Fuel Tech Inc (FTEK) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fuel-Tech NV first quarter 2005 earnings conference call. My name is Anne-Marie and I'll be your coordinator for today. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to Miss Tracey Krumme, Director of Investor Relations. Please proceed.

Thank you Anne-Marie. Welcome to Fuel-Tech's first quarter 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 Chief Operating Officer, 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 included in this conference call is accurate only as of the date discussed, and investors should not assume that this information remains operative at a later time. Fuel-Tech undertakes no obligation to update any information discussed in this call. And as a reminder, this 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 Argabright. Steve, please go ahead.

Thanks Tracey, and thank you all for joining us today. As you know, we reported revenues for the first quarter of $12.1m, a 96% increase over last year's first quarter. With net income of [$48m] or $0.03 per diluted share, compared to a net loss of $0.03 per diluted share a year ago. Our air pollution control group led the charge to this record performance, and I'm very proud of the job they've done.

Starting with this segment, we continue to be pleased with the order flow, as bookings year-to-date have been about $14m, bringing the total over the last 11 months to approximately $30m. Of particular note are the orders from our alliance partners, a trend we expect to continue in the near future.

As we mentioned last quarter, the TVA commercial scale demonstration orders were another key event for us, and those projects are progressing very well. Also, we are continuing to convert design engineering orders into NOxOUT system orders, as we have in the past.

To discuss the future regulatory landscape briefly, Clear Skies was not passed by Congress, as you know. In its place, the Clean Air Interstate Rule, or CAIR, was issued in March, which adds all or parts of 13 more states to the SIP region for NOx control in 2009. We expect approximately another 140 coal-fired utility boilers will be added to our market potential as a result of CAIR.

In addition, the Retail Haze Rule, as a nationwide initiative to improve visibility in areas such as national parks, is expected to bring roughly another 50 units into the mix. That rule was supposed to be issued April 15 but has been delayed 60 days by the EPA. Due to the future westward expansion of our market resulting from these two rules, we're already working to expand our sales network to ensure we cover all the potential opportunities.

Of course, the SIP Call is driving our current business, and will continue to do so for the next two to three years. NoxOUT's prices are favorable, with 2005, 2006 and 2007 prices all between $3,000 and $3,500 per ton.

FUEL CHEM sales for the second -- for the quarter lagged behind our projections for several reasons, to include two cost sharing and one 30-day no-charge demonstration on utility boilers; logistics problems in one of our largest customers, resulting in a significant capacity reduction through the lack of coal. The problem is supposed to be fixed shortly.

In addition, the expected expansion of TIFI to a large coal-fired boiler within one of our existing utility customers that we've mentioned in the past, was put on hold temporarily, as the unit cannot operate at the high load that results in slag formation. The utility is working on a solution to the problem.

That said, there are some extremely good things happening as well. Excellent progress is being made in penetrating major targeted utilities. The initial stage of the TIFI demonstration on the 700-plus megawatt unit announced in February has gone well, and has been extended after a recent outage. Last week we reported the initiation of another TIFI demo on a PRB coal-fired boiler, at a major mid-Western utility - the first such application for this customer.

Although the 800-plus megawatt oil-fired unit we referred to in February has not been running at high capacity, due to high oil prices and mild weather, initial results for our TIFI demonstration have been excellent. Also, several meetings with high-level executives have occurred in the last 30 days, and we are very optimistic about gaining business with these companies in the near future.

As we have mentioned in the past, a major impediment to increased FUEL CHEM growth rate is the regulatory accounting approach taken by the utility industry, due to state utility commission policies. With the help of an outside law firm, we have developed a package designed to assist our existing and potential customers, in approaching their state commissions about recognizing the cost of our program, in the same manner as they do many of the benefits as they pass through to ratepayers. Comments received from staff of several state commissions have been very positive about the concept.

As to our efforts outside the U.S., the results are very encouraging. Our TIFI application in Italy is performing extremely well, and should be an excellent reference in Europe.

In Mexico, our government-required tests on a pilot scale combustor produced exceptional results - the best ever recorded in this tightly controlled environment. We're now in discussions about expanding the testing to full-size units, and hope to have implemented the process by mid third quarter. As we have mentioned, we believe our technology can be of great value to Mexico, as the energy balance in that country is such that the use of more poor quality heavy fuel oil is a necessity. We also recognize that politics play an important part in that country, when you deal with government agencies.

During the last call, I mentioned our ongoing programs to leverage our technologies in the new market niches where we see opportunities. I am very pleased to report that about a month ago, we initiated the full-scale testing of a spin-off of TIFI, which we call Targeted Duct Injection or TDI.

Initial results of this program, which is designed to significantly reduce sulfur trioxide, have been very promising with reductions in excess of 90% observed. Sulfur trioxide or acid emissions have become a growing problem, as they can be a byproduct of the selective catalytic reductions of NOx on units firing higher sulfur coals.

We are currently evaluating the market relative to our approach, and looking for additional sites for commercial validation. A provisional patent application has been filed as well.

We're very glad to report the addition of John Norris to Fuel-Tech as an executive consultant. John has excellent credentials, with experience in the executive suites of two major utilities, and brings with him the knowledge and contacts that that experience implies. With John's help, we expect to build on the base that both Dick Rigg and Ron [Sidell] took part in creating.

With John coming on board, and taking into account the credentials and respect that he, Dick and Ron all have in the utility industry, I believe it speaks quite well about Fuel-Tech. People like these do not put their reputation on the line unless they believe in the cause.

In other personnel-related news, I mentioned at the last call that we added four technical people, to ensure that we could meet the demand we see coming. And we also just added a Director of Key Accounts to our FUEL CHEM sales staff. This gentleman comes to us from a regional sales VP position, with the unregulated subsidiary of a major coal-fired utility. His job will revolve around assisting our sales people in penetrating key, targeted utilities. Vince?

Thank you, Steve, and good morning. As Steve mentioned, we reported record net sales for the quarter ended March 31 of $12.1m, a 96% increase over the first quarter of 2004. Pre-tax net income was $1.2m or $0.05 per diluted share, compared to a pre-tax net loss of $531,000 or $0.03 per diluted share in the same quarter a year ago. Net income for the quarter was $753,000 or $0.03 diluted share, compared to a net loss of $531,000 or $0.03 per diluted share.

The operating results for the first quarter exceeded our expectations, as revenues from our air pollution control business were $8.3m, which represented a $5.9m increase over the comparable period of the prior year. This business segment, which began to show increased strength in the second half of 2004, is experiencing a robust period of order activity. Approximately $14m in orders have been received thus far in 2005, and the backlog as of this date is approximately $17m.

Utilities and industrial facilities that are impacted by the Environmental Protection Agency's SIP Call regulation, are continuing to prove that Fuel-Tech's technology is a viable tool in their ongoing regulatory compliance planning. Fuel-Tech continues to work towards developing alliance agreements, with critical customers looking to finalize their compliance plans.

The FUEL CHEM business recognized revenues of $3.7m for the first quarter of 2005, which was slightly above the level of the prior year. Revenues for this segment were unfavorably impacted by two circumstances during the first quarter, that require further discussion.

First, as Steve mentioned, there were three demonstration programs that commenced during the first quarter of the year, that did not yield commercial revenues. One was a no-cost demonstration at a critical coal-fired utility, while the other two demonstrations were conducted on oil-fired units, and were structured on a cost share basis.

When we enter into a cost share arrangement with the customer, during the demonstration period Fuel-Tech will invoice the customer at a specified percentage of the commercial price. Then, at the end of the demonstration, if Fuel-Tech meets the criteria for success that were established for the program, Fuel-Tech will invoice the customer for the remaining percentage of the commercial price.

These latter two demonstrations do not reach their evaluation date until later in the second quarter. If Fuel-Tech had invoiced all three demonstrations at commercial levels during the first quarter, revenues would have been enhanced by approximately $500,000.

Secondly, during the first quarter, one critical Western coal-fired utility unit was significantly derated unexpectedly for an extended period of time, due to the inability to have the required amount of Western coal delivered to the plant. Supply chain issues were the reason for the lack of coal. If Fuel-Tech had been feeding chemical at standard dosage for this unit, an additional $400,000 in revenues would have been realized.

Independent of the results of the first quarter, the outlook for the FUEL CHEM business segment is still strong. Western coals are being burned in larger quantities and on an increasing number of facilities, due to its lower cost and lower pollutant content relative to Eastern coals. Penetration of this Western coal-fired utility market remains the primary priority for this business segment.

Gross margins for the Company as a whole for the quarter were 47%, down only marginally from last year's 48%. The air pollution control and fuel treatment chemical business segments realized gross margins in the first quarter of 48% and 46% respectively, versus gross margins for the first quarter of the prior year of 43% and 52% respectively.

The improvement in the air pollution control margin is attributable to the mix of projects that have been worked on, while the decrease in the fuel treatment chemical margin is due to the demonstration activity discussed previously.

SG&A expenses increased by approximately $900,000 from the first quarter of 2004. The increase is primarily attributable to human resource related expenses, as staffing levels were increased in several areas in anticipation of overall business growth.

Revenue-related expenses related to the NOx reduction business also contributed to the increase.

R&D expenses for the quarter were $334,000, an increase of $31,000 over the first quarter of 2004. First quarter expenses included funding of a successful demonstration of the TIFI technology in Mexico, with a research facility owned by the Mexican government.

In the first quarter of 2005, Fuel-Tech recorded tax expense of $483,000. This amount represents $474,000 in deferred tax expense, related to taxable income in the first quarter, and $9,000 in current state income tax expense. As a reminder, net income for the fourth quarter of 2004 was favorably impacted by the recognition of a $1.5m non-cash tax benefit, related to the anticipated utilization of net operating loss carry forwards.

Our balance sheet continues to remain strong. We ended the quarter with $6.3m in cash, working capital of $11.7m, and no debt. As mentioned previously, the overall level of business activity for both business segments remains dynamic. Additional orders are expected in the near term for the air pollution control business, and strong revenues are expected through 2007.

For FUEL CHEM, as Steve mentioned, our opportunities both domestically and abroad continue to look favorable. In reviewing our outlook for 2005, we continue to expect revenues to be in the $45m to $48m range. Our pre-tax net income for this revenue range will be from $0.15 to $0.19 per diluted share. Back to you Steve.

Well, thanks, Vince. In summary, we are very happy about the record revenues we've posted in the first quarter, and with the orders and backlog on the air pollution control side of our business. And we anticipate strong continued order flow in this segment.

For our FUEL CHEM, even though the first quarter revenues fell short of our goal, we are very excited with the progress being made with major targeted utilities, and with that being made outside of the U.S. as well. We're also thrilled about the initial test results achieved by the TIFI spin-off for sulfur trioxide mitigation, and we'll be working hard to establish a commercial presence in that market.

Now, Anne-Marie, please open the call for questions.

Absolutely. [OPERATOR INSTRUCTIONS]. And your first question will come from Robert Kirkpatrick with Cardinal Capital. Please proceed.

Good morning and congratulations on the quarter.

Thank you Rob.

Since we're on to our third consultant in a short period of time, I should ask if John has taken a job as CEO of any other utility yet?

No, but I just state that before long. No, seriously, John's a great guy and you obviously recognized that we can't guarantee his tenure. But he's very excited about the opportunity, in fact is already participating in our calls.

Great and I'm delighted to hear that. But maybe on a more serious note, you could talk a little bit more about the Mexican opportunity. Has that changed? Having seen the results from the demonstration boiler, do you feel different about the opportunities in Mexico? What's been your relationship the last 90 days, with both the Mexican government and your partners down there? And then finally, if you could talk about other foreign market opportunities beyond Mexico?

Okay. Mexico really has not changed what I'm thinking about the market opportunity based on our results, and again the results were exceptionally good that facility that number one they had never seen results that good. And what we did here from the people that operate that facility, that number one, they had never seen results that good.

That over the 25 years or so that these tests have been required and being done, only -- we were only the third company of - I'm not sure how many total but several dozen - that had passed the rigorous test. And certainly the first one that achieved the exceptional results we achieved.

Again, going in we were quite confident we could do what we did. We were looking at the market from that perspective from the beginning. And it's clear, you'll understand, that Mexican government facilities like CFE, which is the national electric utility, and [PNEX] which is the national refinery, where there's opportunities in both places. Politics still play a significant role in achieving business in both those organizations.

Our partners are very astute and understand the politics involved, and we're very confident that they can help us achieve the accounts that we're looking to achieve. Now hopefully we're going to be getting our first short at a full-size unit mid to late third quarter, that's the goal today. We've had recent discussions with our partners about the next steps, and those are being implemented. That pretty much covers Mexico.

Outside of Mexico, again Europe is really the only other activity I can talk too much about on the FUEL CHEM side. And again, the recent results that we've seen on our Italian application have been really exceptional. In the fact that there's a certain kind of coal that they buy on the spot market, comes in by ship, that they've been unable to run in the past more than two or three days. Because of severe plugging and so forth when the run.

They just got done with a 23-day run on that particular coal, without requiring any undue shutdowns or great loss in capacity. So that speaks very well for the technology - I know they're excited about it as well. So that gives us a base, if you will, a reference in Europe that we hope to expand from.

Again, we're working with a small company in Germany to try to penetrate some of the coal-fired business there. That has not resulted in any excitement yet but I anticipate it will. We're looking beyond Southern Europe, beyond the Mediterranean area, to try and find some entrance to Eastern Europe where a significant amount of coal's being burned, but that has not been done yet.

Okay. And more likely you would probably do that with a partner, as opposed to a direct effort?

That's absolutely right.

Okay. And if I understand your -- Vince's comments correctly about the Western coal-fired plant that was derated, due to an inability to have Western coal delivered. That has not yet been solved and, therefore, will impact to a certain extent the second quarter results as well, correct?

It will [indiscernible] we expect that solution, based on what we've been told, to occur within the next week or so. So you're right that April or so. It's starting to ramp up again -- a bit in April, and we expect it to be completely solved by next week.

Okay. And the problem was getting powder river basin coal delivered to the power plant?

That's correct.

So it's not -- I assume this is not a mine mouth power plant?

That is correct and I think in general, and we discussed this briefly last time. I think Sheryl brought up a question about the rail general, and I think it's well known that the rail situation nationwide is pretty much stretched. Especially with more and more power river basin coal being desired by Eastern utilities, which is certainly the case.

So hopefully this will be an isolated case. Don't know of long-term whether it's going to have any impact on other utilities or not.

Yes, okay.

Yes, Rob. The impact on the second quarter won't be as strong as it was on the first quarter for us.

Okay, super. Why don't I let a couple of people ask some other questions, and I'll get back in line.

Very good. Okay.

And your next question will come from David Beard with Morgens Waterfall. Please proceed.

Good morning.

Hi David.

Can you just break down some of the FUEL CHEM shortfalls, and also where the revenues would have been if all these things didn't happen?

Okay. Well, basically let's talk about the demonstrations, David. Basically we had three demonstrations during the first quarter of the year. One being no-cost and two of them being on a cost share basis. If all three of those demonstrations had been basically invoiced at commercial levels, we would have recognized an additional $500,000 in revenues here in the first quarter.

Now, in reality what's going to happen is the following. Obviously for the no-cost demonstration, where we're not recovering any revenues there. That's just a decision we take in order to basically gain business with critical utilities. However, on the cost share units we would expect that out of that $500,000 number, that approximately half of that would fall into the second quarter as revenue for us. So, somewhere between $200,000 and $250,000 of that $500,000 will fall into the second quarter as revenue.

Now, obviously a very high margin as well, because there won't be any cost associated with that. But again, that assumes that the demonstrations are deemed successful and, of course, we assume that that's going to be case at this point in time.

There are some other nitpicky things that occurred but we didn't really want to address a bunch of excuses, where there are high oil prices, etc., on some other units were involved but those were the primary issues.

Does that mean that the capacity reduction at one of the customers, is that an additional item?

That does not have an impact on any revenue falling from quarter-to-quarter, David.

Okay, thank you.

You're welcome.

And your next question will come from Jack Robinson with Winslow Management. Please proceed.

Hi guys.

Hi Jack.

Can you talk a little bit about the mindset of the utilities that you're talking with, about FUEL CHEM? Not only -- and also -- the one -- First of all, the [one set] have the product, the process in place and are using it, and what kind of feedback you're getting, and the new prospects? I mean these utilities are -- from my understanding is that they've -- they're ramping their capital expenditure programs in a variety ways.

They seem to me to have plenty of cash but that isn't -- shouldn't be something that should stop them from moving forward with us. Can you -- I just would like to get a flavor of what's going on in their head?

Okay. First of all the ones that we do do business with. I think across the boards there's recognition, number one, that the technology works and it works well. There are some issues, and we've talked about it briefly before, and I'll refer to it as regulatory accounting. Whereas, in a lot of cases in regulated states, even if -- even in one that's unregulated, there are cases where the utility cannot pass along the cost of our program, like they pass -- like they're forced to pass along the benefits.

In other words, a case in point where a utility switches to higher levels of powder river basin coal, which nominally is somewhere between $20 and $50 a ton cheaper than some central appellation, low sulfur coal. By switching to lower cost fuel, most of that benefit must be passed back to the rate base. However, what's allowing them to do that to a certain extent is our process. They were unable to run the high levels of powder river basin coal, prior to us installing our processes on their furnaces.

So they can't pass along the cost but they have to pass along savings. That's what I discussed during the call itself relative to, us working to put together a package with an outside law firm. To help our customers go to their public service or public utility commissions, to convince them that it would benefit the ratepayers to allow them, not only to pass along the benefit but also pass along cost of doing so.

Because it would give them momentum to do it on more units. So that, I think, is the mindset of the existing customer. Again, that the technology really works, we need to find a way to make it more economical in the system we're involved in.

As far as new customers or the other guys. We, like I said in the call, in the last three days or so there's been some very, very exciting calls with high level executives in our four major utilities. That we've been talking to at certain levels for several years, and made a significant amount of progress. And I'm very confident that those discussions that have happened in the last three days or so, are going to result in some significant business at new, targeted utilities in the very near future.

So again, I -- the [PUCPSC's] situation is a top priority for us, to try and work through and help our customers solve it. But the recognition of the viability of the technology is stronger than ever. Does that help, Jack?

Yes, that's helpful. This legal -- the law firm you've engaged. How -- Just tell what is it specifically that they've been asked to do. And how is that -- Is there a committee that includes some of the utilities? How are you going to present this?

Well, they were asked specifically. When we first approached them, we approached this specific firm because they had a significant amount of experience working with TERC, Travel Energy Regulatory Commission. Our initial thought was, 'Well, if we can get a policy through TERC that would be favorable to what we were just talking about, that would be a good way to go'.

And the more we delve into the situation, the less attractive that became because it's more of a state situation than a federal one. There are one or two states that do allow already the pass through of additive cost. So, our charge to them changed a little bit, in that now the task became why -- let's find out exactly why that one state in particular did what they did. Let's look at testimony and use -- put together a package based on that testimony, and what our process is capable of doing.

To take to an executive at a utility and say -- one we know is interested in going to their regulators. And first of all we're going to run -- this got completed about a week ago. Take it to an individual who's a good friend of ours and say, 'Would this help? Is there anything else we can do? How should we proceed with this?' And get his input, and then after that happens, then go much wider net, so to speak, to other utilities that we know would like to account for this process in a different manner, and help them do so.

And just a final question, Steve, on this. How long will all of this take?

Well, the -- we're trying to get together with the executive in question within the next week or so. And after that I'm very confident that he's going to give a thumbs-up. And after that we will go to our targeted utilities, and try to get it in front of the appropriate executive immediately.

So I would say within a week we should have a reading from this individual. And after that we're going to take it out as fast as we can to the rest of the utilities. So I would say within six weeks or so, we'll try to have it in front of all our major targets.

And, let's say it's successful, what will be the financial impact?

Well, that's hard to predict other than the fact that we all want the FUEL CHEM business to grow faster, and we all know that this is an impediment to that growth. Again, I want to stress the fact that recently our penetration of the executive suite in some very large, targeted utilities, has sped up consistent -- considerably, and I think John Norris will help that even more. So we expect some very exciting things to happen in the very near future.

Thank you.

And your next question will come from [Mark van der Bloem] with Fulcrum. Please proceed.

Good morning gentlemen.

Good morning.

Congratulations. Sheryl passes on her congratulations as well. Unfortunately she's on a different call right now.

Thank her for us.

Just wanted to clarify a couple of things. So the backlog as of today on the APC side is $17m, as it was last quarter?

That's correct.

Okay. So, of the $8.7m orders that was -- there were won essentially since last quarter. How much of that -- How much has been booked this quarter in revenues for APC?

How much of the $8.7m that we actually just booked?

Not of the $8.7m but of that $17m backlog that existed as of last quarter.

Well, we've booked about $14m in the quarter.

$14m.

Right. That was the level of APC bookings for the quarter.

Okay.

I think the easiest way to --

Excuse me. That was through April 25, I'm sorry. So it did extend in April.

I think the easiest way to look at it, Mark, is out of the $17m that we have on the backlog as of today, right now we'd anticipate be -- between $12m and $14m of that falling into revenue in 2005. So I think that's easiest way to look at the backlog as we have it today.

So that would be an incremental obviously revenue over the amount that we reported here in the first quarter of $8m. And, of course, we expect additional bookings to be having herein, in this next month to two months to three months, that also will have an impact favorably here on 2005. So it's not just the revenues that we're going to be recognizing off our current backlog. We expect additional bookings to generate revenue for us as well in 2005.

All right. One thought, just looking at your revenue being surprisingly higher than we'd anticipated. What can we expect from margins? I'm just looking at SG&A as percent revenue, and R&D dropped significantly now. Is that -- Is any of that attributable to you guys stepping out of ACUITIV, and not having the executive consultant this time period? Or is just this is a pretty much a constant run rate that we can expect for the year, these dollar figures?

I can't talk in terms of -- no, constant run rate in terms of revenues or in terms of the SG&A?

The SG&A and R&D.

Okay. The run rate I would not expect to change dramatically. We might see a little bit of an increase on the SG&A line as we go from quarter-to-quarter, and as we look at still additional resource requirements for the business as it grows. Now, in terms of the reduction versus percentage of sales, obviously that's top line driven at this point in time.

And as we've discussed previously, it's difficult for us to really forecast quarter-to-quarter on the top line. And as you just pointed out, the performance for the first quarter of this year is -- it's a little bit of a surprise to us as well. Just in terms of the timing of the revenue recognition on the projects. That's not something that we can readily control but, again, on a full year basis we think our results look very strong right now.

Okay. Just one final point. Do you recall you guys you mentioned last quarter a 12th order that was to be put on line, in about a month's time, so some time in April?

Yes. We announced it April 25 actually.

April 25, okay. I just wanted to make sure.

And that's actually the 13th order.

Right. 13th and it was April 25 announcement.

Great. Thanks guys.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. And your next question will come from John Gruber with Gruber & McBaine Capital Management. Please proceed.

Good morning.

Good morning.

My question is the -- on FUEL CHEM. It's $3.7m in the first quarter, it's sort of 'the dog ate my homework' story here. It seems like every quarter. When are we going to get over that, and what's FUEL CHEM's revenue going to be in your assumption of [indiscernible] $46m to $48m for the full year?

Of FUEL CHEM revenue, John, of the $46m, $48, right now we would target a number that would be something slightly less than half of that, is what we're looking at. So somewhere on the lower 20s is our target.

So you see very good growth after this tough quarter in FUEL CHEM, is that right?

That's correct.

And then that -- of course, that means that the rest of the business slows down dramatically. What -- and is that being cautious or is that just you just don't have the orders to maintain that pace?

For the air pollution control?

Yes.

It's going to be the case of timing, John. We may seem some additional surprises in timing as we move throughout the remainder of this year. But it's a just a little bit too soon for us to know on, on this end at this point in time. So that's why we still think we're going to be meeting our overall $45m to $48m revenue target. And again, right now we target numbers in the lower 20s for the FUEL CHEM, and somewhere in the mid 20s for air pollution control.

And as we go forwards, we'll see if we stand to that or if we were able to adjust accordingly.

And then the FUEL CHEM revenue this quarter? What do you expect that to be?

For the second quarter?

Correct.

I would expect an incremental increase but unfortunately I couldn't give you a specific number at this point in time. But I definitely would expect an increase in the second quarter versus the first.

Or we'll better given --

Absolutely. No, I agree.

well with targets and [inaudible - over talking]. So is this just a modest increase or an increase which would say yes, you're going to do -- you can really do $22m, $23m?

John, in terms of trying to pick a specific number, it really is to early for us to tell at this point in time. The no-cost demonstration that we talked about did turn into an extended demonstration. So we're going to be recognizing revenues on that particular customer as we talked about. But it's just too difficult for me to actually pinpoint a number.

There will be an increase - I just don't know the magnitude as of today.

Thank you.

Thank you.

Hello?

Yes.

This is George Gaspar here. Am I supposed to ask a question? I missed the prompt. Hello?

Hello George.

George Gaspar, Robert Baird. Could I ask a question here?

Yes, you can.

I don't what happened to the operator.

I don't know. She faded and I wasn't sure what was going on. My question is, again on this -- on the chemicals side. I think in the last quarter you were -- the guidance was around the $22m range for the year. Making that -- and you're still saying the low 20s million on that. If I was just to back out first quarter, that would suggest that in the last nine months you would have to do $18.3m, or about $6m a quarter, to get you into the $22m range.

And based on the fact that you are suggesting that the low 20s is still doable, it's quite logical here that you're going to have a pretty good increase in chemicals sales in the last nine months?

We're anticipating that, yes.

Okay. And the margin on the chemical side in the first quarter was a little bit lower than I would have expected. On the operating income side it was 46% versus your nitrogen oxide 48%. Firstly, congratulations on those -- on that side, that's pretty good volume.

Thank you. We think so too.

Can we expect that this margin on the fuel chemical side can move up, more into the mid-55 range, as the volume grows from this lower level in the first quarter?

The margin level will definitely increase, George. In the firs quarter there's a bit of an anomaly because of the demonstrations that we had in place, including the one no-cost demonstration. Historically we've, on a weighted average basis, had margins in the -- anywhere from the 52% to 54% range for the FUEL CHEM business. And we would expect that level to return, as we look a full year picture for FUEL CHEM.

The first quarter is, again it's difficult to look at that in the vacuum, and we will see increases in margin as we go forward.

Okay. I apologize I gotten on this call later than I should have. Got a question on the application on the FUEL CHEM side. In -- You were talking about your orders and the backlog, how has the backlog order -- order total -- your total order. You mentioned the number through late April versus -- What was this late April versus what you showed at the end of the quarter specifically? Could -- Can you give us the difference?

Was this -- For which business again, George, I apologize? Air pollution control?

Yes.

Bookings through April of 2005 have been about $14m on the air pollution control side. If you look at -- If you subtract April's announcements from that number, let's see, that was $6.4m, so $7.6m.

So you've booked $7.6m since the end of the quarter?

No, $7.6m in the [inaudible - over talking] quarter, and another $6.4m in April

$6.4m in April, that's a pretty fabulous quarter. Okay, excuse me, I mean the ongoing business. And also I apologize if you made comments on this, do you have a target for execution on a test basis in Mexico at this point? Do you have -- Have you picked a location, or has a location been picked for an actual test?

Well, they're talking about two places, so we've got it narrowed down that much anyway.

Okay. Would these be on powergen or would they have something, [do a refinery]?

No, it's powergen for sure.

Okay. And then on other international, what do you expect out of Europe relative to this -- the order that you -- I believe you announced recently for some equipment? Can this grow at any particular level that would be worth commenting on at this point in time?

Well, I think Europe's going to have a strong year based on its history. It certainly won't be to the level of revenues that we see in the US. But we're very happy with what's going in Europe now, and anticipate some additional, significant bookings in the relatively near future.

Okay, all right. And then, in the last conference call you briefly mentioned something about some alternative possibilities, for the use of your chemical injection process.

Yes, that's right.

Is there anything you can say about that? Have you made any progress on that score?

Yes. In fact it was probably brought up, George, while you -- before you got on. But we initiated a test for a spin-off from our Targeted In-Furnace Injection technology, we've called Targeted Duct Injection. It's a very similar approach to the injection in a furnace but it's injecting in a duct, and that's sounds like an easy transition. But because of temperatures and space and so forth it isn't.

But, long story short, we initiated a demonstration of this new approach a little over a month ago. This approach is specifically targeted to reduce sulfur trioxide, which is an acidic emission that has seen a lot of press lately. The test was extremely successful in that we reduced sulfur trioxide levels in excess of 90%.

Now the case is we -- it wasn't without interesting problems, shall we say, that are being worked out. But the basic technology performed extremely well, and now we're looking at what that really means, based on the market that's out there. And we're seriously looking at how to commercialize this technology as quickly as possible, because the results were actually thrilling to us.

What was the application, can you tell us? Was it still in a powergen area that this injection --

Yes, it was. It was in a power generation boiler.

So it was in a power generation duct?

That's correct, and there -- that would be the market - the powergen market again would be where the primary use of this particular spin-off would be used.

Okay. And does this coincide with maybe some of the emphasis that's coming through on the Clear Skies Act? Is this just -- Is there opportunity here because of some of the noise in this bill? Or maybe some previous legislation that EPA is really pushing on right now, that might give you a heads up on this?

Well some of the opportunity, George, comes from the fact that selective catalytic reduction, which is installed on numerous units in the country, as you know, as another NOx. Kind of like the Cadillac of NOx reduction technologies. A side issue with that in some cases is that, you not only reduce NOx but you oxidize sulfur dioxide into sulfur trioxide, which can result in acid plumes and other issues.

The technology that we think we've developed here could be a solution, one solution to that issue. That's one application, there are others but that could be the most interesting one.

Yes. Well, that sounds very interesting. Okay. Well, hey, keep up the good work. You guys are up pretty well if this chemical area does what you think it's going to do. It should really start to lay something pretty good on the bottom line.

I'm sure. We definitely expect that.

We're working hard to make that happen.

Exactly.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. And your next question will be a follow-up from Mr. Robert Kirkpatrick. Please proceed sir.

Nice to see lots of people asking questions and showing interest.

Definitely. It is good.

You didn't talk at all about your relationships with the coal companies, and I was wondering if you could do that? And then if Vince could maybe explain a little about, how the revenue recognition works on the air pollution control side? Because you seem to imply that it's a little bit out of your hands, in terms of what you actually book. And then finally, if you could discuss whether there was any unusual mix between turnkey projects and non-turnkey projects, on the air pollution control side for the quarter?

I'll start, Rob. Basically it's -- you say it's out of hands and that it really depends on cost that we incur on projects, as the projects move towards completion. We use the percentage of completion method of accounting for our projects, and unless we incur costs in terms of hard vendor costs or our internal engineering costs, we can't recognize revenues.

So what happens in terms of a project's progression to completion is, there can be customer requirements to advance the time schedule, or to delay a time schedule. And depending on what phase of the project that we're in, that can cause some dramatic shifts from quarter-to-quarter in how we recognize revenues.

So that's why it's a little bit out of our hands, in terms of us being able to forecast from quarter-to-quarter. Because, as we had a little bit of a pleasant surprise this quarter, we actually had a couple of our projects recognize more costs and more expediently than we had planned them to be incurred. So that's how that works from a revenue recognition perspective.

Great, thank you.

On the coal companies side, [Peabody] there's really not much change. However, we are doing more entertainment with their executives and so forth for certain utilities. That's an ongoing situation, and one that has been very successful. We're doing work with another coal company that has brought to us an industrial situation, a large industrial plant with some slagging issues.

And I'm not at liberty to talk much detail about that, but that is ongoing and should turn into a commercial account in the very near future. So there's not a lot of activity but there is some, and this recent one is going to turn in some revenue.

And Rob, in answering your other question with regard to mix of projects. No, we don't have anything unusual that's in our project mix as of this point in time. We don't have any turnkey projects that are at a margin level, that would have a material impact on weighting down our margins as of this point in time.

Great, thank you so much.

You're welcome.

[OPERATOR INSTRUCTIONIS]. And your next question will come from Ron Vincent of Morgan Stanley. Please proceed.

Hi guys.

Hello.

Where do you see your greatest growth coming from outside the US? Do you have plans to take that growth to Mainland China, where they have a major problem with coal plants?

Well, China is definitely on our radar screen so to speak. We have been working over there for quite some time through agents and so forth. But there is -- Everybody's dream, I guess, is to get into the Chinese market on pollution control. We're hoping to be one of the players over there but it's a little too early to discuss that in detail.

Certainly, the new plants being built are under regulatory pressure form our understanding. That's very unusual. From a retrofit perspective we don't see a whole lot of pressure. Although, I think if you look at maybe the Beijing area, with the Olympics coming in that direction in two or three years, that there may be some opportunity on the retrofit side, which is traditionally more of our marketplace than the utility industry.

But that doesn't mean we're not pointing toward getting some business in new construction, so to speak, because there's certainly a lot of it.

Of course, on the FUEL CHEM, Mexico's at top of our list outside this country. We're seeing some progress in Europe as we've discussed. Again, infrastructure-wise it's difficult for us to go to some areas like Asia Pacific, where we're looking for a partner. For example, as we know there's significant amount of potential for the FUEL CHEM business, and probably on the air side as well in other places. But we don't have big numbers in our eyes about what's going to happen in the real near future.

Thank you.

[OPERTAOR INSTRUCTIONS]. And there are no further questions at this time. I'd like to turn the conference back over to Mr. Steve Argabright for closing remarks.

Well, thank you very much Anne-Marie, and thank you to everyone who was on the conference call today and who has an interest in Fuel-Tech.

Ladies and gentleman, thank you so much for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.