Fuel Tech Inc (FTEK) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your third-quarter 2004 Fuel-Tech N.V. earnings conference call. My name is Brian (ph) and I will be coordinator for today.

[OPERATOR INSTRUCTIONS].

I would like to now turn the presentation over to your host for today's call, Mr. Steve Argabright, President and COO of Fuel-Tech. Please proceed, sir.

Thank you, operator, and thanks to you all for joining us today. Welcome to Fuel-Tech's third quarter 2004 call. By now, all of you should have received a copy of today's release. If you did not, please call 203-425-9830, and we'll be happy to send you one. Joining me on the call this morning is Doug Bailey, Deputy Chairman, who will be available for the Q&A session, and Vince Arnone, 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 statement.

The 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 the statements made in this call will remain operative at a later time. Fuel-Tech takes no obligation - 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'd like to now discuss our operations during the third quarter. As you know, we reported revenues for the third quarter and year to date of 9.6 million and $23.1 million respectively. The next income for the quarter was $0.05 per diluted share, and was $0.01 per diluted share year to date, compared to net incomes of $0.06 per diluted share in both comparable periods last year.

These results are in line with our expectations, as both of our core businesses showed incremental improvement compared to the last quarter. As we've said in the past, the air pollution control segment of our business was expected to pick up during the latter half of this year and to continue that trend into 2005 and 2006.

Starting with this segment, we are very pleased with the orders we've recently announced for $5.2 million to provide NOxOUT selective non-catalytic reduction systems for five coal-fired boilers, operating by a major Southeastern utility. As was the case with Duke Power, we work closely with the utility over a period of time, to demonstrate our technology before receiving the commercial order.

Again, following the lead of our alliance with Duke, we've created an internal team, specifically tasked with meeting the needs of this key customer. We have booked almost $15 million in air pollution control orders since June 1 and we are pleased to report that additional orders are expected in the near future. This expectation becomes more credible when we analyze the makeup of that 15 million.

Represent six orders for utility boiler equipment, four for equipment for industrial units, and eight design engineering orders, seven of which are in the utility industry. As you know, we have been very successful in the past in converting design engineering orders to equipment releases. Sales activity is very strong in both the utility and industrial marketplaces.

In other air pollution control related news, we have recently executed a memorandum of understanding with a mayor OEM, which outlines the cooperation between our two companies in marketing a combination of unique technologies we each possess. This combination of technologies has the potential to reduce NOx emissions from 50-75% on coal-fired utility boilers that would cost significantly lower than that of traditional, selective catalytic reduction, making it a very viable alternative for major utility compliance plans.

We have long been proponents of combining technologies to achieve the lowest cost per ton of NOx reduced, and are very optimistic that this alliance will bear fruit in the near future, at which time more details will be forthcoming.

For our FUEL CHEM business, we are pleased to report that revenues through three quarters were up 70% over last year. This was primarily attributable to our continuing penetration of the Western coal-fired utility market and, to a lesser degree, to business generated in the oil-fired utility market, where we have recently closed some significant new business. We have recently expanded to two more units at one of our key customers accounts and our patented targeted in-furnace injection technology is now installed on 11 coal-fired utility units.

The targeted in-furnace injection demonstration on a large boiler that we announced was expected to start late this month, as been postponed due to the extended delay of a major outage. And no date has yet been set for its initiation. However, three additional units are in the design phase of customer utilities, two of which are on an existing site, while one is at a new location. We hope to have 13 units on-line by the end of the year, by the end of the year, by at least three and possible more to follow in the first quarter of 2005, based on our current sales activity, which continues to be very strong, especially in major targeted utilities.

Although we are still aiming our primary sales and marketing efforts toward the Western coal-fired utility industry, we are not ignoring other opportunities. On the heavy fuel oil-fired side, we have recently been awarded new targeted in-furnace injection business. On boilers at two major utilities, we're on a unit at a large industrial facility. One of the utilities - utility units is a new application for us, while the other is a conversion from standard in-fuel treatment to the more advance combination of in-fuel and in-furnace injection approach.

Starting next year, revenue from these accounts is expected to be well in excess of $1 million annually. In addition, we have executed the distribution agreement with our Mexican partner and expect to demonstrate our technology in that country late fourth or early first quarter. In other international news, the short and very successful accounting demonstration has not been restarted as yet, as they cannot burn high-ash coal at the moment due to ash disposal issues. Hopefully, the demonstration will restart late this year.

Although we do not have a specific success to point to as yet, our relationship with Peabody Energy is still strong and is resulting in additional contacts in key utility hierarchies. In other news, we are actively seeking an appropriate replacement for Dick Grigg, as executive consultant to the company, and have recently had discussions with two individuals.

Turning to our acuity visualization software business, we are pleased with the recent addition of John Zink as an ACUITIV customers and with the signing of a new distributor for the Japanese market. We continue to investigate the addition of other distribution channels for ACUITIV and, in one case, are considering merging our code into that of another leading company's software product. Additionally, product evaluations and discussions are progressing with key independent software alliance partners, interested in licensing our visualization technology or, combining business resources.

We plan to extend the ACUITIV life (ph) promotion into next year, to accommodate companies that do not have the 2004 budget dollars available, but have indicated a willingness to purchase ACUITIV in the early months of 2005. To enhance our visualization product further and in response to customer requests, we recently announced the availability of Version 4.1. Among other feature upgrades, this latest version enables data sets to be read from additional, major commercial CFD codes such STARCD and CFX. Vince?

Thank you, Steve, and good morning. As Steve mentioned, we reported net sales for the quarter ended September 30 of 9.6 million, down from 10.2 million last year. On a year-to-date basis, net sales were 23.1 million, down from 28.2 million last year. Net income for the third quarter was $1 million or $0.05 per diluted share, compared with net income of 1.3 million or $0.06 per diluted share in the same quarter of a year ago. On a year-to-date basis, net income was $261,000 or $0.01 per diluted share, compared with net income of 1.4 million or $0.06 per diluted share in 2003.

The third quarter results were in line with our expectations. Although down slightly from the comparable prior year quarter, both the air pollution control and FUEL CHEM business showed incremental improvement from the second quarter of this year. The air pollution control business has begun to show the improvement that we had expected in the second half of this year and we have realized approximately 15 million in project bookings since June 1.

The FUEL CHEM business had a record quarter with revenues in excess of $5 million. Year-to-date revenue growth has exceeded 70% with the improvements attributable to the increased penetration of the Western coal-fired utility market and, to a lesser degree, the addition of Martin Marietta's retail fuel treatment chemical business, which was acquired on September 30 of 2003. The Martin Marietta accounts have contributed more than 1.8 million in revenues, year to date, this year.

Gross margins in the third quarter were 50%, up from last year's 45%. Year to date margins are at 47% versus 38% in the prior year. The increase is due primarily to a change in product mix in favor of the higher margin in FUEL CHEM business and, additionally, to a lesser concentration of turnkey air pollution control projects. The FUEL CHEM business, which realizes higher gross margins than the air pollution control business, comprised 54% of the revenue total in the third quarter, and also comprised 54% of the revenue total on a year-to-date basis. This is comparable to 34% and 26% for the third quarter and nine-month periods of the prior year.

SG&A expenses were up 15% and 13% respectively in the third quarter and nine months of the year versus the comparable periods of last year. This increase is primarily attributable to the addition of sales resources for the fuel treatment chemical business and to revenue-related FUEL CHEM selling expenses. Our balance sheet continues to remain strong. We ended the quarter with 5.3 million in cash, working capital of 10.6 million and no debt. Cash is down from December 31, 2003 by approximately 2.5 million, with the primary factor being the investment in equipment to support the FUEL CHEM business.

As mentioned previously, the second half of 2004 has begun to show the improvement in the air pollution control business with accelerated revenues expected in this business in 2005 and in 2006. The backlog for this business as of today is approximately $12 million and FUEL TECH continues to work towards developing alliance agreements with critical customers as they look to finalize their compliance plans. Additional, FUEL CHEM has begun to deliver the dramatic growth that had been expected with year-to-date revenue 70% greater than prior year.

With the current base business that is in place and when incorporating additional units that we plan to have on board prior to the end of the year, we expect our quarterly run rate at the end of this year to be in the range of approximately $5-6 million per quarter. The results of the fourth quarter will be a temporary step back from the results of the third with revenues declining slightly and earnings ranging from a slight loss to a slight gain.

Extended customer maintenance outages, normal seasonality and delayed startups on coal-fired units are the drivers behind the expected slight reduction in FUEL CHEM revenues from the fourth quarter, while results for the air pollution control business, based on our knowledge today, are currently expected to be at the same level as the third.

As we mentioned on a recurring basis, air pollution control revenues are very sensitive to the timing of project bookings and to the timing of customer requirements for completion. On a full-year basis, we expect revenues to be in the $31-33 million range with air pollution control and FUEL CHEM revenues contributing at essentially the same level. Our net results for 2004 will range from approximately breakeven to a slight gain.

Thanks, Vince. As a company, we have viewed 2004 as a springboard to the outstanding results we feel lay ahead for FUEL CHEM. The FUEL CHEM group has made great strides in penetrating a very difficult coal-fired utility market with target in-furnace injection installed units growing from five to 11 so far this year.

Sales activity, especially with major targeted utilities, is stronger than ever. The air pollution control business has rebounded, as we predicted, with almost 15 million in bookings since June 1. I am particularly proud of the job our people have done in securing an alliance with Duke Power, and in booking the recently announce multiple unit sale at another major Southeastern utility. Brian with that, please open the call for questions.

[OPERATOR INSTRUCTIONS].

And your first question comes from Robert Kirkpatrick of Cardinal Capital. Please proceed, sir.

Good morning.

Morning, Rob.

Let's start with the air pollution control side in the fourth quarter and then move on to the FUEL CHEM side in the fourth quarter. So I'd like to make sure I heard Vince's forecast correctly. Could you repeat those, Vince?

The numbers on the fourth quarter. Basically I had said that FUEL CHEM is going to be taking a step back, OK, and air pollution control would be approximately the same level as the third.

OK. And the FUEL CHEM taking the step back, now you should have more units on line during a quarter on average, is that correct?

On average, that is true. The ones we've recently started up, however, are quite small and a couple of the larger units are still on outage. So it's more of an outage related situation right now.

OK. And the larger units that are on outage are on outage because of the seasonal slowdown that is normal to the utility industry early in the fourth quarter?

That's exactly right, Rob. The early fourth quarter and then again in early spring you'll see that sort of thing pretty normally.

All right. So the revenues per unit might actually be down sequentially but they probably aren't terribly different on a year over year basis?

That's correct.

OK. And then of course, your anniversary in the Martin Marietta acquisition as well.

Right.

Correct.

At what -- and I assume there has still been no revenues recognized from ACUITIV, nor are any forecast for the fourth quarter?

Basically nothing of material basis at this point in time and we don't have anything forecasted right now either.

OK. And could you go into maybe a little bit more detail on what you are expecting for 2005, either on the APC side, on the FUEL CHEM side, or overall?

Rob, it's at this point in time we're basically going through our planning processes and it would be premature for us to be taking about 2005 with any sort of specificity whatsoever. We would expect that we would give our first guidance on 2005 as we had our year-end conference call. At that point in time we'll feel more comfortable going out with 2005 numbers. What I would say today is that in both businesses, we are expecting a very positive improvement, but without being able to put any specific numbers to that level of improvement at this point in time.

So you expect to see significant growth in each of those and the question is how do you define significant?

That's correct.

OK. Could you talk a little bit about pricing on the FUEL CHEM side? Are you seeing declines in what you're able to obtain for your contracts when you actually sign them up or is pricing pretty stable?

I think pricing's pretty stable. One thing you do see as we expand, one of the issues with our contracts typically are that we would provide discounts as more units come on, as more chemical is provided, that they're usually structured that way. So you may see a decrease in pricing based on increasing units utilized in the process, but initial pricing other than the typical risk share, which we still do, has been held steady.

OK. Great. And, Vince, what are the total Sarbanes-Oxley compliance costs that we're going to pay this year and what are our total public company costs?

Sarbanes-Oxley, I'd say really the impact on 2004, I would consider it to be much less than a penny per share, only to the point whereby I would not consider it to have a significant impact on our results for 2004. As we go forward, as we talk about Sarbanes-Oxley, we will feel a more sizeable impact of that legislation, OK, but a little bit difficult to measure right now.

I think the entire public company community is trying to get a feel on what that cost impact is going to be. Luckily, due to our size, due to a lot of the controls that we had put in place already and some of the reporting we put in place, the impact on 2004 is going to be nominal. OK? Total public company costs, again just an estimate off the top of my head, anywhere say from $0.04 a share, in other words 800 thousand, maybe up to $1 million, somewhere in that range.

OK. Great. And has there been any discussion about reincorporating in the United States as opposed to where we are today? Maybe Doug would care to address that?

Actually I can respond and, Doug, you can add if you would like. It is something that we are giving extreme consideration to at this point in time. It's a topic that's going to be further discussed at our December board meeting. We're taking a first step evaluation at the process and once that first step evaluation is done, we'll be able to make a firm decision on whether or not we would go forward. But I can tell you right now that it's something that is being diligently looked at as we speak.

OK. Great. Well, I'll quit monopolizing the questions and let somebody else ask a few. Thank you, guys.

And your next question comes from Sheryl Skolnick of Fulcrum Global Partners. Please proceed.

Good morning and thank you and you'll have the other monopolist on the call.

Hello, Cheryl.

Hi, Cheryl, how are you?

Good morning. I'm fine. I need a little clarification, please. You said that you had one of your FUEL CHEM projects was on an extended outage and I assume that means that it's something other than just the seasonal factors?

Well, actually the outage has been delayed so we haven't been able to install equipment because they had not...

OK, good. I'm glad you -- they haven't taken it offline yet.

That's correct.

And did you say it's been delayed so that it might not even get taken offline in the fourth quarter?

That's true.

OK. So at best it's going to be first quarter business or could it wait till spring?

It's hard to say right now what their schedule is because they don't' really know themselves. So I'd have a hard time answering that accurately. Hopefully, it's sooner rather than later.

Yes, of course. So, Vince, your commentary about the 5 to $6 million run rate for FUEL CHEM by the end of this year for the quarter, is that different -- the difference between them having their outage and not having their outage so it's lower if they don't and it's higher if they do?

It's not necessarily specific to that one particular unit, Cheryl. It's that and others that are on extended outage in the fourth quarter. So it's not just attributable to that one unit.

I think you'll normally see -- I think we've addressed this before, that the fourth quarter usually is lower than the third quarter even though the run rate on a quarterly basis may be higher.

OK. And then the -- I get it. And then I guess another question arises with respect to ACUITIV. Can you give us a sense of how much you've spent on it year to date?

Basically at this point in time we've been running a rate of about a penny per share per quarter, so to date approximately $600 thousand.

OK. Can you talk to us a little bit about the status of Mexico? You said that you've reached a distribution agreement. Does that mean that somebody down there has accepted your tests?

No, it does not mean that yet, unfortunately. What it does mean is that we and our partner have agreed on how we're going to move forward together. Right now we're waiting to get on a schedule to run that demonstration in their laboratory. Again, it should be late this year or early next.

Right.

So that's step one and then move forward to full size units after that.

And that was part of the equipment that you needed to spend the money on?

No, not yet. In fact, we have -- the equipment that you'd need for this combustor that we're going to run the tests on, remember, it's about 3 feet in diameter as opposed to 90 feet across.

Yes, I remember.

And that equipment and the chemicals necessary to run the tests is in place in Mexico as we speak, we're just waiting to get on the schedule, so to speak.

OK, good. And then I guess I'm going to take Rob's line of questioning to the next step. Given that you're spending, I don't know, $0.04 a share to be public, and you're probably going to end up spending a little bit more of that as your Sarbanes-Oxley compliance costs kick in, and given that you have no debt and you don't seem to appear to need cash, why on earth are you still public? Other than the fact that the stock price is at 5 instead of something higher that would make everybody more money on a takeout. Or is that the answer?

I guess I can't answer that, Cheryl. You'd have to ask the Board of Directors that question.

Yes, well, I'm sure the Board of Directors is asking themselves that. If they're not, maybe they ought to be. OK. And then I guess I'm a little bit concerned, and tell me why I shouldn't be, and I think this happens to me every year in the third quarter -- given that this is the second of two -- that it seems like the pace at which you're signing FUEL CHEM contracts has slowed a bit.

You're doing great on the APC side, it's clear you've got a new significant Southeast utility. That didn't come through in the first press release. When you said that, that's important that it's not Duke, it's somebody else. So congratulations on that. But I guess I'm a little bit concerned about the pace of FUEL CHEM. So either tell me why I should or shouldn't be.

Well, I guess -- I don't think you should be because the activity that we see in the major utilities we're calling on is really outstanding. The results we've had, the credibility and the reputation we're gaining in the marketplace is better than it's ever been. Coal use is up.

The differential between compliance, eastern compliance coal and PRB, where you're talking maybe 1% sulfur on the eastern coal and typically on PRB let's talk about .8% or so, the differential in cost per ton is enormous. That spread is growing. So people are looking more and more toward PRB and PRB quality is starting to decrease. I think we've talked about that before where we're seeing more -- higher levels of sodium.

And one thing that has not changed is that the utility industry is still extremely conservative, it takes a long time to make decisions. But I'm looking at a list of six majors that we have not sold one drop to yet that are strongly considering being sites for demonstrations and so forth in 2005. So I'm disappointed that it's not going faster, but I'm not discouraged at all because the activity is truly outstanding.

OK. That's good. That's very helpful. Thank you. I'll queue back in if I have follow up questions.

Thanks, Cheryl.

And your next question comes from the line of David Beard of Morgans Waterfall. Please proceed.

Hi, good morning. A couple of clarifications. When I look at FUEL CHEM revenues being 34% of last year's total revenues, that would imply that it's 3.5 million. And this year you're north of 5 in the quarter, but that's not up 70%. If it's up 70%, it's 6 million. Can you either just give us the numbers or tell me why my math is wrong.

OK, now, David, one more time on your question? FUEL CHEM revenues in the third quarter?

Of last year were 34% of total revenues.

Right.

Do I take 34% times 10.2...

Yes, just...

... end up with 3.5 million.

Right.

So if I take 3.5 million up 70%, that's 6 million.

Right. The year to date increase is 70%, David. The year to date...

...date.

Yes.

OK. It would be easier if you just gave us these numbers, at least for me and trying to back into all this math and year to date and quarter to date. Just give us the numbers would be very helpful.

Will do. Point noted. Thank you.

Second question, in terms of the booking pattern on the product you have in backlog, is there any way to say how that's going to flow out over the next X number of quarters?

I think other than typically saying that it takes somewhere between six months and one year to complete -- to go from order -- or release, I should say, to completion, it's difficult to say. One thing that might be a factor here is that when you look at the ozone season, it's restarting May 1st, so there's undoubtedly going to be a flurry of activity prior to that date as far as deliveries go. But typical -- again, a typical booking takes six to 12 months to complete. Does that help?

No, that's helpful. And how does the bookings you get in the current quarter relate to medium (ph) zip (ph) calls next summer given that we've got the full amount of time to pollute (ph) vis a vis the credits? Can utilities book orders from you in the third -- in the fourth quarter or the first quarter and still get them installed in time to meet the zip calls in the summer?

If you haven't got an order in by right now, the chances of getting it up and operating by May 1st, on a commercial basis, are not too good. However, remember that we do have some trailer-mounted systems that we've utilized for that purpose in the past. I think we talked about that a year ago or so. So we do have a limited capability for "emergency" use. However, a typical full installation of a commercial system is probably not going to happen very easily in that period of time.

OK.

But that doesn't mean -- some of the orders we've gotten are not for delivery until July. Some of the orders we've recently received. So it isn't all necessarily May 1st type stuff. It just depends on the utility's needs relative to the tons they're emitting versus their requirement. So May 1st is a key date, but it isn't critical in all cases.

OK. I have just three more questions and I'll stop monopolizing as well. Relative to the FUEL CHEM business, you said it's going to be down sequentially in the fourth quarter in terms of revenues?

Correct.

But you estimated that there's a run rate of between 5 and 6 million. How can the number be between 4 and 5, but the run rate be between 5 ands 6.

Basically what we say there, David, is that if all the units that we have essentially installed were running for a complete quarter, they'd generate revenues in the 5 to $6 million range. So what we're saying is that we're expecting to add a couple of more units to be online prior to the end of the year, so basically when we come to the end of the year, the number of units that we have onboard, if they run for a full quarterly cycle, the run rate is 5 to $6 million per quarter.

So it's really an installed capacity of 5 to 6 million?

Exactly.

OK. And just could you help me understand why the gross margins increased, either year over year or sequentially?

Right. Basically, the primary reason for the increase is the product mix shift in favor of the FUEL CHEM business versus the air pollution control business. That's a primary driver. And margins we realized on FUEL CHEM are greater than those we realized in air pollution control.

OK, good. That's helpful. Thank you.

Thank you.

And the next question does come from David Fondrie of Heartland Funds. Please proceed.

Yes, good morning and congratulations on a nice quarter.

Thanks, David.

Thanks very much, David. Good to talk to you again.

We're going to beat FUEL CHEM to death here. At 5 to 6 million at a run rate, you indicated that you were anticipating like three, I think you said three more installations in the first quarter. Does that 5 to 6 million run rate anticipate those three additional installations or does it exclude it?

No, it does not.

It does not.

No.

And are those -- do those three installations include this large test that has been delayed?

No.

Does not. So that also would be an additional one.

Yes. I just have trouble predicting when that may occur, but no, it does not include that.

OK. Can you talk a little bit -- well, you mentioned the trailers in the last call.

Yes.

Do you still just have the one or do you have more than one?

Well, we've got one large one that's capable of handling a large utility-size boiler...

OK.

...a couple of small ones and we've got some skid-mounted -- well, all of our normal equipment is skid-mounted -- but skid-mounted inventory that could be put in place. As long as the unit's not 600 megawatts or a very large unit like that, if it's a smaller utility unit, we've got additional equipment that could be brought into focus if necessary.

OK. And the large one, was it gainfully employed last year? I can't recall.

It wasn't employed the whole time, but it was employed for several demonstrations and it's already -- in fact, it's probably on the road as we speak because there's another demonstration scheduled to start next week and another one scheduled for the first quarter. So the unit has been quite busy.

On the FUEL CHEM side, ammonia prices and I guess most gas-based, natural gas-based derivatives are quite high. Are you able to pass that all along or is that just -- is it still an insignificant piece of your cost that it doesn't impact your margins?

Well, really it's not involved, David, in the FUEL CHEM side at all. It is heavily involved on the air pollution control side because our process is basically urea-based, which is made from ammonia and CO2. So yes, the price of urea has definitely increased due to the natural gas and the fact that there aren't too many people in the U.S. that are in that business anymore, it's mostly imported. So that's been a factor, not on FUEL CHEM but on the air pollution control side.

But again, when you look at the alternatives to urea, people are using ammonia, so it's not only our reagents, quote unquote, that's gone up, but it's everyone's. And remember, we don't sell urea to - for selective non-catalytic reduction purposes. We have licensees that are basic in urea supply rather than supplying it ourselves. It's commodity, we're really not in that business.

But on the FUEL CHEM. - so the FUEL CHEM side is not urea based or ammonia based?

That's right. The one factor on the FUEL CHEM side that probably should be raised is freight. Of course, with oil prices going up 40% or whatever, we're seeing additional costs on the freight side and we have had to absorb some of those because we are contractually bound to do so.

OK.

So that has been a factor but certainly not ammonia-based problems at all.

And on the pollution control side, are costs of steel having any impact, or is that, again, not a significant piece of your costs?

No, a very insignificant piece of our costs but a very significant piece of the cost of selective catalytic reduction, for example.

Yes. OK. Could you remind us again what your NOL is going forward?

Going into - we had approximately $17 million rolling into 2004, we have between $4 and $4.5 million that are expected to expire in 2004.

So you will use - hopefully will use some of that...

Hopefully use a portion thereof, yes.

OK. And depreciation and amortization for the nine months?

Depreciation and amortization if you give me one quick second. Slightly less than $1 million.

Great and I guess that's it. Thanks.

Thank you.

Thank you, David.

[OPERATOR INSTRUCTIONS].

You do have a follow-up question from Robert Kirkpatrick of Cardinal Capital. Please proceed.

Thank you. Could you spend a little bit of time explaining why we are not seeing more of a ramp-up in Q4 on the APC side of the business?

It's really - Rob, it's so timing-oriented. It's something that if I was to tell you today that I knew exactly where we were going to end up I should be playing the lottery because I really don't know. You know we just received an order for $5.2 million within this past week and a half or so. If we would have received that order four weeks ago, I would probably have a different outlook on my results for the fourth quarter, OK?

So much of our revenue recognition on the air pollution control side is timing-oriented and it really is as simple as that, where we are tied to our customers' schedule and we really can't move at a pace that is different than that. So we may get a little bit of a surprise in the numbers if indeed one of our key customers allows us to move a little bit more expediently with regard to the procurement of equipment, but that is something that is just very difficult for us to forecast on a quarter by quarter basis, so that is why we try to work within ranges.

And I think, to emph on that a little, Rob, we are expecting some, as I mentioned during the regular part of the call, that we are expecting some additional bookings in the very near future and when you look at that - if you had a significant booking two weeks from now, you're really not going to enjoy much revenue from that. It's impossible. But it is certainly nice backlog to have going into 2005.

So it really drives you in the first half of '05?

Right. You start recognizing a significant amount, and that's correct, in the first half of 2005.

Right. Secondly, I want to comment that I think it is very important for this company to get a replacement for Dick Grigg and I urge you guys to move quickly on that.

We agree 100% and are doing so as we speak.

OK. And thirdly, the - could you shed a little more light on who the partner in Mexico is and why you have chosen them?

Yes, it's not anyone you've ever heard of. It's a small company called Cresa (ph), it's a group of folks who have been representing U.S. companies in Mexico for many years. U.S. companies like General Electric, some steel suppliers, and the reason we chose them is because they have excellent - I mean excellent - connections, contacts at the national utility, CFE, and at the national refiner, Pemex. Those, if you talk about the potential in Mexico for us ...

That's really where it is.

... those two probably represent 80-90% of that potential. And so that's the primary reason. There are two brothers, basically, who speak better English than I do and can translate a technical presentation on the fly like you were in the United Nations, very professional people, very good contacts, that's the basic reason why.

OK. And then is there any more information that you can share with us about the memorandum of understanding that you have entered into with a major OEM?

Other than the fact that it combines a technology that they have and one that we have that allows us to have some very high NOx reductions that we've not been able to achieve on a regular basis before. Part of that, the combined technology, requires some steel-bending, some engineering that we don't normally undertake. Whereas this group is very, very good at that sort of thing.

So it's a combination of technologies and a combination of skills that is so attractive, and unfortunately I am not at liberty to give you a name as yet but I can say I think within the next 60 days or so they'll be quite a bit of information put out there on that particular partnership.

And can you talk about what type of NOx reduction you could have done before this and what percent NOx reduction you think you can do after this?

I'll address mainly our old standby product, if you will, and that's NOx-out selective non-catalytic reduction and let's address primarily the coal-fired electric utility industry and you are talking somewhere between 20 and 35%, typically, reduction on that particular process. That's typical.

Right.

Now if you look at this combination we are talking about, you can double those numbers.

So it becomes 50-60%?

50-75.

OK.

And the costs that you are looking at versus a full-blown selective catalytic reduction is probably in the range of 25-40% on a capital cost installed. It's significantly cheaper and the NOx reduction is not that much less. Now the reason I think it's significant, one of the reasons is, is because if you look at the regulations in the future moving west, you look at people burning Powder River Basin coal, Powder River Basin coal apparently has a lower nitrogen level so when it is burned, NOx goes down, typically.

So we're very optimistic that we'll get a higher percentage of what's coming down the pike with the new regulations, not that the old one is finished, because it isn't, but a higher percentage with the new regulations because the lift, or the percent reduction requirement, is lower because the baseline NOx is lower. So we're very excited about the potential to expand our horizons with this agreement we have.

Great. Thank you so much. I appreciate your time as always.

Thanks Bob.

You do have another follow-up question from David Fondrie of Heartland Funds. Please proceed.

I'd just like to follow-up that last question. What is the NOx reduction if you are using the full-blown selective catalytic whatever it is?

Selective catalytic reduction - on a practical basis, 80-85%. There has been some reports of 90. You're pushing the system pretty hard when you do that.

So this new combo product, you're getting pretty close to comparability.

We are and of course, the 75 is the up, you're going to have to have certain conditions to sit in the 75% range with this technology but just like you - or 90% with FCR. But you're right.

And then my other question, just as a clarification, you said that there was a new order, a $5.2 million from a new customer. Southeastern utility, not Duke. Is that included or excluded from your $12 million backlog number? I was...

It's included.

It's included.

So your $12 million backlog number is not a 9/30 number, it's really a current number.

It's a point-to-date number, yes.

OK, very good. Thank you.

And gentlemen, there are no more questions from the audio bridge at this time.

And again, I want to thank you all very much for your interest in Fuel-Tech and please let us know if you have any additional questions in the future, we will glad to try to answer them.

Ladies and gentleman, this concludes today's conference call, you may now disconnect your lines and have a great day.