Fuel Tech Inc (FTEK) 2004 Q1 法說會逐字稿

Welcome to the Fuel Tech N.V. first quarter 2004 earnings conference call. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to turn the presentation over to Ms. Tracy Krumme, Director of Investor Relations. Ma'am, please go ahead.

Thank you, Carol. Welcome to Fuel Tech's first quarter 2004 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 will be happy to send you one.

Joining me on the call this morning is Ralph Bailey, Chairman and CEO; Doug Bailey, Deputy Chairman; Steve Argabright, President and COO; and Vince Arnone, Chief Financial Officer. Steve and Vince will open up the call with their comments and then they'll be available for the Q&A session, as well as Ralph and Doug, who will also be available to answer questions.

As a reminder, the matters discussed in the 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 we have set forth in our forward-looking statements. These factors that could cause results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed, and investors should not assume that statements made on this call remain operative at a later time. Fuel Tech undertakes no obligation to update any information discussed on this call, and as a reminder, this conference call is being broadcast over the Internet and can be accessed at our Website, www.FuelTechNV.com.

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

Thank you, Tracy, and good morning everyone. Thank you for joining us today to review our financial and operating results for the first quarter of 2004. As you know, we reported a loss of 3 cents per diluted share for the first quarter, which was flat or compares to the same loss per diluted share last year. We reported net sales of $6.2 million, down 24 percent from last year's $8 million. This decrease in revenues result from an expected shutdown in our air pollution control business, which was partially offset by increased FUEL CHEM revenues.

We are pleased to report that our FUEL CHEM business had a record quarter, with revenues up 116 percent over last year. This was attributable to our Western coal-fired business as well as an increase in our more traditional oil-fired business, and to a lesser degree, the addition of Martin Marietta's retail fuel treatment chemical business which was acquired on September 30. It's important to note that these strong results were achieved despite the fact that the Western Farmers' unit was shutdown for a maintenance outage during the majority of the month of March.

We continue to be extremely excited about the growth opportunities in our FUEL CHEM business. As I have said before, we have identified five key utilities that we believe are important to achieve critical mass. These utilities have been identified as high-priority prospects due to their leadership positions and the revenue opportunities available to provide our Targeted In-Furnace Injection technology to multiple units within their facilities.

In the first quarter we announced demonstrations at two of these major utilities. Last week, we started pumping at one of these units and initial results are very positive. The second demonstration was delayed due to improved coal quality, significantly reducing slagging problems at this time and eliminating the financial incentives to move forward for now. Modeling of this unit has been completed, so if problems do reoccur we can react very quickly. More importantly, though, we recently received an order for a demonstration scheduled to commence this summer at another prioritized utility on a 325 MW Powder River Basin coal-fired unit.

At another of our targeted utilities, our process is currently installed on two small units, and we are currently negotiating a three-year contract to expand to two additional units at the same facility. We are also meeting with the management teams of other larger stations within this same utility, so there is a possibility for more expansion here as well.

We continue to make progress at the fifth targeted utility and have scheduled corporate discussions with them with the help of our newly hired consultant, Dick Grigg. We are pleased with the progress we have made at these key utilities and are optimistic that the successful demonstrations will lead to increased penetration of our technology both within these utilities and at new customers.

Dick Grigg, our newly hired consultant I mentioned, brings more than 30 years experience to Fuel Tech as an engineer, plant manager and senior officer of New York Stock Exchange traded Wisconsin Energy. He'll be working closely with me and the FUEL CHEM and APC managers and salesmen to help penetrate targeted accounts and to assist in creating additional strategic marketing programs customized to fit the utility industry. He is excited to work with us because he believes in the technology we provide, and we are very pleased as well because of his many contacts, excellent reputation in the industry, and we expect he will be very helpful in generating additional business.

On the marketing side, we continue to believe that major coal companies are valuable resources. We are pleased to report that our activity level has picked up recently as a result of Peabody Coal's aggressive marketing. If you recall, we announced the joint marketing agreement in June of this year to market our TIFI technology to units burning high sodium coals. We are hopeful this arrangement will lead to increased revenues in the near future.

Although our primary focus continues to be the slag control business. We are continuing organic development of additional technologies as natural spin-offs of our current process. We have also already applied for patents based on this work, and expect to demonstrate the new approaches in the near future.

Internationally, we are continuing our discussions with a potential partner in Mexico, and I will be their next week for additional meetings. Mexico has experienced a shortage of reliable electric power and is looking to increase production capacity significantly over the next ten years. In the short-term, we feel we can provide low-cost megawatts by improving the efficiency and reliability of existing facilities. We are also pursuing business in Europe, primarily in Italy through our Italian subsidiary.

Turning to the air pollution control business, revenues for the first quarter were down 61 percent from the previous year. This shortfall is due primarily to the reasons we have discussed in the past which include recent rulings and uncertainty regarding New Source Review, financial issues and constraints at utility companies, and low 2004 NOx allowance prices, which provide utilities with a short-term alternative for meeting SIP Call requirements. Allowance prices for 2005 and 2006 are currently trading at a 50 percent premium over those for 2004, and we still expect a definite improvement in this year's second half results.

As I have mentioned in the past, a significant amount of our sales focus has been on creating alliances with major utilities going forward. A well structured alliance has mutually beneficial terms in that it would provide pricing and scheduling advantages to the utility while at the same time giving Fuel Tech the opportunity to optimize our engineering and manufacturing resources. We believe that we are very close to executing an agreement with a major utility and should have a positive announcement in this regard in the near future, followed shortly thereafter by the release of some engineering and equipment for construction.

As we have mentioned in the past, we have also been pursuing a technical alliance that will allow us to combine our technology with another established process that will enhance our capabilities in specific situations. I am pleased to announce that we have just executed a memorandum of understanding with a well-known supplier of NOx reduction technologies, and we are working together to target the appropriate customers.

In other utility news, we were disappointed to learn that a large booking we expected late in the first quarter has been delayed due to local political issues. In this instance, we were in the facilities permit for NOx control, but there was controversy over the continued operation of the plant. On the industrial side, we have seen an increase in activity and expect to see bookings from this market segment by the end of the second quarter.

Going forward, we see additional drivers for the air pollution control business. The replacement for the stalled Clear Skies Rule has been named the Clean Air Interstate Rule. The EPA may try to include all of the states West of the current SIP Call region instead of adding just the ten states originally mentioned. Additionally, 474 counties have been designated to be out of compliance with the new national Ambient Air Quality Standard for ozone which takes effect in 2007 and requires compliance over the following several years, depending on the severity of the local problem. This will cause affected states to refocus on specific measures to reach attainment in those counties. 40 of those counties have volunteered for early compliance by December of 2007. Their plans must be submitted by the end of this year, so we'll be watching that situation closely.

Turning to our software business, we are developing multiple opportunities for international distribution of our commercial visualization package, ACUITV software. In a key initiative, we have recently begun discussions with software alliance partners interested in licensing our visualization technology. It is anticipated that such discussions could lead to a significant number of licenses now that we have launched Version 4.0, which provides customers with a new suite of interactive tools for transient model visualization, cluster support and enhanced visualization features.

Version 4.0 opens new avenues for engineers, designers and sales and marketing personnel to dramatically reduce the time and cost of analysis, collaboration and communications in the design and sale of products as a single solution, and now be used enterprise-wide. We expect these significant enhancements to aid in our penetration of our addressable market, which includes the automotive, aerospace and defense, power and chemical processing industries.

Based on the interest demonstrated by customers in our target markets in the performance of the now available ACUITV Version 4.0, we remain committed to capitalizing on the opportunity to realize earnings in the commercial market with this leadership product offering. As it has in the past, ACUITV technology will also continue to play a vital role as one basis of the Fuel Tech approach that is used by our sales and engineering groups to aid in high-impact selling and the unique design of our FUEL CHEM and APC technologies.

I will now turn the call over to Vince for the financial review. Vince?

Thank you, Steve, and good morning everyone. As Steve mentioned, we reported net sales for the quarter ended March 31 of $6.2 million, down 24 percent from 8 million last year. The net loss for the first quarter was 3 cents per diluted share, which was flat compared to last year. The decrease in revenues is the result of an expected slowdown in our air pollution control business. As Steve said, this slowdown should continue through the second quarter of this year and we expect this business to show improvement in the second half of the year and thereafter.

The first quarter decline in air pollution control revenues was offset by a year-over-year increase of 116 percent in our FUEL CHEM revenues. Revenues derived from Western coal-fired utility boilers had the largest year-on-year impact, and positive contributions were obtained from utilities burning oil. In addition, revenues from the customer accounts acquired from Martin Marietta Magnesia Specialties on September 30, 2003 were greater than expected.

Gross margins in the first quarter were 48 percent, up from last year's 33 percent. This is due primarily to a change in product mix in favor of our higher margin FUEL CHEM business. The FUEL CHEM business, which realizes higher gross margins than the air pollution control business, comprised 60 percent of the revenue total in the first quarter of this year versus only 21 percent in the prior year.

SG&A expenses were up 10 percent in the first quarter versus last year; this increase was primarily attributable to the addition of sales resources for the fuel treatment chemical business and to revenue-related FUEL CHEM selling expenses. Going forward, we anticipate that our SG&A costs will increase as higher sales volumes, particularly in FUEL CHEM, lead to increased selling costs, primarily from commissions. We believe that our FUEL CHEM infrastructure is essentially in place to support future growth opportunities.

We continue to have a strong balance sheet. We ended the quarter with 6.1 million in cash, working capital of 10.2 million and no debt. Cash and working capital were down 1.7 million and $787,000, respectively, from year-end. The decline in cash and working capital was driven by our net loss in the first quarter and by the investment in equipment to support the FUEL CHEM business.

Our backlog for the air pollution control business stands at approximately $4.2 million, down slightly from last quarter's 5.3 million. As Steve said, and as we have stated before, we have seen a slowing in our air pollution control business, which is likely to last throughout the remainder of the first half of this year. Although we expect to receive new contracts during this slower period, revenues from our air pollution control business will temporarily be affected, and should be -- and we should see a pickup in the second half of this year and continue to be strong going into 2005 and 2006.

Additionally, as we have mentioned before, we expect 2004 to be the year in which we start to see the dramatic growth from our FUEL CHEM business. We expect revenues in this business to increase 75 percent in 2004 from last year, and if this target is met, we would expect our quarterly run rate at the end of this year to be in the range of 5 to $6 million per quarter. Additionally, it is very important to note that the FUEL CHEM business is impacted by seasonal demand periods which have the impact of reducing revenues in the fourth quarter of the year, and to a lesser degree, in the first quarter of the year. Units are often shut down for regularly-scheduled maintenance during the more temperate weather seasons of the year, as there is lower power demand during these periods.

The net result for the second quarter of this year will be a modest improvement over quarter 1 and will approximate breakeven to a slight loss. On a full year basis, we continue to expect revenues to be flat -- sorry -- to be flat to slightly improved in 2004 versus 2003, with air pollution control and FUEL CHEM revenues contributing at essentially the same level. We will realize an overall improvement in gross margin dollars and weighted average gross margin percentage due to the greater contribution from FUEL CHEM. Finally, our bottom-line in 2004 will be slightly improved versus 2003 with the favorable change in product mix.

With that, I will turn it back over to Steve.

Thanks, Vince. In summary, we are very pleased with the continued progress we are making in penetrating the coal-fired utility market, both directly and through third party relationships. We remain confident that the APC side of our business is going to pick up significantly in the second half of the year and beyond, lead by an alliance with a major utility.

That said, Carol, I would like to open the call for questions

(OPERATOR INSTRUCTIONS). Sheryl Skolnick, Fulcrum Global Partners.

Congratulations on getting the third utility, but talk to me about the second. That is a disappointment, to be perfectly blunt, I'm sure, for everybody concerned. But what's going on in the dynamics of the coal market that they all of a sudden decided to use a better quality coal? How long might this continue? Did you say that there are other opportunities within the same utility, perhaps, to do the demo on a different boiler?

The dynamics of the coal market really haven't changed, Sheryl. That situation, if you'll recall, is that (indiscernible) an Eastern coal-fired unit that had intermittent issues. And as it turns out from a timing perspective, I guess you could say we were unlucky in that there mine mouth situations, they weren't running into any of the bad themes that they were having when we started this project. So it really -- that's really the answer, is that it is not a typical Western fired coal unit like the one we did announce, number 3; actually it's number 4, the fourth one. But we think it might come back. And yes, we are in discussions with other stations at that particular utility. You're right, it was a disappointment, but on the intermittent situation like that unit was in on the Eastern coal side, it was just bad luck, I think.

Okay. So you're saying its number four because you're including Western Farmers' HUGO in that? Where did I miss the third one, then?

We actually have -- let me go through the number of units we've got; I think that would probably help. Right now we're currently installed on six units. Two of those are in the Midwest, and that will be expanding to four units. That is at a targeted utility. We haven't talked much about that before because it was just small, and we were hoping and going forward on the progress that it was going to expand within that facility. Well, we have been given the go-ahead and we're negotiating a three-year contract to move forward on four units at that facility (multiple speakers). There's two in Utah which are expanding to three; there's one in Oklahoma, as you well know; one in Wyoming. And the demonstration that just started last week or so -- so with the demo starting this summer, that should be a minimum of 11 units operating by mid third quarter; seven of those would be continuous-feed, four of them would be intermittents. That is the situation as it stands today.

Okay. Because I was confused, obviously, on how many of them. So that's basically four down, one to go?

The fourth one being -- the third one or the fourth one, whichever you want to say (multiple speakers)

The one just announced.

-- intermittent that we hope comes back, if not at that station at another. We're making progress on the fifth one as well.

Okay, excellent. And then on ACUITV, how much money is it going to cost you to market this? And that's obviously a key issue for a number of people, and I guess I kind of try to get a feel for what the return is going to be.

This is Doug, Sheryl (multiple speakers). Pardon me for my raspy voice because I have a bit of a cold.

Hope you feel better.

Almost all of our cost has been in the development area. We have a group of six people, five of who are doing development, one of who is doing sales and marketing. So our marketing cost is actually very, very low. Our aggregate cost is at a run rate of about $750,000 per year, largely devoted, as I said, to development. And its reasonable to assume a significant portion of that is in the base business of supporting Fuel Tech's primary business activities as well. So we have a very low marketing cost budget, some direct selling and some significant opportunities that we are cultivating.

I'm not sure I know what to make of it, but I guess since it appears that the modifications that you made seem to have really enhanced the product, I guess we'll have to (indiscernible) --

Those modifications are key to the marketing program, which you would expect, and that's what stimulated the interest we have. So we're actually very, very encouraged with the list of prospective customers, as well as some partnership opportunities with major solver companies that would in themselves lead to many, many licenses sold through them.

I'll hop off and see if someone else wants to ask a question; I may be back. Thank you.

Robert Kirkpatrick, Cardinal Capital.

Doug, just to keep you talking -- if you could maybe shed a little more light on the types of customers that you're talking to, as well as a little bit more about this potential alliance? And also, how long you expect the sales cycle to be on this product?

Okay -- pardon me. The customers that we are talking to directly fall into the target vertical markets that Steve mentioned earlier, those being automotive, aerospace and military applications, chemical processing, power, as well as some university opportunities. And there's probably a similar number of prospective customers by vertical market, and I would say they aggregate several dozen opportunities. They typically would take a demo of the software, a 30-day demonstration, to evaluate their needs and probably have a swing cycle of 60 to 120 days, something like that; something longer, something shorter. We are pleased that we have already had two of our (indiscernible) annual licenses that expired came up for renewal, and those customers are renewing, which they're showing satisfaction with even the earlier version of the product.

With respect to distribution alliance partners, there are several key solver companies that participate in the Computational Fluid Dynamics market; those are Fluent, Star-CD, CFX which is part of ANSYS. And those represent major alliance partners, all of whom we have had or will continue to hold discussions with. From a broader vision, ACUITV should not be viewed as a software visualization tool for Computational Fluid Dynamics alone. We will start in that market, but we could see the application in finite element analysis, fluid solids interactions, and what I would call the broad area of computer-aided engineering. So that would lead you to other potential alliance partners as the functionality of the software is enhanced.

Is the intention, therefore, to use an indirect channel of distribution as opposed to scaling up an internal sales force to sell this?

For now that is correct. We have no plans to build a direct sales force at this time. We don't think that investment is yet prudent until we verify that the customer acceptance is what we expect and hope it to be. It's a much lower risk approach to partner with a solver company whose needs are real. And we have capabilities well ahead of what they have themselves. In fact, we have already seen one such company partner with a competing software that we think we can outclass ultimately, for whom we were not ready a year or so ago. And we expect that would be an opportunity since it's an all or nothing proposition for several thousand feet, to completely cover our fixed cost and then form a basis for growth that generates earnings for the companies. Those are deals that have to be cultivated and negotiated, and certainly the pricing of the product is very, very different through a distribution alliance partner than a direct sale, but well worth the approach.

And the pricing on this per seat is $20, $200, $2000, $20,000?

Sure. An annual license for a single seat is $6900 and a perpetual license is $17,200, and we have sold about an equal amount of each so far. Those are discounted somewhat for multiple seat purchases. The pricing through a distribution partner would be dramatically different, but the volume opportunity would outweigh that. And of course, the production cost of the software is very, very low, probably 20, $30. It's a significant margin opportunity once you have the sales contracted.

And how many -- I'm sorry; how many total seats have you sold so far?

Only four.

Only four, of which two were perpetual and two were single seats, on an annual basis?

Not counting renewals, yes. Right.

Jack Robinson, (indiscernible).

Steve, thanks for the update. Doug, let me just follow-on on ACUITV, because I don't get it; I still don't understand why we are in this business. What is the current burn rate and when do you expect this business is going to be cash flow breakeven? And what efforts has the Company made to find third party partners or outside capital to fund this, what I consider to be an unrelated business?

First of all, I think many of us feel it's a very, very related business because it is a core technology that we use not only in the analysis and design of APC and FUEL CHEM systems, and that is why that business exists in the first place. Second, it has a tremendous benefit to the selling of these systems, because these are complex model systems. Many people can easily be skeptical as to how they perform. This tool enables easy understanding of that through the presentation of the data visually. The HUGO FUEL CHEM Station is a good example of how that can be easily displayed. So it's going to always be an important tool and a core technology for Fuel Tech. Given that we have had that investment, it's a relatively modest incremental investment to explore the opportunity in the commercial marketplace where there are many, many more customers other than Fuel Tech that have these deeds. The computer-aided engineering market itself is growing over 15 percent a year. These companies have some very attractive blue-chip customers, and the names that we have on our list represent large Fortune 500 companies, for example, large government and military users. And there is definitely money available to purchase these licenses. The question is this distribution strategy. And as I said earlier, we are talking to all of the CFD solver companies, and are in, actually, discussions with one in particular that could lead to a complete embedding of our software with a point, click and launch, and it would be therefore provided to all of their licensees. If we do that deal the business would turn immediately profitable.

What is the current burn rate?

As I said earlier, it's about 750,000 run rate per year.

So it's about a penny a share a quarter? (multiple speakers). And how much longer are we going to give this business if it doesn't turn profitable, if you don't do this deal?

I think we have a budget for this year that anticipates some milestone results. I think, given the opportunities that are in front of us, we have the potential to complete these deals. It would make a material difference in Fuel Tech's 2004, 2005 earnings per share.

What will the Company do if you don't hit the milestone, because you haven't hit any milestones yet here?

We just launched the product this past month for those -- that commercial marketplace. That's why our licenses sold to date are limited. The need for (indiscernible) analysis is very prevalent throughout all of these vertical markets. We have not needed that requirement in the modeling work that Fuel Tech is done, but fair to say the enhancements that were done will continue to benefit Fuel Tech. But now we've get some functionality that other customers require, and I do believe you're going to see a growth in licenses, both on the direct side. But that would be outweighed significantly by a partner and a sale. And that's the lowest risk approach. That is something that we could accomplish this year because the speed to market that these companies need has increased (inaudible).

Doug, just so I'm clear -- I'm sorry to monopolize this -- but when is ACUITV going to be cash flow breakeven?

It could be cash flow breakeven at the end of this year if this one major partnering opportunity is done.

And if it's not done?

Because it's a 7 figure opportunity that exceeds our (multiple speakers) --

But when will we know if this partnering opportunity is done?

We're actually in price negotiations right now that I expect to take through the balance of this quarter, because of the -- it's only about a 1 to 2 month development effort to integrate, you could potential see the sales through that partnering arrangement in the fourth quarter.

Tony Campbell, Knott Partners.

Steve, I was wondering if you could kind of give us a sense of -- kind of with regard to FUEL CHEM. In terms of the target, I guess you've done pretty well in terms of the target operations. But I guess what I would like to get an idea of its sort of the win ratio, if you will, in terms of the number of calls you make and how successful your salesmen are. I assume you are monitoring that. And just a sense of kind of where we can go in terms as sort of a first tier, which we've done pretty well at sort of getting at. And sort of the size of the second tier, etc., and just kind of -- how good your salesmen have been, I guess, is really the bottom-line. But also, kind of a sense of above these sort of core five, where we stand?

I guess the salesmen, in my opinion, have been externally successful. From the perspective of bringing a technology -- a new technology to an industry like the electric utility industry in this country is a daunting task, as we have discussed in the past. And we have known all along that one of the most important requirements to progress in that effort as quickly as possible is to get references from well-known, well-respected utilities, which we are doing and we have done. I am also very pleased with the progress we have made on those top five; unfortunately -- we would have had four if it hadn't been for the bad luck on the coal quality. But the fact that we have progressed that far on those four, and now have an entree in the very high-level on the fifth with Dick Grigg's help is very encouraging to me. Believe me, the salesmen that are not directly involved with those five have been in front of -- I can't think of a Western coal-fired utility or a station that we haven't been in. We're pushing very hard. I expect to see some other demonstrations. Certainly one is very close that could happen the summer at a very major utility, one of the top five. But it could have well been one of the top five because of the number of units and the amount of Powder River Basin coal they burn. I think with the announcement -- the demonstration we started about ten days ago -- let me comment on that for a minute -- because that is by far the biggest unit we have done to date. The results in the last ten days have been extremely positive. They're seeing some things that they haven't seen before, as far as their ability to maintain full load during nighttime situations without having to shut down, maybe cut load 50 percent or so to shed slag; they have not had to do that. There's been some other operational improvements that are very significant from a financial perspective. And of course, they've been given an incentive to -- when the demonstration is over to be a good reference for us, and I hope they take that incentive. So I guess in my mind the salesmen have been quite effective in getting our message in front of every important customer out there, in my opinion. And that, combined with the successes with these top five, and this really newly aggressive stance, if you will, with Peabody, I think is going to help us a lot as well. So I am extremely encouraged, and I think the sales force is doing a good job. The plan that we have approached this market with has been effective. Dick Grigg is going to help us a lot at levels we have not had entrees to regularly before. He also is, with his background and 34 years in the industry, has some insights into how the utility industry thinks from a financial perspective, which are going to be very helpful for us from a strategic perspective. So all those issues rolled up to one, I think -- I'm very pleased with the progress we are making, and think we're right on track to get where we need to go.

What about Mexico, because that would obviously be a nice add-on?

That's an interesting situation, and like I mentioned in the call, I am going there next week with our VP of technology for this group. We found a partner that I think is very, very good; one that has connections at high levels, one that you can trust. We're going to make an additional presentation next week, very technical in nature in this particular situation, to CFE, which is a national utility. We're then going to visit a laboratory where they have requirements for product testing to find out what is required from that. And we know that the needs are significant and that we can solve those needs better than anyone else. The results that we have seen on oil-fired units recently in the Caribbean, where they burn oil from Venezuela that has some very similar constituents to T-Mex or Mexican oil, have been startlingly good. We just saw an inspection from a unit down there from our partner in Puerto Rico, that the unit was online for 15 months without a shutdown. We have a little video that they took of the recent inspection and it's incredibly clean. And the amount of deposit that is left which is very small can be removed by the flick of a finger rather than dynamite or a sledgehammer. So I think when the people in Mexico see our capabilities for real, like this shows, and we have invited them to various accounts, I think we will make progress. The bureaucracy is not easy to sort your way through, but with the help of these people we are partnered with the down there, I'm very confident we're going to get there. And it's going to be an exciting marketplace when we do.

I am wondering if you could just give us a few more details with this joint venture on Peabody. I guess it's sort of been dormant, and as I hear you guys talking that sort of -- all of a sudden things are starting to move forward. Maybe you could give us (multiple speakers) more color or light on this joint venture?

Joint venture is much too strong a word; it's basically a joint marketing agreement. It's centered around the use of high sodium coals. I think we've talked many times in the past about the fact that sodium is one of the bad actors that causes slag to -- it's like the glue for the rest of the ash in the coal. There are certain mines out there in the West that have higher sodium than people like to burn. And Peabody, as others, have mines with these higher sodium levels. And they're looking to our technology to allow sale of some of the coal without blending it, necessarily, with lower sodium coals. And what that does is it can result in significant savings for them from a mining perspective, where they don't have to spend the extra effort and money to blend two or three coals together to have an acceptable sodium level, for example. So that is starting to take hold. The fact that we have shown over and over again that we're capable of handling coals with higher sodium levels has gotten through, and we're very pleased to see how aggressive they have become. And there's four or five utilities in particular where they are carrying the message along with us. So it's a very exciting thing with Peabody. It took a while, like a lot of things in this industry, but we're very excited about the potential that they bring to us.

I guess we should be further helped by the fact that the economy is picking up.

That's right, and further helped by the price of natural gas, which doesn't show any signs of coming back. So let's hope it's a red hot summer.

(OPERATOR INSTRUCTIONS). David Baird (ph), Morgan Waterfall (ph).

A couple of questions on air pollution control. Do you have any bookings or backlog numbers for the quarter?

Yes we do. Basically, at the end of the quarter , physically as of today, our backlog is approximately $4.2 million.

Second, could you just give me the price of credits in dollar terms? I know you'd given a percent, but I didn't catch the dollar.

The current pricing of 2004 is around 2000; (indiscernible) 1800 to 2000, and you can take 2005 and 6's around 3.

Is that enough of a differential to push people either way, or do they look at that as really being an ROI equivalent of your product?

No, I think when you are seeing that kind of change from one year to the next, and we've talked many times about why 2004 has been depressed --

I'm talking more '05, '06.

'05 and '06, so I think so. I think you will see, with the alliance we're talking about is certainly one of them, but you're going to see other utilities follow up on that particular situation. And I am very optimistic based on talking to the number of utilities we do every day on the air pollution control side that we're going to see some significant bookings in the very near future.

Switching to FUEL CHEM. The Martin Marietta -- can talk about how big that is in terms of a contribution to revenues for this year, assuming you hit your 75 percent growth year-over-year?

Martin Marietta has been a very, very pleasant surprise for us, David. First quarter of the year they contributed just about $800,000 to the top line. And the way we see the year going right now, we would probably say that we can annualize that first quarter and look somewhere in area of, say, 2.5 to $3 million from Martin Marietta accounts for the year.

The key is, too, David, that we're converting some of those larger units to our type of approach towards fuel treatment. And that certainly is going to contribute and it's going to provide the end users with significantly better results than they have had in the past. Not that there results were terrible; we wouldn't have been involved with Martin Marietta if they were. But with our approach, we can do some things that no one else can. I would like to comment, too, on the oil side we have been quite successful recently in taking some business from our competition. So we're pleased about that as well.

Next, with the FUEL CHEM business, you said you had 11 units installed --

By the end of this summer we'll have 11 units (indiscernible); hopefully more, but I think it's going to be a minimum of 11.

So for the first quarter you had six (indiscernible). Were all those six running that contributed? If it's 60 percent of revenues, it's roughly just a little over $4 million. Did those six contribute 4 million in the quarter? Can we look at it that way, in terms of a per unit contribution?

No. Because remember, as I said when I summarized how many units we have and are going to have, four of those units that are existing today are intermittent fees. So no, you can't say that, unfortunately.

How should we look at revenue contribution per unit as we track it on a quarterly basis?

It's hard to say on the intermittent ones. It really is almost impossible for us to predict when they're going to have a need. The continuous feed units that we've talked about in the past, that analysis of usage and revenues hasn't really changed from the average sized unit of 350 to 400 megawatts, you're talking in the $1 million range on an annualized basis. The intermittent ones are very hard for us to predict.

Last question. Relative to the utility boiler that you just announced today, bring me through your thought process of it, either in terms of using their name or telling which plant it's on. And will -- have they committed to allowing customers to come and see the demonstration yet, or is that to be announced?

It's premature for that. They're certainly like the others. And like the one that started up two weeks ago, we have given them incentives to allow that sort of activity. The business, I think, is not as important now as using the name, having papers written for conferences -- which we have done with Western Farmers' a couple of times -- allowing people to call a plant manager and say I hear you're using FUEL CHEM from Fuel Tech; how does it work, what is good, what is not? That's where we are looking to get their help. And again, they're incented monetarily to help us in that regard. I can't really tell you the one we announced today is going to go that direction or not. I certainly hope so.

Sheryl Skolnick, Fulcrum Global Partners.

I have some more typical sell-side analyst questions, if you can stand it. First of all, when you were talking about -- when Doug was discussing ACUITV, he gave us the burn rate and then talked about the potential for a partnership that might be very significant or more significant that I think he said would have meaningful impact on the business. So I assume that that's not in the Company's guidance of slightly better bottom-line than last year?

No. We have not put that into the forecast.

Okay. So the way we're thinking about the earnings for this year and presumably for next year is still at that cash burn rate of $750,000 a year?

In fact, Sheryl, that burn rate is below the budget. So it has been budgeted it would have more earnings impact than we are actually spending.

Okay. So we get a little bit of room when you report that it might be (indiscernible) actual incentive is a little bit (indiscernible). The second thing that I'm trying to wrap my arms around here is you've been helpful in giving us backlog on APC. And I guess what I'm trying to understand is, given the major utility and the other utility, we'll call it all your utility relationships that you have now for FUEL CHEM -- either in terms of the number of potential boilers that you could be in, or in terms of the revenue run rate potential from just those customers alone -- can you quantify that for me?

I think Vince did that when -- you're talking about a run rate in the fourth quarter of between 5 and $6 million. That assumes the 11 units that we just discussed a little while ago.

Okay. But is that all the business you could possibly do with these major utilities?

Oh, no.

That's what I'm asking. I'm not talking about just the units that you're operating now, but if those work and given the -- assuming that your technology is appropriate to this coal that they use in those units, what is the potential just from the existing base of utilities with whom you have contractual relationships? Do you want to get back to me on that?

I will have to.

Okay. Because presumably part of your strategy here is that you demonstrate it at one boiler, and they say -- oh, gee, wow; this is the best things since sliced bread. Then you penetrate the other boilers, right?

In fact, that is happening. I did comment on the fact that that is happening. Now, if we were -- every facility we are in, and figuring the number of boilers, and if you add them all -- that's your question, right?

Yep. And then if you could prorate that by the likely probability of -- and we're not putting a time limit on this -- but if you execute well both technologically and through your sales and marketing and customer relations process, what would be the likely net yield from that potential?

Okay.

Okay. That would be very helpful. And then, if you could do -- just again remind us what the industrial and coal and oil-fired opportunity is as well, when you come back with that information. That would be extremely helpful.

The industrial side -- again, when we're talking oil, we're talking utilities. The industrial side is pretty minor.

But some of that is also more international as well.

There is plenty of activity still in the U.S. (multiple speakers) the Eastern seaboard burning oil.

Still, huh?

Yes.

And with the price.

Same with the price.

Interesting. If you can get back to me on that I would appreciate it very much. Thank you.

Robert Kirkpatrick, Cardinal Capital.

Sorry, a few more buy-side type follow-up questions. You said Martin Marietta's business that you had acquired was about 800,000 in the first quarter; what was that in the last quarter?

In the fourth quarter of the year I think it was closer to a $300,000 amount.

Okay. And is there a seasonality factor, or was it just that you were able to convert more, or people had bought in advance of the acquisition? Why was that such (multiple speakers)

Essentially a combination of both, Rob. Partially seasonality in the fourth quarter, but we actually have picked up basically additional business as we have been converting some of these customers to our product line. So it's definitely a combination of both factors.

And just a clarification -- your 5 to $6 million run rate in Q4, assuming the 11 units, is just for the coal-fired portion of the business or that assumes all FUEL CHEM sales?

That's all FUEL CHEM, Rob.

Could you talk a little bit more about the APC side? You mentioned two things of particular interest. One was a big order that you expected to be shortly announced which seemed to be some sort of, maybe perhaps more of a strategic alliance. And then secondly, a technology alliance. And are those two different things or have I confused them?

They are two different things, and as far as the alliance with a utility, there's not a whole lot more I can say at this point, other than it's a very easily recognizable name; people will not ask who is that when it is announced. We've been talking -- we've run -- we've got business with them already on a very small scale, and we've done extremely well with its existing business, which helped significantly in moving toward this alliance we're talking about. So hopefully you'll see the full picture within a very short period of time, but I really can't say a whole lot more about it now. It's going to be a multiple unit situation, that's all I can say.

On the technical side, we've said in the past that -- our basic technology is selective noncatalytic reduction. In the utility boiler scenario, coal-fired utility boiler, it's limited in its ability to reduce NOx to somewhere around 30 to 35, maybe 40 sometimes, percent reduction range. We are looking at expanding that reduction capability into the 50 percent, 55 percent range by working with someone who provides combustion modifications from the perspective that you combined A plus B, and you get up into the 50 to 55 percent-plus range. I recognize that the importance of that is that you can displace some SCR, some Selective Catalytic Reduction installations, by being able to get up into that range. And we are also looking at what is coming down the line. When you look at the drivers for the future, we think there is going to be a significant amount of additional business in the West when this Clear Skies replacement, if you will, and the SIP Call expands further West. And one of the reasons that it is very exciting for us to look at this percent reduction is because Western coal by its very nature has less inherent nitrogen, therefore, produces less NOx. So we think that with a technology of this combination that can get us into that range, that our applicability will increase significantly in displaced SCRs, where you don't need to have 85 percent reduction; you can get lower reduction and be in compliance.

The difference in cost between your existing 30 to 35 percent reduction in NOx and combining this with the combustion modifier to get it to 50 to 55 percent is what type of magnitude of difference?

Maybe another 50 percent. It's very specific to each unit, because in this situation where you're modifying the combustion air in particular, if there is retrofit costs where you have to remove a lot of asbestos for example -- there aren't too many of those out there, but there are a few left -- then you're talking a significant amount more. But I think 50 percent is probably a realistic number. So you're not -- you're still definitely, from a capital expenditure ballpark, in the right place.

You're still orders of magnitude less than an SCR-type situation. So the incremental (indiscernible) that Steve is talking to for these additional enhancements really puts the combination technologies in play for us.

And is that expected to be, again, something that you would announce shortly, meaning in the next 90 days or something? Or is that something that is more year end?

We basically announced that we are now formally working together. In fact, the memorandum of understanding was just executed, and there is going to be a meeting within the next two weeks to sit down with this particular company and decide what our targets are, what our joint targets are. So it's moving as we speak.

Fadi Shadid, Friedman Billings Ramsey.

General question in terms of what kind of feedback are you getting from utilities on the air pollution side? The new SIP CALL region is starting soon, and there is next year and they're calling for a hot summer. What kind of feedback are you getting when a utility tells you no, we don't want your product? Are there competing technologies that they're going with other than SCR-type projects? Or are they changing their fuel use habits? In terms of compliance strategies, what kind of things are you hearing?

We are hearing that -- hey, we think 2005 we're going to need some help. There's lots of strategies to do the overall compliance plan for an individual utility. You can shut down; you can do combustion modifications; you can do our technology; you can do SCR; you can buy credits; you can do all (indiscernible) import natural gas, which hasn't been much of an option lately, and doesn't appear to be in the near future. So nothing's really changed from that perspective, except that everybody is starting to say that next year is going to be -- they're going to have to spend some more capital, as opposed to what is happening in 2004, where there is four months of requirements and a five month allocation and a few other issues that have contributed to the slowdown in our situation. And I think it's not only a slowdown for Fuel Tech, but the industry in itself is seeing the same thing if not worse. So I don't think that -- to think -- the thought process has changed much at all; I think it's just the recognition that the requirements and the price of allowances and the economy and the continued high price of natural gas -- all of those factors are weaving into what we think is going to be a definite improvement in the future.

Any opinion on how good of a predictor the NOx allowance prices are for this summer, in terms of are we going to be compliant or not? And last year they were off; they ran up early and then they tanked, and things were fine. This year they are very low. How good of a predictor are --

They're very good. The requirements start in three weeks. And you're seeing $2000 per ton range of allowances this late in the season. I mean, last year at this time I think it was 8000.

Right. I'm saying now (technical difficulty) for '04 even, are we -- unit allowances are at $2000, maybe they're saying everything is going to be fine. Is that -- should we be confident in that or are you confident in that, that things are going to be fine this year?

I think the industry is confident that based on that price and other indicators we hear, that yes, they are going to be fine.

(OPERATOR INSTRUCTIONS). Jack Robinson, Winslow.

One follow-up. Steve, I think this goes to you. We are being asked to vote for a new Board member. And given his background in the fossil fuel industry, will he be helpful to your efforts in any way?

This is Ralph Bailey, Jack. I should speak to that. We are adding a director at this next meeting which will give us a majority of independent directors, which is necessary to meet the requirements of not only Sarbanes-Oxley, the SEC, but also NASDAQ. We have been very fortunate, I think, to enlist the services of, at least for a year, of John Morrow (ph). John is a very highly respected retired CFO of Conoco. And after his retirement after Conoco was merged into Dupont, he worked with Jim Wolfeson (ph) at Wolfeson Associates for a few years. He's a very talented man with both a legal and financial background. His -- the years that he spent with Conoco, and also the association with coal through Consolidation Coal Company in Pittsburgh, which Conoco owned. He also happens to be very familiar with Fuel Tech. He did at one time serve as a director. He has owned shares in Fuel Tech for quite some time. John is a visionary, and I think he will be very helpful to us as we conduct our current business and also plan for the future growth of the enterprise. He is -- like you have seen, he is not a young man; he's 80 years old, but he's a very young man and very vigorous; vigorous both in mind and in body. And I think in the time that he will serve with us, John will be very, very helpful to us. He is an outstanding man, and very a participative sort of a director.

I would like to echo that; this is Doug Bailey. I have known him for about 20 years or more, and John is a man of very broad, keen business judgment. We are very fortunate to attract him back to Fuel Tech. He will bring great wisdom serving as a director.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions in queue. I'm going to turn the presentation back to Steve Argabright for his closing remarks.

Again, I would just like to thank everyone for joining us today and for your continued interest in Fuel Tech.

Ladies and gentlemen, this concludes your presentation and you may now disconnect.