales for the quarter increased 103 percent to $11.4 million, up from last year's $5.6 million. Net income for the quarter was $1.3 million, or six cents per diluted share compared to a net loss of $406,000, or two cents per diluted share, in the same quarter last year.

Our gross margin percentage in the fourth quarter decreased to 38 percent, which was a seven percent decline from last year's fourth quarter, and a six percent decline from the third quarter of this year.

This lower gross margin simply reflects product mix, as a greater percentage of our total revenues were derived from the air pollution control business, a significant portion of which was turnkey. And that has a lower gross margin percentage than FUEL CHEM and non-turnkey projects.

In the fourth quarter, our SG&A and R&D expenses remained relatively flat, increasing to $2.9 million from $2.8 million in last year's fourth quarter. And we continue to have a very strong balance sheet.

We ended the quarter with $11 million in cash, up from $8.2 million last quarter, and almost $14 million of working capital, which represented a 57 percent increase over last year. If you would exclude a reclassification of $1.8 million of debt from short term to long term, working capital increased 37 percent over last year.

Our backlog at December 31st was approximately $10 million, the same as last quarter.

We also increased our financial capabilities by amending our credit agreement with our bank. We increased our credit line to $10 million from $6 million, as well as relaxed some of the restrictive covenants in the agreement.

Just quickly, for the year, sales increased 85 percent to $32.6 million, from $17.7 million last year. Gross margin percentage again decreased to 44 percent versus 49 percent last year. Again, this decrease is primarily due to product mix in favor of lower margin NOx reduction business, a large part of which was turnkey.

Net income for the year was $3.1 million, or 14 cents per diluted share versus a loss of $1.6 million, or nine cents per diluted share in 2001.

SG&A expenses increased to $10.2 million from $8.7 million in 2001, reflecting increased revenue related expenses, new hires for FUEL CHEM sales and marketing team, and the one-time $100,000 fee for our listing on the NASDAQ national market.

FUEL CHEM's infrastructure is now fully in place, and we don't anticipate any new hires, except for technicians that'll be brought on to service any new business.

As Steve discussed earlier, the weak economy and the financial constraints on the electric utility industry have had an impact on our business. We are - and are expected to continue well into 2003.

One of our financial goals for 2003 is to improve our profitability over 2002, in spite of the adverse market conditions. To do so, we're taking aggressive steps to expand our markets while strictly managing and reducing costs where possible.

With that, I'd like to turn it back to Steve for closing remarks - Steve.

Thanks, Scott. Again, I want to say how optimistic we continue to be about the growth of all three of our businesses.

Our return on investment approach towards selling our NOx reduction processes is beginning to generate significant interest, and we are confident we will book revenue because of that approach this year. As I mentioned, we are expecting contracts for two large NOxOUT ULTRA systems for use with coal-fired boiler SCRs in the near future. Engineering on these systems has already begun.

On the FUEL CHEM side, we have just received another order for our targeted in-furnace injection process on a large coal-fired unit, and we will be demonstrating an exciting new enhancement of the technology when the unit starts up this spring. Additional orders are expected soon.

Discussions with major coal suppliers as potential strategic marketing partners are also progressing well.

The repositioning of our ACUITIV visualization software has already resulted in significantly increased interest, and we are aggressively pursuing business in several markets.

We are committed to achieving our financial goals and will do everything in our power to achieve them.

Kevin, I would like now to open the call for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone.

If your question has been answered, or you wish to withdraw your question, then key star followed by two. All questions will be taken in the order in which they are received.

Our first question is from Tony Campbell of Knott Partners.

Good morning, gentlemen. And I think it's fair to say you guys did a very good job in a very tough market environment.

Scott, I actually have about three questions, if I might. The first question, Scott, could you just - of the $32.6 million in sales, could you kind of break that down in the three categories for us?

Sure, Tony. About 78 percent of that was our air pollution control business, 22 percent was our fuel treatment chemical business.

OK, one thing to keep in mind when talking about the software, according to Generally Accepted Accounting Principles, we will not be recognizing license revenue until the capitalized cost of the software is recovered, OK. So we have about five - a little under $500,000 on our books of capitalized software costs.

So, you know, even if we start booking license revenue - or, not booking - but even if we start getting license fees by selling licenses on the software, we won't recognize those fees until we recover the capitalized cost of the ...

Sure. Have you done - have you made any sales?

We've had two commercial sales so far.

OK. And do we sort of have an idea of how big those are?

Each one is in the $10,000 range.

OK. Then I guess I'd like to talk about, get someone to give us some further clarity.

You talked about the FUEL CHEM and the enhancement - the enhancement. So I presume that if you've got enhancements, that that's going to lead to - so a possible change in pricing. And I wondered if we could kind of explore that, if we might.

Well, I don't - Tony, this is Steve - I don't really see much of a change in pricing, although it's not impossible. What I do see, however, is making the technology even more attractive to the utility industry.

And I don't want to get too technical, but the enhancement really revolves around being able to keep, not only the upper portion of a furnace, the upper portion of a coal-fired furnace clean, but also to expand that effort toward the lower furnace. And, again, I don't want to get too technical, but we've figured out a way to apply chemicals in a very high heat transfer area of the furnace.

And there are a lot of utilities that do have issues with that part of the furnace, that they've tried to use mechanical techniques, and some of them do it successfully, but a lot of them don't. So, we're going to be demonstrating that new enhancement this spring.

So, pricing - it could, if it's - there's more value added available, certainly we'd look at pricing changes. But right now I'm looking more at a better entree into the market than we have today.

So it sounds like this should have, you should be able to increase sales because of these enhanced features.

Yes, we think so.

And I guess finally, there was some insider sales that were probably done in a sort of a disruptive way to the market. So I would like to - maybe the company could address how they're going to, in the future address this, because I think we all kind of view the stock as being sort of undiscovered and pretty interesting. And it's sort of distressing to see insider sales. So, maybe we could let someone address that.

Tony, this is Ralph Bailey. And I would be pleased to tackle that question.

In answering that question and some others that have been asked, I would first like to explain to you, and make sure you understand and others understand, the company's compensation policy.

In Fuel-Tech, compensation is made up of three elements. One is a competitive salary, and that's based on the information that we obtain from companies comparable to Fuel-Tech. The second part is performance-based annual bonus opportunities. And third is longer term compensation, which is based on stock option.

Now, as to the stock options, we have a shareholder-approved plan that is administered by the compensation committee. And that committee is chaired by an independent director, a man who is very experienced and knowledgeable on compensation matters.

The plan limits outstanding stock options to 12 percent of our outstanding shares. And that percentage falls between the six and eight percent that one would expect to see for a mature company, and maybe it's up to 15 or 20 percent for startups or more entrepreneurial type ventures.

In stock options, when they are granted, are in effect a contract between the employee and the company. When the options are vested, the employee is free to exercise, hold or sell, as he or she sees fit, so long as legal lend-up (ph) periods are complied with, and that the company is not under a no-trade advisory, which from time to time is issued by the general counsel.

And further, insider trading in this company is defined as trading in the company's stock based on material non-public information, or communicating material non-public information to others, in violation of the law.

The company expressly prohibits insider trading.

The term insider includes not only directors, officers, 10 percent shareholders, or employees of the company, but also may include immediate family members who reside with the insider, or persons for whom the insider has a financial responsibility.

All our proposed transactions are submitted to the general counsel, who confers with management, which means me, and he then responds quickly to the individual as to whether or not they would be in legal compliance to trade.

As you know, we have a relatively small number of employees. And we believe that this matter is under very tight scrutiny and control.

But unless there is a legal or compliance reason why a trade should not be made, they are approved.

Now, the case in point was Doug Bailey's sale of some of his warrants. These warrants were issued at the time that American Bailey invested in Fuel-Tech. I personally put up the money and hold the common stock. And the warrants that we received were distributed between the small number of employees that we have in the company.

Doug holds 1.75 million warrants and 86,332 common shares. So that brings his ownership to approximately 8.4 percent.

Back in September, Doug filed a Form 144 announcing his plan to sell 56,932 shares. That form expires and was refilled, as it had to be, which caused some confusion, because somebody thought he was selling another 56,932 shares.

So of that total he has sold 45,600, or approximately 2.5 percent of his holdings. These shares were all sold when the market was around $4.25 or so. After he sold, the stock moved below and above that price.

Now, none of our employees are extravagantly paid. And it can be expected that as long as we have a stock option plan in place, and as long as we have rights outstanding, part of these shares will be traded, as a part of their compensation. And that's what they were intended to do.

I can assure you that Doug and all our other insiders and loyal employees have the best interests of this company and its shareholders clearly in mind. We're all working together to create a stronger and more profitable company. And we value our shareholders and the investment that you and others have made in the company.

And so, there is no insider trading going on that isn't under close scrutiny. And, frankly, I have been asked why don't I stop it. And I can tell you, I don't have the right to stop it. Using stock options, once they're granted to the employee, they have certain rights, as long as they do them under the legal scrutiny that I have described, are free to trade. And it should be expected that they will trade.

And so that's the full and complete answer.

Well, the only thing I'd add is, if I could, since we think we're at the beginning of a fairly good ride here, there are some companies, and I'd bring up Fifth Third Bank where basically the employees are encouraged and the compensation system is jiggered to allow employees to exercise and hold options. And frankly, the track record there is that most employees have held onto the options. And I believe they've done rather well over a period of time.

And maybe that might be something that you guys might want to consider - paying more cash and, so we don't see people selling.

And I appreciate your full and - full explanation with regard to your, with regard to Doug's situation.

Well, there's some of us - there's some things that can be done. For example, I will likely be picking up some of those warrants and put them in my own account. I've never sold a share of stock in this company, don't intend to.

And so, that'll take maybe some pressure off, may not. As long as they're out there, somebody from time to time is going to need some money. And, you know, as long as that's part of compensation, we have to expect that.

But we also know that our employees are quite aware of what impact this could have on the price of the stock.

And, you know, if Doug had sold 15, 20, 30 percent of his warrants, that would have been one thing. But, you know, actually, what he did sell was a very small amount.

And I know that others from time to time have sold shares because they were remodeling the house or buying an automobile or doing something where they needed money. And sometimes shares are sold in order to take a part of the gain to pay their taxes.

So, as long as we have a stock option plan, there will be trading that I can't legally and shouldn't be expected to be able to stop. So I think it's a matter of - I don't know the Fifth Third situation as to how they were encouraged to hang on. Most of our people are hanging on.

There will come a time when an option is expiring, that they have no choice but to exercise, and - or lose the benefit of the option. And when they do that, they have taxes to pay, and they will sell shares.

So, hope that helps.

Thank you.

Thank you. And your next question is from Alan Weisenbaum (ph) of Fulcrum (ph).

Hello? Hello.

Hello.

Hi. How are you?

Good, Alan (ph).

Good. Just a couple of quick questions, and then a comment.

In terms of - if you remember, a while back we had heard that there was one major - or a utility that had a Midwestern facility that was under the FUEL CHEM business, and we were hoping to hear about that one.

Right.

We still have not yet heard. Can you update us on the status of what's going on at that plant? And if and when can we expect to hear who that utility is?

Well, actually, Alan, there's two in the Midwest. The first one, the larger of the two units, the one that was on first, is now down for a major outage, where they're reconfiguring the furnace and some other major work. We still don't have any ability to talk about that by name.

The second one is running - well, it was curtailed for a couple of months due to plant issues that we certainly have no control over, but is now back in operation and is running quite well.

So, we can't expect to hear who that utility - that utility will not let you say who they are ...

No, they won't. Unfortunately not.

In terms of, again, just focusing on the FUEL CHEM side of the business, when do you - I mean, one of the issues that people have expressed to me is that, you know, we keep on hearing that utilities are going to come on board. And understood - understanding that the environment is very tough, now we're trying to hook up with the coal companies.

Sure.

When do you anticipate that, you know, this business will start to hear more contract signings? Or, if it is a return on invested capital type of analysis, wouldn't you expect that, given a very tough environment, this might be a project that these companies would look to do in an effort to save costs?

Yes, Alan (ph). Well, I mentioned during the regular part of the call here that we did receive an order already this year ...

Right.

... on one unit, which is projected to start up in April. And we are very close to getting some additional orders.

You've got to understand this industry is extremely conservative even in the best of times. And when times are like they are right now, it's very difficult for them to pry money loose for new technologies, in particular.

Now, we're doing everything we can to speed that process up - strategic alliances like we talked about. We're very willing to share risks to get them started from the perspective of participating in installation capital needs, if you will, in discounting chemicals for trial periods until the results that we expect are achieved.

We're looking at every option we can to try to speed that up. But, like you mentioned, the situation in that industry right now is very difficult.

Right.

And we're optimistic that we're going to get some good ones in the very near future, just like we just did. But it's - unfortunately, it's slow.

OK.

Alan, this is Ralph Bailey. I wanted to ...

Hi, Mr. Bailey.

... chip in here.

The other thing about the electric utility industry that needs to be understood, and we certainly recognize, there's a regulated and an unregulated side.

The regulated side can pass cost increases through in their rate base. The unregulated guys cannot.

Therefore, the - as you look at these proposals as they are made, you know, the rates of return are tremendous. And what we have to do is to sell the unregulated side, as they have the money to spend with us.

And somehow or another we have to induce - and we're working on that, as Steve has said - to induce the regulated side that they're letting embarrassingly strong rates of return slip by simply because they can pass these increased costs through.

We have a - one of our directors is an important electric utility executive. He's given us a good deal of guidance in that direction.

And so there's going to be quite a program as we aggressively get into this matter as to how we induce people to take advantage. And in some cases, we're working on situations where we ourselves might finance under very attractive circumstances, their investment in our technology.

OK. Sounds reasonable.

The only comment that I wanted to make also is regarding the stock sales. I think having management aligned with investors' goals, which means having stock options is probably very worthwhile, I guess the one issue is when unfortunately the stock doesn't trade that much.

So even if somebody is using this as forms of compensation and sells, you know, 5,000 shares, it has a dramatic impact on the stock, given that maybe there are other things that have to be done, just because a small amount of shares has such a dramatic impact on the trading volume.

Yes, it's sort of interesting in that regard. When some of the sales were made, they were largely the entire trading that was done on that particular day.

Right. Which is what the - which is what - I don't think anyone would argue that having stock options and compensation in the form of stock is fine. However, as you said, some people have circumstances that they have to sell.

But when the stock is so thinly traded, you know, 500 or 1,000 shares, which may be very light, but do have a dramatic impact when the stock trades are thin.

Well, we've done a lot of examination about that. Several studies have been made about what the real impact on the insider trading is.

And the largest of those studies came to the conclusion that insider trading didn't have any impact on the value of the stock. And this came from a study that was rather exhaustive, including a lot of companies and a lot of trades over a long period of time.

But I think the emotional side of it, certainly, we recognize and understand.

OK. And I thank you.

Thank you. And your next question is from James Scopello (ph) of Karen (ph) Capital management.

Hey, good morning, gentlemen.

Good morning.

I'm trying to get the breakout - well, last quarter NOxOUT was six point - third quarter NOxOUT was 6.2 million and FUEL CHEM was 1.8 million, which totaled the $8 million in revenue.

And in the fourth quarter, what's that breakout?

The breakout is, in the fourth quarter, we have 9.2 for air pollution control - 2.1 on fuel treatment.

OK. OK, and then in terms of looking at the - you have a $10 million backlog at December 31st. What's the burn? Is that all going to be burned? And the next year, 12 months, less than that? More than that?

Call it in the next nine months, nine to 12 months certainly. Most of it in the next nine.

OK. And then, with the bookings, over $7 million in the fourth quarter. Where was - and it - bookings for the year were about $24 million. So how did the other three quarters fall out with bookings?

The - I don't have the breakdown handy, James (ph). I could give that to you.

OK. That'd be great. And then you said that - let's see - the credit facility is up to $10 million now?

Correct.

And the term loan, what's the situation with that?

The term loan was, at the end of January, was paid off with proceeds from the, from the line. So that's why if you look at our balance sheet, the debt that was on in the third quarter as short term became long term.

Right. I saw ...

Because we paid it off with the credit line.

Right. I saw that little switch there. And ...

Right.

... and who's that bank on it? The same bank that was before?

Yes. Bank of America.

OK. All right. And then, now, in terms of going forward, the backlog is flat sequentially. What should we be looking for in the first quarter in terms of revenue? And then all of 2003.

Well, as per usual, the first quarter is typically a weak one for us, and will continue to be in 2003.

As far as the whole year goes, we're expecting, based on current market conditions, moderate increase in revenues. And whether that means a 10 percent increase or a 20 percent increase or higher, it's hard to say, OK. A lot depends on how long this economy, and in particular the price of power, and all the other factors stay the way they are.

As Steve mentioned earlier, and we're working real hard on some new business opportunities, and to expand our markets. I think we're going to be pretty successful in those endeavors. How much revenue impact that has in 2003 is a big question mark.

So, you know, I think business as usual, we'll see moderate increase in revenue. But, you know, there are some wildcards there, as well.

OK. So just because backlog is flat, I shouldn't be looking for an 11.4 million. It should - going to be ...

No. No, no, no, no.

OK. Do you have a sense on how much less? I mean, we're sitting in February. So do you have a sense yet on how much less it would be?

I really - I do, but I don't want to talk to that right now, because there are still some things that can change it, you know, even this month. So, I'd rather just say it's going to be our weakest quarter as we see it right now, with a pickup starting in the second quarter.

Pickup starting in the second quarter?

Yes. I mean, you'll see improvement in the second quarter, certainly. Based on our current expectations.

OK. And do you foresee an EPS about, in the first quarter, or loss per share in the first quarter?

It's - it could go either way. If it's EPS, it's going to be small. And if it's a loss, we expect it to be a small loss.

OK. I see.

OK.

And, OK, yes. If you can just get those bookings. I'm just having trouble getting to that 24 million for the year. I was trying to back into it, but it was pretty difficult.

And, OK. Is there anything else that's going on in the industry? Are there any kind of - are there substitutive products you're seeing out there?

No. There's really nothing new coming along. Relative to SIP Call compliance for NOx and so forth, if you're not out there with a commercialized product today, you're just - you won't be selling anything.

I see. All right. Well you guys, as expected, had a solid fourth quarter. And, you know, hopefully after the first half, you know, you'll of course build on that.

Well, we expect to. And, you know, as Steve mentioned, as bad as the market is - the economy and what's happening in the electric utility industry, it does present opportunities for us. And that's where ROI selling of NOxOUT systems comes into play.

And that's going to provide us - or should provide us - with some good business this year, as well. So, you know, we always look to exploit the opportunities that are out there in whatever the market conditions are.

OK. You think FUEL CHEM is a base here at $1 million per quarter?

One million per quarter? What do you mean?

I think it was $1 million in the fourth quarter, right? Revenue?

No. It was 2.1.

Oh, I'm sorry.

Two point one.

OK, 2.1.

And we should start seeing that build.

Oh, I see. OK. All right. So it should build from this level. OK, great. All right. Thanks, gentlemen.

Thanks.

Thank you. And your next question is from Ross Teeler (ph) of Caxton (ph) Associates.

Yes, gentlemen. It's really not so much a question as a comment. I would like to second the earlier concerns and comments about the insider selling. And without regard to the academic studies about the impact of insider selling, I think it's quite clear to anyone who is watching the stock, that when you have a substantial holder selling stock in an uncertain economic environment, and uncertain market environment, it provides an incredibly depressing effect.

Fuel-Tech is not IBM, and so the amount of selling that was done was aggressive vis-à-vis the average trading volume. And I think that it caused the market tremendous concern. And I think there was a lot of uncertainty.

And I would have argued that, as I did to certain insiders, that the company should have come clear with what the magnitude of the insider selling was likely to be, and what was motivating it.

Because when you have someone who has such a large position, the market tends to flee before the seller, rather than try to ascertain and ask questions and find out the true fundamental reasons.

I think, you know, everyone in Fuel-Tech is there because they see tremendous promise. And when someone who is so close to the company, as the seller was, begins to unload stock, it starts to raise doubts whether it be in professional investors' hands, or more importantly, often in retail investors' hands.

And the damage that was done to shareholders I think was substantial. And I look forward to 2003 being a year when we actually start to be able to bring FUEL CHEM and others to the bottom line.

I think it's, you know, this has been a great story. I think it's time we start to print the numbers. And those are my comments. Thank you, gentlemen.

Thank you. And your next question is from Pat McLaughlin (ph) of UBS Paine Webber.

Yes, the first question is for Steve as it relates to FUEL CHEM and the new enhancements. And I'm not sure, but FUEL CHEM is the higher margin business that we're trying to grow and the RAZOR BLADE (ph), continuing use of the additives.

What does this new enhancement, to work on the lower end of the boiler, do to the margins of a new FUEL CHEM installation? Does it lower them?

No.

Are you selling more - are you selling more additive? Does it raise them? How is this going to work?

Well, the actual gross margins won't be impacted. Dosage - again, this is something new. But we think that dosage requirements for a typical sized unit will be about the same, maybe slightly higher.

But as far as the actual impact on gross margins, there won't be one.

OK. And in terms of the - OK. Well, that's good. So, in other words, we're not ...

They won't ...

... cramming more - we're not - OK. That was my question. We're not cramming more content in here to get the thing sold, and then make less money.

No.

The next question is, the April contract - do you all want to share with us the size of the unit that this is being installed on and/or the expected annual dollar volume?

The size of the unit's about 350 megawatts.

OK.

Which is - which is about average, if you took all those in the U.S. as an exercise. That would be just about average.

That's a little smaller than the ones we're on out west already ...

Right.

... certainly a significant size.

And would that translate to, in terms of, you know, annual dosage, dollar volume, $600,000 per year?

Oh, north of that. I'd say 800 probably.

OK. That's great. OK. The next question is for Scott.

Scott, as it relates - there's been a lot of chatter here about options and exercises and warrants and whatnot. Can you take me through all the warrants outstanding, all the options outstanding? And let's assume the stock is $16 a share. What is the net-net-net number of shares outstanding, fully diluted?

Sure, Adam (ph). I'll do this off the top of my head.

That's fine. That's close enough for me.

So we'll just do ballpark here. There were three million warrants issued to the American Bailey Group at the time of their investment, OK.

Now, some of that has been exercised, but a very small piece of it, OK. So maybe it's - I don't know - 2.9 million, 2.8 million, somewhere around there is still outstanding.

OK.

On the stock option side, as Ralph had mentioned, there's about 12.5 percent of outstanding shares is reserved for stock options, OK. And we have, oh, I don't know, 19 million, call it 615,000 shares outstanding.

So that means there's a reserve of a little under 2.5 million shares for stock options. Of that I'd say about 2.2 million is probably currently outstanding.

OK.

OK?

All right. So we've got 4.1 plus 19 - we've got 23, almost 24 million all in, all in.

All in, all in.

OK. All right. That's all I've got.

OK.

Thank you. And once again, ladies and gentlemen, if you would like to ask a question, please key star followed by one on a touch-tone telephone.

Your next question is from Frederick Brenner (ph), who is a private investor.

Good morning, gentlemen. I've been listening to your discussions of how to handle all your exercises of stock options and how it affects the marketplace.

And I can only question the efforts - past efforts and hopefully future efforts will be a little better, into getting some sponsorship for your company.

You've got a wonderful story to tell. I've been in the stock a year-and-a-half. I am patient. But I think part of the problem, when you go to - when an insider goes to sell 5,000 shares or 10,000 shares, and the market gets rocked as it did in the most recent exercise, it exhibits a total lack of sponsorship.

And with a story like yours to tell and something that is necessary for the utility industry, one would think that you would be making more of an effort, at least so it can be demonstrated that there is some sponsorship in Wall Street.

Well, Fred, we're working very hard on that. And, in fact, in the latter part of 2002, we brought in an industry professional in-house, Tracy Krumme, ...

I've had conversations with her, and I know she has told me that you are proceeding with that. But that has been about five or six months.

And I realize part of the problem is the price of the stock is under $5, and some of the majors don't want to touch it, even though that's when you should be there. But this is a problem which would solve your moving of 5,000 or 10,000 shares in a blink, ...

Well, ...

... if you had some sponsorship.

... and, as I said, you know, Tracy's working on it. The environment has also changed on Wall Street, as I'm sure you're aware, ...

Yes.

... as far as analyst coverage is concerned, which makes it even more difficult to get analyst coverage for a small company like ours.

But, I am optimistic. Tracy's optimistic. And we're working hard towards that. I can't promise you anything on it, but ...

OK.

... but that is definitely a priority of ours.

Well, Tracy and I have discussed it, and I know she's working on it. And I just want to suggest that I think that would certainly solve a lot of your moving of 5,000 or 10,000 shares.

And when and if it were to come to pass between your investment relationships, that piece of stock, it isn't a whole lot of money, certainly should be easy to move. But the way it was done was, one, obvious, and two, very unprofessional.

That's it from me.

Thank you. And ...

Right (ph). And you have done a wonderful job so far. Things look wonderful. And as I said, I'm a patient investor, and I'm keeping my eye on it carefully to add to it. And I thank you.

Thank you. Your next question is from Fred Orr (ph) of Lord Abbott.

Good morning, gentlemen. Other callers have expressed a fair amount of optimism about the future. I'm a little more concerned that your business trend, or lack thereof, I guess.

The FUEL CHEM business has been very stagnant for quite some time. And I recognize the difficulties of selling ROI-based programs to regulated utilities that have no incentive to cut costs. And I further recognize the difficulties of selling a fuel treatment process into the unregulated utility boiler market, when they don't have any money.

So I'm not terribly optimistic near term about that business. Adding one additional boiler is wonderful, but it's only a penny a share.

And, you know, many of us had thought that we'd be looking at, you know, double digit boilers for the FUEL CHEM business as early as the middle of this year, and that's clearly not in the cards.

Nonetheless, the other area of concern for me is your NOx business. Allegedly we have 1,200 boilers out in this 19-state region. So (ph) from (ph) by the EPA SIP plan with a May 4 deadline, your commentary today suggests that we're going to get to the end of '03, i.e., five months before that deadline, without any significant uptick in your air pollution control business from that particular source of potential demand.

My concern is that utilities, industrial users, municipal incinerators, et cetera, all seem to be either willing to ignore the May 4th deadline for implementation, or are finding alternative means of achieving it rather than adopting your technology solution.

Could you update us on your views about the remaining market opportunity in the, that 19-state implementation plan area? And help us understand why boiler owners are willing to ignore the deadline in favor of other alternatives. Thank you.

All right, Fred, I - and, again, let me say that I don't think they're ignoring the deadline. What I do think is that the SIP Call requirements are going to - the utilities putting in capital expenditures are not going to be reaching the requirements in time.

Now, what does that mean? That means they're going to have to find other alternatives to achieve compliance, like I said earlier.

So, right now, if you look at the price of a NOx ton in that SIP Call area, it has gone from under $3,000 a ton to well over $5,000 a ton for 2004 and 2005.

Now, what's the annual cost of that on a 350-megawatt boiler to a utility owner?

Well, ...

Of using credits only to achieve implementation standards?

Well, it depends on what his baseline is. It depends on how - you can't do it ...

I understand.

... you can't do it by boiler. You have to do it by - remember, this is a cap for a utility.

Right.

So, you can't look at it that way. You've got to look at the big picture for that utility, combining all their units, and where they're going to work out to the ton cap they have for that seasonal requirement from May 1st to September 30th.

Well, a mere 4,000 tons of credit purchases would be equivalent to the, you know, a fairly high cost for one of your units.

Oh, absolutely.

And that's an ongoing annualized cost of compliance. And I - it's just - it's totally incongruous to me why a utility would opt for assuming an ongoing liability in equal to or in excess of the cost - capital cost of compliance through (ph) a hardware edition.

Well, Steve (ph), this market has changed significantly in the last nine months. It's becoming apparent that the equilibrium number of SCRs (ph) and technologies installed are not going to make the May 2004 deadline. That's why these ton (ph) allowances are going up a very - just in the last week or so you've seen over a 10 percent in the price of these.

In the Northeast, where the May 1st requirement 2003 is still in place, those times (ph) are now approaching $8,000. So, people are finally discovering that "Hey wait a minute. If I'm going to make it and I'm going to buy allowances, they're now going to be extremely expensive." That's why our sales force is out in force talking about "Wait a minute. We can help you by providing easily to install nox-out (ph) systems to get you out of that problem or to help you out of that problem or if you are a utility who's has done planning and will achieve the requirement you can sell those times (ph) and make money based on high allowance prices like they are right now."

But, you know, you've guided us to essentially broadish (ph) to mildly up revenue numbers which means that little if any anticipated revenues is going to come from that area in calendar '03 which was a time that - you know - if we go back a year or two that we thought would probably potentially be a peak year for delivering nox (ph) solutions into that marketplace. And, in fact the peak year's come and gone and we've seen virtually no business according to your comments today.

And, it just seems to me that with the deadline rapidly approaching - you know - either you're telling me - you know - 82 percent of the market opportunity is going to occur after the deadline or in fact it's bypassed you in some way, shape, or form either through the use of credits, alternative (ph) solutions, alternative technologies or what have you. You know, what portion of that originally envisioned market opportunity do you think is left here?

Well, we don't see a change in that. What we see is an extension of it. You know, we've said all along that we've seen between 80 and 120 units coming our way based on this mandate. We haven't changed that at all. We've extended that beyond that 2004.

And, you've delivered one or two to date?

No, we've delivered about 40.

About 40 of the 80?

No, 40 of the 80 to 120. We think it's going to more than 80 and that's the low end.

OK. So, you've delivered 40 of the 100. So, you think about 50 percent of your revenue opportunity in the 19-state region is still ahead of you?

Absolutely.

OK. But, that implies very little, if any, additional growth on an annualized revenue basis to me. I mean, I'm a bell curve guy. Once you've penetrated 50 percent of your market opportunity growth tends to cease and stabilize.

Well, see in - a year or two ago we also said that - you know - although we didn't think there was going to be a cliff in 2004, there was certainly going to be a valley. We don't see that now. We see the growth continuing for a couple of years beyond that deadline because of this situation.

OK. Thank you very much.

You're welcome.

thank you. And, your next question is from Neil Goldman (ph) of Goldman Capital Management (ph).

Good morning guys. Just one quick question. The size of the fuel chem (ph) market in your minds today with your new applications and new focus on coal, et cetera?

I don't really think it changes too much Neil (ph). I think we're still talking in the $200 million range. What it does is give us another entree, something that will benefit the utility even more.

: OK.

But, we see it as more of an advantage from a sales marketing perspective. We don't think it really expands the number of units more. It expands our ability to penetrate it.

: And, in term and then your goal would be to get to 25 percent, $50 million, of that in what timeframe?

As soon as possible.

: No, but you made a comment ...

It's been slow. I'd say - it's hard to tell how many units we're going to get per year, but some of the units - the bigger units are worth - you know - in the range of $2 million a year and we're certainly actively calling on those. So ...

: Because, you had a made a comment about $50 million earlier - someone did.

Yes, in fact that was related to the 10 utilities we were in discussions with that if you had all the units that we feel have issues that we could help solve, that's where that $50 million came from.

: On top of what you already have?

That's correct.

: OK. I mean, so conceptually that could be - you could have that run rate two years out?

Conceptually, that's true. In reality, that'd be difficult but that's certainly a goal of ours.

: And, $50 million - the gross margin in this case is about 60 percent?

It's approaching that, yes.

: OK. All right.

The other thing Neil (ph), when Steve (ph) talked about a $200 million market that's domestic and we're busy trying to expand that to other areas ...

: Right. Well, I'm just assuming that $50 million in two years is domestic and we can add on top of that whatever you guys pull off internationally.

OK.

: All right guys. Thank you.

Sure.

Thank you. Your next question is a follow-up from James Scopello (ph) of Karen Capital Management (ph).

Hi guys. I'm just going through the numbers a little bit more. Backlog at the end of the third quarter was $10 million and then you had $11.4 million revenue and over seven million bookings. So, is it - when you say over seven is it - is it very much over seven? Is it substantially over seven? Because, I'm coming up with a backlog under the fourth quarter around 5.6?

No, it's - tell me again how you're getting that.

I'm doing - the end of the third quarter backlog is 10 ...

Yes.

... and taking out $11.4 million ...

Well, no you taking out our fuel chem (ph) business also. OK? Backlog just relates to air pollution control. OK? So, you've got to remove the ...

2.1?

Remove the 2.1 ...

OK. So then, it's 9.3 ...

Hang on. There's also some chemical revenue in the nox (ph) side. So, really what we look at - we had about $10 million before, at the end of the third quarter. Additions were a little under $9 million. OK?

I'm sorry. What was under nine?

A little bit under $9 million were the additions during the quarter.

What does that mean?

New bookings.

OK. A little under nine. OK.

And, projects completed was pretty close to that as well. You know, projects of the revenue recognized.

Completed - we were a little under nine as well.

Yes.

OK. So, if - all right to $10 million and then I guess take out - I guess nine-point ...

You're just about taking out - putting in and taking out the same number just about.

OK. I got you.

OK.

OK. Thank you.

Sure.

Bye.

Thank you. And, your next question is from Pat McLaughlin (ph) of UBS Paine Webber (ph).

Yes, Steve (ph) again back to fuel chem (ph) and you forget domestically you said you've received one order from China?

That's correct.

Can you - can you elaborate on the nature of that order, the size, and is it again an order that results in repetitive revenue going forward? And, how are you marketing to these different areas of - and how are you marketing in Europe and China?

OK. Let's take China first. The order we received was through an agent that we've had a long-term relationship with. This is the first significant order we've had. We've had a couple of other very small ones. And, the order was for chemicals for the treatment of heavy fuel oil-fired gas turbines. In other words, where they're burning heavy fuel oil to generate electricity with combustion turbines all of which in the United States run on natural gas.

Right.

Yes, we hope it's going to be an ongoing order. It was in excess of several hundred thousand dollars. The margins, of course, are lower than they would be if we were selling direct. It's basically a resale. We get paid in American dollars by the agent. That's how we sell in China. We also have a similar relationship with people in Taiwan and Korea.

In Europe, we have a company in Italy. So, we're selling direct. And again, I mentioned earlier that we got an order for a preliminary design engineering for a coal-fired unit in Italy. And, we're hopeful that that turns into a chemical order in the near future.

OK. And, what's the size of the Italian unit?

330 megawatts.

OK.

About the same size as the one I just mentioned earlier here.

OK. And, the margins for something like that that's - the difference between an agent order and something that's sold by a subsidiary - are we talking five margin points or 10?

No, it's probably about half.

OK.

Again, we're not - we're not directly selling it nor are we directly servicing it. So, other people are going to have to be paid to do that.

OK. All right. Thank you.

Excuse me this is Ral Berry (ph). Steve (ph) you might elaborate based on that question why we have our sites on Mexico.

Yes, Ral (ph) that's a good point. Mexico has a primary fuel for generating electricity for running industrial plants and so forth is fuel oil that has high levels of sulfur and high levels of vanadium (ph) and other contaminants that result in difficulties both from an efficiency and operational perspective and also from a opacity (ph) or pollutant perspective.

That market is significant. There's - I think the national utility has over 30,000 megawatts of generation utilizing this oil. And, certainly the larger industrial facilities like Penex Oil (ph) and others like that also burn a lot of that oil. And, we feel that that - we have some solutions to those issues that are very unique that we've applied the same thing in Puerto Rico on oil that, although isn't nearly as bad as what you usually would see in Mexico, it comes from Venezuela and it does have some similar issues.

And, we've been very successful there in penetrating the same type of accounts that we're looking toward in Mexico. So, we're actively looking for an appropriate partner to do business there like we have in Puerto Rico. And, we're also initiating a search for an individual to help us run that business because potential is very large. The business culture and so forth is different and we need to make sure we enter that market in the correct manner.

Thank you. There are no further questions at this time. I'd like to turn the program back for any closing remarks.

Again, I'd just like to thank everyone for joining us on the call today and for your continued interest in Fuel Tech. Thank you very much.

Ladies and gentlemen thank you for participating in today's conference. This concludes the program. You may now disconnect.