Fuel Tech Inc (FTEK) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Fuel-Tech fourth quarter 2004 financial earnings conference. My name is Caitlyn (ph) and I'll be your coordinator today. At the time, all participants are in a listen-only mode. We will facilitate a question and answer session at the end of the conference.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference call is being recorded for replay purposes. I would like to now turn the presentation to your host, Ms. Tracy Krumme, Director of Investor Relations. Please go ahead.

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

Joining me on the call this morning is Steve Argabright, President and COO, 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 statements.

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 that statements made in this call remain operative at a later date. Fuel-Tech undertakes no obligation to update any information discussed in this call and as a reminder, this conference call is being broadcast over the Internet and can be accessed at our website www.fueltechnv.com.

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

Steve, please go ahead.

Thanks, Tracy. As you know, we reported revenues for the fourth quarter in full year 2004 of 7.8 million and 30.8 million, respectively. A net income for the quarter was $1.4 million or 6 cents per diluted share, compared to a net loss of 280,000 or 1 cent per diluted share in the same quarter a year ago. Net income for the year was 1.7 million or 8 cents per diluted share, compared to 1.1 million or 5 cents per diluted share in 2003.

As we have said in the past, the air pollution control segment of our business was expected to pick up during the latter half of 2004 and continue that trend into 2005 and 2006. Starting with this segment, we are very pleased with the orders we announced last week for a total of $4.8 million, which brings the total bookings for the last 9 months to almost 22 million; definitely a record pace and we expect additional orders in the very near future.

We are particularly excited about the orders for 2 commercial scale NOxOUT demonstrations on Tennessee Valley Authority boilers. As you know, TVA is the largest public provider in the country and represents the third major Southeastern utility we have penetrated in the last year.

We are also pleased with the other orders we announced last week as they represent not only solid equipment revenue, but also additional demonstrations and design engineering opportunities that have resulted in a very high percentage of equipment orders in the past.

In other air pollution control related news, we announced the memorandum of understanding with a major OEM last quarter which outlined the cooperation between our two companies in marketing a combination of our respective, unique technologies. We are confident that this alliance will bear fruit in the very near future at which time more details will be forthcoming.

For our FUEL CHEM business, we are pleased to report that revenues for 2004 were up about 60 percent 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 continue to close some significant new business as we recently announced.

The overall level of growth was slightly less than the 75 percent we had hoped for, primarily due to extended unit outages and lower than estimated chemical utilization by the coal-fired units that use our Targeted-In-Furnace-Injection technology on an intermittent basis as coal quality dictates.

We have recently initiated another demonstration on a very large coal-fired boiler at a new major Utility bringing the total to 12 units in this market segment domestically. We expect 1 or 2 more units to start demonstrations by the end of the first quarter or shortly thereafter and several others are in the data collection or early design phase.

Western coal, primarily from the Powder River Basin continues to grow in popularity as we see additional utilities giving consideration to including more of it in their fuel mix. In fact, the popularity has resulted in one of our major customers curtailing production on one unit and hence chemical usage, due to a local transportation issue causing a shortage of PRB coal.

Our demonstration on a coal-fired boiler in Italy has resumed and is performing well under very difficult conditions. We have also signed a memorandum of understanding with a German company to investigate the possibility of working together in a joint marketing effort in Germany and Eastern Europe.

As I mentioned, the heavy fuel oil-fired Utility market has traditionally been a good base business for us, but now we are seeing an increasing level of revenue growth due in large part to our TIFI technology. We currently have business on 23 boilers in this segment, 7 of which are utilizing the In-Furnace-Injection technology in combination with the more traditional In-Fuel feed (ph). We are actively working to increase that penetration both domestically and outside the U.S., primarily in Mexico, a very large potential market as I have mentioned in the past.

As we announced, we have initiated a demonstration in Mexico at a government sponsored laboratory and expect to hear about the official results very soon. We also have a very active program to leverage the FUEL CHEM technology into new market niches where we see an opportunity to solve problems in a value-added manner and thereby enhance our revenues.

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, I need to inform you that Mr. Ron Seidel has resigned his position as an Executive Consultant to the company. Mr. Seidel has accepted a position of President of Texas Independent Energy, a wholly owned subsidiary of public service enterprise group based in Newark, New Jersey. Even though this tenure with us has been very short, he has been instrumental in helping us make several high level utility industry contacts. In fact, he is involved with us in a very important meeting with the Senior Utility Executive taking place later today. We are already looking for his successor.

Regarding ACUITIV, the decision has been made to cease the commercialization efforts of the software and offer the technology to other companies that are focused on software sales. However, as the technology is an essential tool in the design, marketing and sale of Fuel-Tech's core APC and FUEL CHEM businesses, a reduced staff is being maintained to meet current support needs, continue development where it enhances our product lines and to support a transition to a third party if necessary.

Vince?

Thank you Steve and good morning. As Steve mentioned, we reported net sales for the quarter ended December 31 of $7.8 million, slightly higher than 7.6 million last year. On a year to date basis, net sales were 30.8 million down from 35.7 million last year. Net income for the quarter was $1.4 million or 6 cents per diluted share, compared to a net loss of $280,000 or 1 cent per diluted share in the same quarter a year ago.

Net income for the year was $1.7 million or 8 cents per diluted share, compared with 1.1 million or 5 cents per diluted share in 2003. Net income for the fourth quarter and the full year were favorably impacted by the recognition of a $1.5 million non cash tax benefit related to the anticipated utilization of net operating loss carry forwards.

Based on a review of historical taxable income, and future projections, the company believes that the accounting treatment for the net operating loss carry forwards is prudent. Net income prior to this adjustment for the quarter and full year ended December 31, 2004 was a break even and 1 cent per diluted share respectively.

The operating results for the fourth quarter and full year were in line with our expectations. Revenues from our air pollution control product line were 4.1 million and 14.6 million for the fourth quarter and full year ended December 31, 2004 while revenues for the comparable periods of the prior year were 4.6 million and $25.4 million respectively.

As Steve mentioned, the air pollution control business has begun to show the improvement that we had expected in the second half of the year and we have now realized approximately $22 million in project bookings since June 1, 2004.

The FUEL CHEM business recognized revenues of 3.7 million and 16.2 million for the fourth quarter and full year ended December 31, 2004, while revenues for the comparable periods of the prior year were 3 million and $10.3 million respectively. FUEL CHEM revenues of 16.2 million represent an increase of almost 60 percent from the prior year. An increase being attributable to further 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, 2003. The Martin Marietta accounts contributed in excess of $2 million in revenues in 2004.

Gross margins in the fourth quarter were 44 percent up from last years 42 percent. And on a year to date basis gross margins were 46 percent versus 39 percent in the prior year. The increase is due primarily to a change in product mix in favor of the higher margin FUEL CHEM business and additionally to a lesser concentration of turnkey air pollution control projects.

SG&A expenses were flat year on year for the fourth quarter and were up 9 percent year over year. The year on year increase is attributable to the addition of sales resources for the fuel treatment chemical business and to revenue related FUEL CHEM selling expenses.

Additionally, due to the decline in the air pollution control business, engineering expenses were a bit higher than the prior year due to a decrease in utilization.

Our balance sheet remains very strong. We ended the quarter with 6.5 million in cash, working capital of 11.4 million and no debt. The decline in cash from December 31, 2003 is due primarily to the investment in equipment necessary to support the developments of the FUEL CHEM business.

As mentioned previously, the overall level of business activity today is more dynamic than it ever has been before. The backlog for the air pollution control business is approximately $17 million as of today and accelerated revenues are expected in this business in 2005 and 2006.

Our recent announcement of orders with TVA provides further support for our belief that major utilities continue to strongly consider Fuel-Tech technology as a viable tool in their ongoing regulatory compliance planning.

Additionally, FUEL CHEM, after achieving 60 percent of revenue growth in 2004 will continue to grow at a strong rate in 2005. Further penetration of the coal-fired market will be the primary driver for growth. However, incremental contributions from business generated by oil-fired units are expected.

As Steve noted, effective March 1st, Fuel-Tech announced that it would discontinue further commercialization of its ACUITIV visualization software business. This technology will be offered to qualified third parties for potential acquisition.

The quarterly cash out lays previously dedicated to this business approximated $200,000. On a going forward basis, the amount will be reduced to an annualized cash cost of just over 1 penny per diluted share.

Finally as a look into 2005, we expect revenues to be in the $45 to $48 million range with air pollution control contributing at a slightly higher level than FUEL CHEM. Our pretext net income for this revenue range will be from 15 cents to 19 cents per diluted share.

Thanks, Vince. As I mentioned during the third quarter conference call, we view 2004 as a spring board to the outstanding results that lay ahead for Fuel-Tech. FUEL CHEM group has made great strides in penetrating a very difficult coal-fired utility market with TIFI installed units growing from 5 to 12 recently.

Sales activity especially with major targeted utilities is stronger than ever. The air pollution control business has rebounded as we predicted with almost $22 million in bookings since June 1st. I am particularly proud of the jobs our people have done in penetrating major targeted accounts and in creating long term relationships with key customers.

Caitlyn, please open the call for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Robert Kirkpatrick of Cardinal Capital.

Good morning. Steve, you've been trying to get into TVA for as long as anybody can remember. Can you give us some more information on TVA's kind of portfolio of power plants? What does this mean in terms of a potential opportunity first on the air pollution control side and then the same question on the FUEL CHEM side?

Yes and you're right. A major utility like that has certainly been high on our target list for quite some time. As far as their portfolio, I can't give you an exact breakdown, but they have obviously been the largest public power provider, have multiple, multiple units. A lot of them have been retro-fit, and we're talking NOx here, retro-fit with SCR which makes perfect sense. The larger units, we've talked about that many times in the past, the SCR process fits very well for those types of units.

However, that utility also has multiple smaller older units like the 2 that we recently announced. They make perfect sense to fit a technology like ours. There has been considerable work done by TVA in the last few years to determine how they're going to comply with the regulations like everyone else from a planning perspective; again, a very complex situation with multiple, multiple units like they have.

This step that we have recently been involved with on these 2 units is to determine the viability of our technology and how that would fit in to their future plans. So it's difficult for me to say today that - how many more units are out there potentially for us; I'm guessing somewhere upwards of 20. Whether that comes to pass in their plan, I really can't comment on at this time. Certainly we are hopeful and we'll be working very hard to position ourselves to be involved in additional units after these demonstrations are over.

Okay. And can you give us a little more detail in demonstrations in terms of when do they start? How long do they last? How long of an evaluation period do you anticipate after that before they would either expect more demonstrations or some sort of decision?

Yes. The demonstrations are scheduled to start mid-summer and we're on track from an engineering perspective to make that happen. They'll run through the ozone season, which as you know, runs through the end of September. At that time we should be able to, with their input, be able to make decisions on if the results were as they need to go further on other units. So I would anticipate the ability for them to make some decisions along those lines by the end of 2005.

Okay. Can you talk also a little bit about the current dynamics of the air pollution - actually I'd like you to come back and answer the question about TVA with the point of view of FUEL CHEM please.

Right. Well, there's been an announcement; I think it was probably about 3 months ago, that TVA is committed to burning more Powder River Basin coal. For several reasons; one, I'm sure that the cost has an influence here, but also reduced nitrogen levels in PRB coal is another reason why TVA would be looking at that to inherently reduce NOx by burning a lower nitrogen coal.

So as they step more into the Western coal market, then certainly our likelihood of penetrating the FUEL CHEM side of TVA increases. And certainly we are talking to them about those sorts of things now and are going to be ready to assist them in any thing along the PRB lines as soon as possible.

Okay, great.

We think there is potential there; again, it depends on when they really get the conversions going.

Okay. And do you have a time table for when they expect to have those conversions going?

I think they are going to be starting momentarily if they already haven't; again, when they do, it converts completely from Eastern coal or starts blending in PRB. It takes a little while for them to learn how to fire it, to do certain things to a furnace to be able to burn it and not lose capacity so it isn't an overnight thing, but it's a progression of things they need to do to do it properly.

Okay. To go back to the APC side, if you could talk a little bit more about the current dynamics of the market, what's going on with the SIP call? What are some of the other regulatory drivers? How's NOx ton pricing? Things like that; give us an update on all that.

Okay. Well, let's start with the NOx ton pricing. Right now, for both 2005 and 2006, they're looking in the $34/35 hundred range. That's something we talked about last year; we anticipated that happening. Also clear into 2007, they're slightly north of $3000 a ton. So those kinds of numbers are good for us; it's hard to say between now and when the ozone season starts in May what they will be, but they're certainly at a level now which is creating activity as you've seen by our bookings.

The SIP call, of course, that's what is driving our air pollution control business today. As we've talked about many times, we anticipated that blasting for the next 2 to 3 years. As far as what's coming in the future, there's been a lot in the papers about clear skies, the Bush administration air pollution control thinking versus some other things that are going on and that is a very dynamic thing in Congress as we speak. However, whether it be clear skies or whether it be the rule we talked about before, the clean air interstate rule, CAIRS, it's called, either one of those are going to increase our market outside of the traditional east of the Mississippi, if you will, area moving further west.

Again, we anticipate somewhere north of 150 more boilers on the utility side brought into the NOx reduction requirement. We don't know yet as no one does, what the levels of reduction will be or the exact timing, but we're anticipating it to be favorable sometime after 2007.

So there are more rules coming, it's just a matter of getting it through the bureaucracy to have them outlined.

Okay. And then finally, and I'll turn it over to other investors or the South side, what is the total capacity of your APC business for '05 and '06? If you went full out, flat out and delivered everything physically, humanly possible, how much revenue could you book in '05 and '06? Assuming you got all the orders.

Well, we've just hired 4 more engineers in anticipating what's coming to make sure we're prepared to meet demands that we see coming down the pike. To give an exact number of units?

or revenue?

Well, you heard what Vince's guidance was. I think if you calculate that, you're talking somewhere around 25 million for the air pollution control side. Certainly, we're prepared to do that. It's a difficult question and answer. I'm thinking again, we don't make anything in our back room here. Our suppliers on equipment certainly have additional capacity and we have back-up suppliers if our current, normal suppliers are backed up, we have other back-up.

So I'm not sure I'd say we're limited. We can gear up very quickly in-house and on contract engineers and so forth to meet whatever demand we see. So that's a tough one.

It is. I went a little bit broad (ph) myself on this one. It is a tough one. In '02 and '03 we were approximately at this $25 million level on revenues for air pollution control. And again what we're looking at coming back to that number year-end in the '05 year.

Another limiting factor is the fact that our technology requires this 5 to 10 month period of time for installation. So at any given point in time as we look out toward the next 12 month period of time, we get a little bit of an idea as to what that back log is going to be. And we can resource plan accordingly for what that activity is going to be.

So the utility also has to keep in mind that when they come and talk to us that there's planning that is required as part of this process; so a couple of things working in conjunction here.

One thing that really points to the priorities that we have to have alliances with our major customers so we can plan in advance to what's coming down. Now, good surprises like bookings we didn't expect, we can handle those.

Okay. Great, well I'll turn it over and get back in line and ask some more questions in a minute.

Your next question from Cheryl Skullec of Furrel Global Partners.

Good morning. Just-

Hi Cheryl.

Good morning. Just to follow up on Rob's question though. Given the nature of the APC, unlike-it's not a recurring services business. So that means that as you install a system and you're done. And you do your engineering services and go down the path and it's up and running, those resources get freed up to go on to the next job.

That's correct.

That's correct.

So it's somewhat-it's not as limiting from a human resources perspective as it would be if you had to assign people to be there on an ongoing recurring basis.

That's true.

Okay. And then I guess if I can go back and just ask one specific question related to the tax benefit; the non-cash tax benefit. We're all presuming that that means obviously as your guidance suggests, you're going to make money in 2005. And you gave us guidance on a pre-tax basis. But will you be paying tax at least on a GAP basis. We you be recording a tax expense?

What will happen is we definitely will record a tax expense. However it will be a non-cash tax expense.

Right.

And please keep in mind that as you look at this $1.5 million, effectively it's referred to as a reduction in the valuation allowance that we had on our books for that tax benefit. I mean this represents effectively a very prudent conservative estimate in this era of Sarbanes-Oxley of what we expect to realize from utilizing our tax log carry forwards.

Again it is a conservative estimate. And we used them the methodology by looking backward at our taxable income history. However, it is obviously our expectation that we can do better than what that estimate could portray. So, anyway, it's prudent accounting for the company. And it's positive. Effectively we're saying exactly what you just said. We expect to make money going forward.

Right and so maybe this is a silly question and you'll forgive me. But is that essentially based on a full 40 odd-percent tax rate?

We used 35 percent basically.

Okay. And then I have to ask about the departure of your Senior Statesperson's consultants types. I mean, part of me wants to say, isn't there any way that you can bring them on board and as part of their contract that if they leave before the year is up that they have to promise to give you some business.

Well that would be nice. I think maybe we ought to go into the executive recruiting business on the side.

Yeah. I wonder. And it's lovely that he has been able to set up some key meetings for you. But I mean given that this is the second person who's been lured away. And given that it does appear to be extremely helpful to have these people, is there anything that you can do to make your position that much more attractive to link these folks in a little bit more permanently?

Well, I guess on an attractive perspective; we've provided what I think are some pretty attractive terms from the perspective of you help us gain business in certain key target accounts and liberal commissions is part of the deal. However when you consider someone as an executive consultant to us like Dick Grigg and then going to the President COO of a company like First Energy, money isn't the only issue although it certainly was a factor. But gentlemen like him, he likes the challenge.

Back to Ron for a minute. It took quite a while for us to get Ron on board. And the reason it did is because this position he recently accepted was a potential at the time. And then it went away. And when he was comfortable that it went away, and then he joined us. And it came back to his surprise. And he was very apologetic about it. I don't know what else to say. We are on the hunt. And it's a position that has been very valuable to us. And one we will continue to try to fill.

Well, I guess the concern is that the last time when you lost Dick Grigg, and obviously folks have to go where their expertise is going to be best valued and most appropriate from their perspective. But when you lost Dick, it was clearly a slow down in your business that came in. Now, I don't know if that's pure coincidence or not. But you've got yourself some pretty stiff goals that you've set. And I guess, walk me through the timing of when you need to win these contracts and how confident you are in them because I'll give you an example. You've got 17 million in announced backlog. Now I assume you define the backlog as the value of the contracts. It's not clear to me that it's the value of the contracts that you expect to book over the next 12 months.

Well, let's go back a minute. You're looking at the air pollution control backlog.

Right. That's all I'm looking at.

Capital backlog. But on the other side of the coin, most of what Dick and Ron were involved with was on the FUEL CHEM.

I know that. But just as an example of what I'm trying to get at here is that you're basically looking at somewhere in the neighborhood of $25 million of APC revenues. Right?

That's correct.

So you've got 17 that we can identify. Pretty soon you're going to have to give us another 8. And the timing of that needs to be sooner rather than later.

On the FUEL CHEM side, you've not given us a backlog number, but we do know with 12 boilers, and grant that some of them are-furnaces and some of them are intermittent, so that they don't produce revenue at the higher rate and some of the biggest that you've got that aren't intermittent. Nevertheless, we can make a stab at what kind of a run rate revenue that's going to give you. And given the seasonality of when you can install these things, I guess what I'm saying is to lose someone like that early in the year, I'm wondering whether or not that isn't just a little problematic in getting to the goal of somewhere in the neighborhood of $21-23 million of FUEL CHEM revenue.

Well, Sheryl, I appreciate your concern, but let me explain a little bit more about how these gentlemen are utilized and what they really bring to the table for us. What they bring to the table is the ability to get audiences in the executive suite of a utility.

Right.

Now, that's been done multiple times by Dick and several times by Ron during that period of time. So, those contacts have been made.

Okay.

Neither one of them traditionally got involved in a day-to-day sales effort. That day-to-day sales effort is the responsibility of our sales people - direct sales people that we have out there every single day. So, it's more of an introductory situation where they bring some credibility to the table. Now, those contacts that they've made are still active, regardless of whether they're consulting for us or not.

Okay.

So, I don't see a problem meeting our - well, it's a challenge, obviously, but ...

But not for that reason.

That's not going to have a direct impact per see on whether we make our requirements or not.

Okay. I guess the blindingly obvious statement is that the reason that I'm concerned is that we've had a problem achieving revenue guidance or expectations here and it seems to me that 2005 is the make or break year.

And we say it's a very critical year.

Right. And so, you'll forgive me for trying to push you on what are the impediments and what's the likely timing of this? Because it just seems to me that you're going to need to have a lot of contracts come in, both for APC and FUEL CHEM in the next couple of months that start right away to get there.

Can't argue with that.

And if this is your guidance, you're obviously confident, but I guess I could use a little bit more help with that.

Well, I mean, obviously, we've got a lot of things in the hopper - the sales hopper on both sides of our business and extremely active. Like Vince said, there's more activity going on right now than we've ever seen in this company. And we're confident enough in that business coming that we've hired people to be in place to make sure that we handle it the day it walks in the door.

Okay. That's fair enough. And then, just a final comment. Thank you for taking care of the acuitive (ph) problem, so I don't have to ask you when are you going to take care of the acuitive problem again.

Well, it is a great technology. It really is a great technology. We utilize it every single day here.

I understand.

It just wasn't for Fuel-Tech as a shrink-wrap software business, but ...

Well, I suspect your shareholders recognized that awhile back. So, thank you.

Okay. You're welcome.

That's it.

Your next question from George Gaspar of Robert W. Baird.

Yes. Good morning. I've got a question regarding the - you mentioned that you're up to 12 customer for 5 on the FUEL CHEM. In terms of your sales, there were 16 million. Can you give us a range of what the sales were on a per customer basis? I mean, you obviously didn't have 12 for the whole year and how this averaged out for the year and what - can you just give us a little color on maybe some of the ranges of total chemical sales and different types of client?

The - and average size Western coal-fired boiler, and there I'm talking 350-400 megawatts, running chemicals continuously throughout the year and that means 300 days or so, is worth roughly $1 million in revenue to us. Now, there's bigger boilers than that, there's smaller boilers than that that we have and there are also units that don't run the chemical continuously because their coal quality does not require chemical treatment all the time.

So, I think what you need to take into account is that those 12 units are not the only boilers we have that get reported under FUEL CHEM revenue. We have a significant number of oil-fired units. We have some paper mill boilers. We have some municipal solid waste incinerators. So, there's a lot of different units that go into that mix. It's hard to say, well, you've got 12 boilers, therefore you have x million dollars because there are a lot of other factors, a lot of other boilers that go into the mix.

Okay. And then, that leads to a question on what your market opportunity is away from the straight power generation side of the market. Can you comment on that?

Well, power generation, I think we have to say that that is where the action is, both on the coal side and on the oil side. The industrial marketplace is not something we're ignoring when the opportunities arise, but it is pretty small compared to the utility market. Now, we haven't talked a whole lot in the past about the heavy oil-fired utility market, but we've made some significant penetration of that market in the near past and we see some additional potential out there in that market domestically, somewhere between $15-20 million worth of potential business for us.

And then, you have to look at places like Mexico. Mexico - we've been working very hard for the last 2-3 years to penetrate that market. We finally got in through our partner down there to demonstrate our technology, which is a law, a requirement - demonstrate it for the national utility CFE on a pilot scale basis. That demonstration was just completed Monday. We do not have the official results, although we're optimistic with what we know.

After that report comes out, then we step into a demonstration on a full size boiler, bringing heavy fuel oil, which is, by far, the primary fuel in Mexico, unlike the U.S. That is the primary fuel in Mexico. So, potential there is an additional $25-30 million the way we see it. So, I think, this - the utility business is really where our concentration is, although we do have some existing business on smaller units.

Okay. And you commented on Italy and some discussion in Germany. What's the format for European opportunity for you, in general?

Well, again, we've got our first showcase unit in Italy. It's working very well. Germany - we've just recently signed this memorandum of understanding with a company over there who knows the marketplace in Germany and in Eastern Europe and right now I can't give you a picture of what that marketplace looks like. That's what we're in the middle of trying to figure out.

There's certainly some business there we know, in Germany on lignite-fired units are potential for us. Beyond Germany and Italy, where most of it - the business is on heavy oil that does not require a lot of treatment, I can't give you a very good estimate. But certainly, it's worth us looking into. And we do have a small company in Italy that's responsible for handling that.

All right. Okay. And then, if you view the quarter-to-quarter outlook here for '05, have to believe that the real momentum here is in the second half of the year and that it's possible that the first half can still be shallow results.

We're still going to have a little bit an issue, quarter to quarter, with some lumpiness, due to the timing of the air pollution control projects. Okay? Right now, if I was to look at the 2 halves, I'd be apt to say that the second half would be slightly more favorable than the first. But again, the timing on completion of our air pollution control projects pushed that at risk, if you will.

So, it's very difficult for us to forecast in that manner. We would anticipate, on the fuel treatment chemical side of the business, that we would see a steady up-ramp as we go towards the end of the year. A possible exception being the fourth quarter as we experienced here in 2004, whereby, due to timing of shutdowns for regular maintenance, there is the possibility for a little bit of a slip-back in that business. But general trend will be that we see an uptick in FUEL CHEM revenues as we move throughout the year. But air pollution control, difficult for me to forecast for you, quarter to quarter.

Okay. And gross margin - what would you be doing on your gross margin side for FUEL CHEM, looking forward in '05 here?

We don't basically speak to specifics by business at this point in time. Weighted average for the company as a whole, I would say we'd probably be at a level somewhere in the 42-45% range.

Okay. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

Your next question from Robert Kirkpatrick of Cardinal Capital.

Sorry to come back with more questions.

All right

That's okay.

I guess my comment on the consultant side would be is it really better to keep these guys or is it better just to get them for a short period of time, have the introduction happen and then have them go on and do something else where they can be an unpaid preacher to the unconverted.

Well, certainly there is benefit on both sides of that because I think both of those gentlemen, I say with confidence, have a very high opinion of Fuel-Tech and our technologies. So, certainly, they will continue to be unpaid ambassadors, I'm sure.

Okay. I'd like to switch over the announcement you made in early February of the 3 FUEL CHEM demonstrations in a modeling order.

Okay.

The first is you mentioned that a continuous feed average size boiler is roughly $1 million a year in revenues ...

That's correct.

... to FUEL CHEM and Fuel-Tech. Can I have roughly a linear relationship so that the Southeastern U.S. Powder River Basin coal-fired boiler with an electrical capacity exceeding 700 megawatts might be a close to $2 million potential?

Not really. But it's certain well north of a million. It isn't necessarily linear. And again, that average, if you look at - and I don't want to get too technical - but besides the size of the unit, there's what problem it has, what design boiler it is. Is it tangentially-fired, is it wall-fired? There's a lot of factors that go into the value. So, that's the danger of us quoting an average number. But I know, from a model perspective, that's important. It is certainly north of a million.

Okay. All right. And does the same thing hold between a continuous feed coal-fired boiler of a certain size and a heavy oil-fired boiler of the same size?

No, as a matter of fact, a heavy oil-fired average is difficult and I anticipated maybe somebody would ask that question. These things range anywhere from $50-500,000. Now, the quality of oil ...

In terms of revenue that comes to you?

Right. That's right.

Right.

The quality of oil in this country, by law, is pretty good. So, the amount of chemical required, in most cases, is not that great. However, if you're looking at Mexico, for example, it's a different situation, where the quality of oil that we just finished this pilot demonstration on is really not good and requires significantly more chemical much closer to what you might anticipate on a coal-fired unit than on a standard "domestically oil-fired unit." So, again, it's very hard to have an average on an oil-fired unit because of the quality of oil burned, type of unit and everything else. But Mexico, you're going to see some larger numbers per megawatt size, if you will, just by virtue of the fact that the oil quality is very poor.

Okay. And how many - you said that you thought Mexico would potentially give you another $25-30 million market opportunity.

That's correct.

Okay. All right. And then, Vince, just so that we all have the right numbers to compare to as we go forward into next year, could you provide us with the APC revenues or the FUEL CHEM revenues because, obviously, one converts to the other, for the first 3 quarters of this past year?

Certainly. Okay. Staring with the first quarter of the year?

Okay.

Okay. I'm just going to go with some numbers rounded, well, to the 100,000 level. Okay?

That's fine.

APC - 2.5, FUEL CHEM - 3.7. Second quarter, APC - 3.7, FUEL CHEM - 3.7.

Okay.

Third quarter, APC - 4.4, FUEL CHEM - 5.2.

Okay.

And then, the fourth quarter, which I mentioned in my commentary, APC - 4.1, FUEL CHEM - 3.7.

Okay.

Those totals should come out to 14.6 on APC and FUEL CHEM, 16.2.

Okay.

Okay? Good.

Great. Thank you for that. And you mentioned earlier, Steve, in your remarks, that Italy was doing well under difficult conditions. What does that mean?

It means that the boiler over there - I visited there in February. The boiler was originally designed - I think I've mentioned this before - was designed to burn oil. It is very short. In other words, the furnace is very small because it was not designed to burn the type of - it was designed to burn good quality, heavy fuel oil.

Right.

Now, it's burning coals from all over the world - Ukraine, Russia, Indonesia, Columbia, U.S., actually. Very difficult to make that transition from good quality heavy fuel oil to fuel that has 10% ash now instead of one-tenth of 1% ash. So, to keep that boiler clean, depending on the type of coal you're burning is a real challenge. We've been able to take care of that challenge, but they get ships in, they'll switch coals once a week, so it's very difficult to keep up with the firing conditions for Indonesian coal versus a Ukrainian coal, for example. So, it's a real learning process for us and them, from the perspective of moving injectors around, from doing a lot of different kinds of things in very short periods of time. So, it's a very tough application because of the variety of coals and the boiler itself.

Okay. Next to last question - as I - am I correct in understanding that any time in the history of Fuel-Tech that you have had a demonstration, that has led to an order 95% of the time?

Well, that's a safe assumption. Yes.

Okay. And any time that you've gotten design engineering work led - has led to an order 95% of the time.

Yes, I think that's safe. I think 90, 95% of the time. We very rarely go to that point with a customer that does not result in business going forward.

Okay. And then, my final question is, Steve, what are you most excited about for 2005 and for the long term?

Well, I'm very excited about both businesses. We have seen, like I said before, the activity levels that we're seeing today are phenomenal. It's a thrill to see that the strategies that we've had to penetrate major accounts, to work on alliances with major customers, have gone to this point. So, it's a feeling that the people in this company have been working a long time to achieve the level of activity we are today and see the future on both sides of our business as being extremely bright. So, I'm just thrilled by the fact that we are where we are today and the future does look like it's - where we thought it would be.

I think, one more thing, and there's some other - and I really can't get into detail because I don't want to announce the success until there is one, but we're looking at other technologies that are directly spun off from what we know how to do very well and that is inject chemicals into furnaces and so forth that could, again, increase our market again on something we're very good at. So, that's also very exciting to me.

So, you're defining your core competency as injecting chemicals into a boiler?

Well, knowing how to - it doesn't have to be a boiler. It could be other types of apparati, if you will. But we are very, very good at injecting chemicals into spaces. I mean, the Mexican thing, picture this pilot combustor that's 3 feet in diameter. That was one of the most difficult things that we've ever done. And it sounds like, what do you mean - it's only 3 feet in diameter compared to 90 feet across. I'd take a 90 foot across unit any time. It's just much easier to design a successful injection system.

But we did it. We did it in this little combustion unit and got, what I think, will be, officially, very good results. There's other opportunities, value added, like I briefly mentioned before, that we think - we have some, maybe, a unique way to solve some problems that we see out there. We'll be looking at some of those very soon. So, I'm optimistic, based on what I know and what our skill level is that we'll be successful.

Okay. Great. Well, thank you, lady and gentlemen, very much.

You're welcome.

Thank you.

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Your next question from Sheryl Skolnick of Fulcrum Global Partners.

Hello.

Hi, again. Okay. Mexico is very exciting. It's very intriguing what you're saying that, if you can do it in a very big space, then you can do it in a very tiny space. And I guess, I would wonder what other kinds of apparati there would be out there that are in between 3 feet and 90 feet. But I guess I'll try to figure that one out because that's what they pay me for.

But my question is to ask you to clarify, Steve, and give me some of your thoughts. I do realize that there is very significant demand out there for less expensive forms of energy, in particular, either Western or PRB coal. And so, you mentioned the shortage due to, it sounds like, a transportation glitch that might have contributed to some softness in the quarter because if it's not burning the coal, you can't - there's on reason they should buy and inject the chemical. Is this something that is a 1-time thing? It was sort of a fluke, but it affected you? Or is this something that the utilities are becoming more concerned about?

This one was a fluke.

Okay.

Was my understanding. But I think, but by the same token I thing - and again, I'm not an expert in coal transportation, but my - what I read and what I hear is that the rail is an issue as far as getting coal from Wyoming to New York.

Right.

As you anticipate, if there were any hurdles to doing that, that would probably be it. So, rail, in my understanding, or transporting Western coal to the East, especially since more and more and more people are starting to look at putting it in their fuel mix, is an issue.

Yes, and a some point, one hopes that the rails will be able to respond, but you never know. And then, I guess, the next question that I would have is this - a point of clarification. From the time that you announce new business 1 in either - well, on the APC side, in particular because I understand what the time lag is on the FUEL CHEM side - what would be the time lag between the date you announced the business and the date you start the business and when you record the revenue for the business?

Well, normally, when we announce it, of course, that means we're starting, essentially.

Right.

And we're starting on the engineering side. So, the engineering, we do percent completion accounting, so there's no revenue until we have a cost. And certainly, the major of the cost on the APC side is when we purchase and start to construct equipment. That happens after design engineering takes place. That happens after drawings and drawing approval takes place. So, that process is probably a couple of months at least. So, it's going to be a little bit mountain shaped, I guess.

Right.

From the perspective of that the large cost that is involved 2 or 3 months down the road. That's when revenue would start to peak and then come back down as we start up the unit.

Okay. That's kind of what I thought, but it's nice to have it confirmed. I appreciate that. That's it.

Okey-dokey.

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Your next question from George Gaspar of Robert W. Baird.

Yes, just a follow-up on this other business opportunity, from an injection point of view. Have you ever done any work in the oil patch on secondary recovery injecting chemicals?

No, we have not, George.

Okay. All right. Because there's some chemical developments that are being tried here that are increasing the actual recovery of oil and spent wells. But one of the problems is the injection process isn't very advanced. This might be something for you do look at.

We will. In fact, I'm sure our chairman has comments on that as Ralph came from that industry.

Right.

So, he certainly would understand it.

Okay. Thanks.

Sir, that was your final question. I'll hand the call back to you for your closing comments.

Well, again, I want to thank everyone for their participation today and their interest in Fuel-Tech.

Ladies and gentlemen, that concludes your conference call for today. You may now disconnect.