Fuel Tech Inc (FTEK) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter Fuel Tech N.V. earnings conference call. My name is Audrey and I will be your coordinator for today.

[Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Ms. Tracy Krumme, Director of Investor Relations. You may proceed, Ma'am.

Good morning, everyone. Welcome to Fuel Tech's second quarter conference call. By now all of you should have received a copy of the press release. If you have not, please call (203) 425-98 (technical-audio gap), and we will be happy to send you (technical-audio gap)

Joining me on the call this morning is Steve Argabright, President and Chief Operating Officer, Vincent Arnone, Chief Financial Officer. As a reminder, the matters discussed in this conference call (technical-audio gap) are forward looking statements that are subject to certain risks that could cause actual results to (technical-audio gap). Those set forth are forward looking (technical-audio gap). Factors that could cause results to differ materially (technical-audio gap) are included in our filings with the SEC. Information contained in this call is accurate only as of (technical-audio gap). Investors should not assume (technical-audio gap) remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call. As a reminder, this call is being broadcast over the Internet and can be accessed at our web site, www.FuelTechnv.com.

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

Thanks, Tracy, and thank you all for joining us today.

As you know, we have reported revenues for the second quarter of $11.8 million, a 60% increase over last year's second quarter, pre-tax net income of $1.6 million or $0.07 per diluted share, compared with a pre-tax net loss of $308,000 or $0.02 per diluted share a year ago.

From the first half revenues were $23.8 million, an increase of 76% over the same period last year, pre-tax net income of $2.8 million or $0.12 per diluted share compared to a pre-tax net loss of $839,000 or $0.04 per diluted share last year. Our air pollution control group led the company to this record performance and I am very pleased with the job they have done.

Starting with this segment, we continue to be excited about the order flow as bookings year to date have been almost $21 million, bringing the total over the last 12 months to approximately $33 million. Of particular note are the additional orders from our domestic alliance partners, a trend we expect to continue.

As we mentioned last quarter, the TBA commercial scale demonstration orders were another key event for us. These projects are still progressing very well. In addition, we have received some excellent contracts on the industrial side both domestically and abroad. The order from our Italian subsidiary for 4 cement kilns was particularly gratifying, as penetrating this industry has been a priority of ours for quite some time.

In other international news on the air pollution control side, we have been working hard to penetrate the NOx reduction market in the People's Republic of China and feel we are making progress in that regard. In fact, we presented a paper yesterday at a conference sponsored jointly by the U.S. DOE, China's Ministry of Science and Technology regarding the protocol for selecting NOx reduction technologies.

On the regulatory front, not much has changed since our last conference call relative to NOx control, except that the regional haze rule has been promulgated but is currently under heavy congressional and environmental group scrutiny, so it is not expected to be finalized for a while yet. Of course, the SIP Call is driving our current business and will continue to do so for the next 2 to 3 years.

As we mentioned, FUEL CHEM revenues for the quarter and for the first half lagged behind our projections for a couple of reasons. Rail disruptions out of the Powder River Basin continue to impact one of our major customers into June, over a month longer than we had expected. The same issue has cut production at another of our facilities, to the point where targeted inference injection is no longer required. We understand that rail problems are expected to continue for the rest of the year.

The high price of oil has significantly curtailed the dispatch of oil fire units, with a resulting decrease in fuel treatment requirements. In fact, through May fuel oil base generation in the U.S. tumbled 37.2% in comparison to last year.

I don't want to dwell upon these problems, but I think it is important to understand the impact it has on our business. If one looks at the year over year chemical revenues from coal fired utility accounts on an equivalent basis with 2004, we have experienced a 75% increase, which would have been even higher had it not been for the rail issues. In comparison, the oil fired utilities business experienced a 28% decrease in revenues, even though significant new business was sold during this period. Without the rail and oil price issues, our FUEL CHEM revenues for the first half would have been very close to our projections at the beginning of the year.

Enough of the what-ifs, let's move on to the what's next, as there are some extremely good things happening. As recently announced, we have received an order for a Targeted In-Furnace Injection technology demonstration on one of the largest boilers in the United States, which is scheduled to start up later this month. Interestingly, this unit burns coals from Midwest mines as opposed to PRV coal.

We also contracted for a TIFI demonstration for a large industrial boiler that was facilitated by a referral from a major coal company. In addition, we have TIFI design engineering orders for two large utility PRV coal fired units from a new customer and are in discussions with several others about demonstrations on their boilers.

We currently have TIFI installed on 13 coal fired boilers, seven that are continuous feed and six that are intermittent, an increase due to the rail related issues and the wind-down of a demonstration where data from continuous feed is being analyzed. By the end of the year we expect to increase that number up to 17 to 20. We also have nine oil fired utility units utilizing the technology.

As we have discussed at length in the past, a major impediment to increased FUEL CHEM growth rates is the regulatory accounting approach taken by the utility industry to the State Utility Commission Policies. We also mentioned that 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 a pass through to rate payers. We provided that package to a key customer of ours and subsequently received positive feedback as to its potential value in helping that utility approach their state regulators about a ruling to allow the cost of a TIFI-type program to be included in a fuel adjustment pass through. We will be discussing this approach with executives at other key utilities in the near future.

As to our efforts outside the U.S., the news is also very encouraging. Our TIFI application in Italy is performing extremely well and we expect to expand to a second unit in September. We have just hired an experienced sales marketing professional in Italy to conduct a thorough study of the FUEL CHEM market in Europe and decreed and implemented plan to penetrate that market.

As we have mentioned, our government-required tests on a pilot scale combustor in Mexico produced exceptional results, the best ever recorded in a finely controlled environment. We are now in discussions about expanding the testing to full size units and hope to have received the contract by the end of the third quarter, despite delay from our earlier expectations. 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.

I am also pleased to report that the full-scale testing of our new-targeted duct injection technology for sulfur trioxide control has been reinitiated after a planned outage at the plant. Results continue to be very promising and we expect extensive parametric testing to be completed in the next 30 days or so. Sulfur trioxide, or acid emissions have become a growing problem recently, as they can be a byproduct of the selective catalytic reduction 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 patent application has been filed on this technology.

The addition of John Norris to Fuel Tech as an executive consultant has been very positive, as expected. John has been involved in several sales situations already and has also provided excellent insight into adding value to our technologies. Vince?

Thank you, Steve, and good morning, everyone.

As Steve mentioned, we reported net sales for the quarter ended June 30th of $11.8 million, a 60% increase over the second quarter of 2005. On a year-to-date basis, net sales were a record $23.8 million versus $13.5 million in 2004. This represents an increase of $10.3 million, or 76% over the prior year.

Pre-tax net income for the second quarter was $1.6 million, or $0.07 per diluted share, compared to a pre-tax net loss of $308,000, or $0.02 per diluted share in the same quarter a year ago. On a year-to-date basis, pre-tax net income was $2.8 million, or $0.12 per diluted share, compared to a pre-tax net loss of $839,000 or $0.04 per diluted share in the same quarter a year ago.

Both the second quarter and 6-month period were favorably affected by the recording of a $2.2 million, non-cash income tax benefit related to the anticipated utilization of net operating loss carry forwards. After factoring in this tax benefit, net income for the quarter was $3.2 million, or $0.14 per diluted share, while net income for the 6-month period totaled $3.9 million, or $0.17 per diluted share.

The operating results for the second quarter exceeded our expectations as revenues from our air pollution control business were $8 million, which represented a $4.3 million increase over the prior year. On a year-to-date basis, revenues from this business segment were $16.3 million, an increase of greater than $10 million over the prior year. This business segment, which began to show increased strength in the second half of 2004 continues to experience an accelerated period of order activity. Approximately $21 million in orders have been received thus far in 2005 and the backlog as of today is approximately $17 million.

Both utilities and industrial facilities impacted by the EPA’s stiff claw (ph) regulations continue to prove that Fuel Tech 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 treatment chemical business segment generated revenues of $3.8 million for the second quarter of 2005, which was slightly above the level of the prior year. On a year-to-date basis revenues were $7.5 million, versus $7.3 million in the prior year. Revenue gains in the first half of the year were limited by the following circumstances: first, there were four demonstration programs during the first six months of the year that did not yield commercial revenue. One was a no-cost demonstration at a critical coal fired utility, while the other three demonstrations were structured on a cost-share basis, one on a coal fired unit, and two on oil fired units.

Under cost-share arrangements 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, this Fuel Technique, 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 three demonstrations are expected to reach their evaluation date in the third quarter. If Fuel Tech had invoiced all three demonstrations at commercial levels during the first half of the year, revenue would have enhanced by approximately $800,000.

Second, as Steven had mentioned, coal supply chain issues unfavorably impacted the first six months of the year, as one critical western coal fired utility unit was significantly and unexpectedly derated for an extended period due to transportation-related shortages of western coal deliveries to that plant. Rail disruptions in the Powder River Basis have impacted several utilities, while maintenance and repair work on key rail lines is expected to hamper coal shipments in several parts of the country for the remainder of the year. If Fuel Tech had been feeding chemical at standard dosage for this unit, an additional $500,000 in revenues would have been realized. Lastly, also as Steve mentioned, the high price of oil has resulted in reduced oil fired electricity generation in the United States. Fuel Tech oil fired business was negatively impacted by this market dynamic.

The outlook for the FUEL CHEM business remains exciting due to its lower cost and lower pollutant content relative to eastern coal, western coals are being burned in larger quantities and in an increasing number of facilities. In addition we received an order for our first utility TIFI demonstration on a large unit fueled by coal from Midwestern mines.

Gross margins for the company as a whole for the second quarter and year-to-date period were 49% and 48% respectively, up significantly from 43% and 45% to the comparable periods of the prior year. The margin improvement is primarily due to the air pollution control business. These margins have improved on a year-to-date basis to 49% from 44% in 2004. This improvement in the air pollution control margin is attributable to the mix of project business.

SG&A expenses for the second quarter and year-to-date periods were $3.8 million and $7.8 million, respectively. The increase over prior year for both periods is due primarily to human resource related expenses, as staffing levels were increased in several areas in anticipation of overall business growth.

Revenue related expenses attributable to the NOx reduction business also contributed to the increase, as did increases in audit and legal fees, albeit to a lesser degree. R&D expenses for the second quarter and year-to-date period were increased modestly over the prior year.

Fuel Tech continues to pursue commercial applications with technologies outside of its traditional market from both an industrial and geographical perspective. As we had noted previously, our first quarter R&D expenses included the funding of a successful TIFI demonstration in Mexico with a research facility owned by the Mexican government.

As mentioned earlier, based on a review of historical taxable income and future projections, a $2.2 million non-cash tax benefit was recorded in the second quarter representing the company's anticipated utilization of net operating loss carry forwards in the future.

Income tax expense for the quarter and six month period was $612,000 and $1.095 million, respectively, primarily representing deferred tax expense related to the utilization of net operating loss carry forward.

Our balance sheet continues to be strong. We entered the quarter with $5.1 million in cash, with working capital of $14.3 million and no debt. As mentioned previously, business activity is accelerating from both segments. We expect additional orders 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 $45 million to $48 million range. With the FUEL CHEM business generating $17 million to $19 million, and the air pollution control business generating $28 million to $29 million. Our pre-tax net income for this revenue range will be from $0.18 to $0.22 per diluted share.

Now back to you, Steve.

Thanks, Vince.

In summary, we are extremely pleased with the record revenues and profits we posted in the first half of the year and with the orders in backlog in the air pollution control side of our business both domestically and abroad, we anticipate continued strong overflow in this segment.

For FUEL CHEM, even though the first half revenues fell short of our goal, we are excited with the progress being made with major targeted utilities, and with that being made outside the U.S., as well. The continued excellent results we have seen from our new-targeted duct injection technology over the last month since restarting the demonstration also gave us cause for a high level of optimism for this business segment in the future.

Also, we see the passage of the energy bill as a positive development for Fuel Tech as it emphasizes the clean and efficient use of coal.

Audrey, please open the call for questions.

[Operator instructions]

Your first question comes from the line of Robert Kirkpatrick with Cardinal Capital. You may proceed.

Good morning. A couple of housekeeping items. One was, you said that the number of units served on coal-fired boilers was 13; is that 13 today or 13 as of the end of the quarter?

13 today. There’s no change since the end of second quarter.

Okay. The nine oil fired units that you serve today, how does that compare with year end '04 or year end '03?

During '03 I don't remember to tell you the truth, but year end '04 we gained two new pieces of business in the last couple of months, actually, and are close to getting some more. Some of these, just for clarification, some of these are conversions from when we purchased Martin Marietta's business. These are upgrades to our technology from the technology they were using before.

Okay. That's some of the two that you've just gotten or that's some of the nine that you have in total?

Some of the nine total.

And the average revenues per unit, we have always talked about a certain level for our coal-fired plant, but how is an oil-fired plant different in that respect?

Quite different from the perspective especially now, with the terrible dispatch orders that the oil fired units have had. It's very hard to say, but if you have an equivalent-sized oil fired unit operating at a high capacity factor, the oil-fired unit is probably about 50% of the coal-fired unit.

Okay. Six months ago you took a non-cash income tax benefit for anticipated utilization of NOLs, and 6 months later we are doing it again. Why are we doing it again, why didn't we account for it six months ago? What has changed and should we be expecting these every 6 or 9 months or are these more one-time types of things?

Robby these are truly one-time types of adjustments. As you noted, we made an adjustment at the end of 2004 for $1.5 million, representing the future utilization of NOLs. That was the first time that, as a company, we had ever made an adjustment like that. What is required is that on a quarter-by-quarter basis, we have to actually sit down and review historical results and review business projections and come up with what we think is a conservative estimate of what the utilization of NOLs is going to be. That is effectively what we've done now at the end of the second quarter.

The $2.2 million effectively represents the utilization of approximately $6.4 million in NOLs. At the end of 2005 we are going to have $7.4 million in net operating losses available to utilize in future years. So what we've said here at the end of the second quarter is that we feel awfully sure that we are going to use at least $6.4 million of that $7.4 million, and we're leaving, obviously, a little bit of conservatism in that estimate at this point in time.

So this is a requirement for review with the external auditors on a quarter-by-quarter basis. Again, if we come to the decision that we are 100% sure that we were going to utilize all of the remaining NOLs, we will then make another adjustment as we come to the end of the third quarter or as of the end of the year.

Okay, but --

-- at the end of the second quarter driven by obviously the very favorable results that we've shown in the first half of the year, and the projections that we have for the remainder of this year and as we see the future for the company.

So the bottom line message is that incrementally you feel sufficiently more optimistic about your near and medium term results that you are willing and able to do this?

That is absolutely correct.

Okay, Vince, a couple of other questions. I think I heard you say that all three of the demonstrations that were cost sharing cost you about $800,000 in revenue in the first half, is that correct?

Correct. That $800,000 actually included as a no-cost demonstration as well.

Okay, thank you, that was it. And that was broken down about $500,000 in the first quarter and $300,000 in the second?

No, unfortunately I can't give you that specific breakdown on the call at this point in time. The impact on the first half of the year was $800,000 in total.

Okay, and just to make sure I heard it correctly again, the power plant that was derated due to the Powder River Basin coal rail issues was $.5 million in the second quarter?

That was partially in the first quarter, but the majority was in the second quarter.

But the $.5 million was a first half number?

That is correct.

Okay, I'll get back in line and let some other people ask some questions. Thank you.

Your next question comes from the line of Anthony Campbell (ph) with Dorsett Management. You may proceed.

Good morning. Will you describe the conditions for the fuel treatment business as probably being the most ideal that you could ever get? Is that appropriate?

Well, except for the situation with the Powder River Basin rail issues, which is curtailing many, many customers from getting the amount of PRV they need. There was an article Monday about Ameron, for example, is getting 15% less than they normally would and they are actually buying spot market Illinois basin coal to make up the difference so that’s not positive.

What about the TVA, the Tennessee Valley Authority, what is going on there and could you talk about the potential in Mexico, give us some more details? What's the next step, where are we going? Then, since we all agree the environment's never going to probably get much better than what we've got today, are we seeing more inquiries, are you tracking the inquiries, and what is our conversion rate from the inquiries to eventual business?

Let's take them one at a time. On TVAs, there is really two things. TVA, as we've talked about in the past -– earlier this year -- purchased two demonstration units for the NOx reduction side of our business. I'm not sure if that's what you are referring to or not.

Wasn't there an opportunity on the other side, too?

There is, and I'll address that.

And isn't that a fairly bigger opportunity?

They, as a company, TVA has announced that they are going to be converting more and more to Powder River Basin coal. They have not been a big burner of Powder River Basin coal in the past, burning Midwestern coals, eastern coals, primarily. So as they convert to Powder River Basin coals, we certainly are in the mix and are taking the necessary sales calls on the plant people and executives to make sure that we're there when they need that sort of technology.

So, yes there is a large future opportunity, there is also potential possibly on some Midwestern coals that do have a slagging tendency. It's different technically than Powder River Basin, but some of these coals do cause some issues, so we are also talking to them about that. So yes, the TVA from both sides of our business is a significant potential for us, and we're treating it as such.

Mexico. The business in Mexico is based around two places -- TSE which is the national utility and Pemex, the national refinery. As such, as government agencies, basically, similar to TVA although even more bureaucratic, there is a long line of things that needs to get done and people that need to get satisfied.

I personally have been working on that situation for well over two years, found the right partner, we've made the presentations, we've demonstrated the technology in a required manner on a pilot scale unit with exceptionally good results, and now we are waiting for a bid, which is a requirement because it's a government agency, that is supposed to come out any minute. That bid [technical difficulty] respond to it and the decision, we've been told based around that bid, will be made early next month, then we step into full sized units and prove that we have the technology that solves the significant issues that they face both currently and going forward.

It's a frustrating situation that takes a lot of time, but we feel the end game is certainly worth the time, as about 17,000 mega watts of their 44 total generation are heavy fuel oil, and the heavy fuel oil quality is decreasing, so they have definitely a need and we are ready to fill that need.

On inquiries, I guess inquiries are an interesting comment because the inquiries we get are based on the fact that our salesman is in their plant creating that inquiry. The phone in our business doesn't ring off the hook a lot from people reading about us or whatever, although we do present a lot of papers and are active in symposia and so forth, but our sales are made by face-to-face sales calls by sales people who are trained to do that, more than answering the phone, so to speak. I don't mean that to be --

I don't think that I was implying that, I was just trying to get a sense of -- inquiries I would look at as a different point of view. I know that they are created by your salesmen, I guess what I'm looking for is what kind of a conversion of these sales. Your guy gets someone to agree to do something, what is our conversion rate look like to actual orders?

Again, going from a demonstration, so to speak, which has been the trend on the FUEL CHEM side, to commercial account has been well over 90%, and I think you could see the same thing if you look at the air pollution control side. When we did a design engineering order, sometimes those -- and on the FUEL CHEM side, as well, precede an actual commercial order. Our conversion rate of those design-engineering orders on both sides of our business is very high. I would say in excess of 90%.

Okay, good. Is there a way that we could financially entice these folks to step up and -- ?

Well we do that all the time. In fact, I think, like Vince was discussing earlier, the risk here, and even in some cases if the utility is perceived to be important enough to us, we have actually given away chemical for 30 days to prove a point that –- yes, this technology will work, we are going to give you an incentive, we will provide the equipment at no cost to you for the demonstration. We will give you either a deeply discounted chemical price, or in one or two cases so far, we will actually give you the chemical for a brief period to prove to you that this technology will do what we say it will do. Other than that, there aren't too many financial incentives that we can offer.

One other further question. Can you give us the size of the potential business opportunity here?

Yes, we've got some very good databases and we have analyzed those databases and based on western coal, we think the market is around $200 million, and that's based on the number of units that burn Powder River Basin coal. However, I think if you take a look at the potential for higher sulfur eastern coals, some of those which will be coming back into vogue when scrubbers are being installed, have low fusion points. In other words they have lagging tendencies, I think we'll see that add to that market we see on the western side. Also, our targeted duct injection, this is the one for sulfur trioxide or acid (technical difficulty), should that prove to be as good as we think it is at this early stage, and I couldn't comment on the size of the market on that yet, because we are analyzing it, but it is very significant. If you add Mexico to that, it's even more exciting.

Okay, well, good luck.

[Operator instructions]

Your next question comes from the line of Sheryl Skolnick from Fulcrum Global Partners. You may proceed.

Thank you very much. Good morning everyone. It was a very nice job in the quarter that you did in the face of some challenges in the PRD business. Tony asked my more general, less sell-side oriented question, so he gets the credit for that, but I am going to go back and ask you to talk a little bit about ATC growth margins and then to expand a little bit on the -- and also some of the more sequential comparisons in the quarter, and then to ask you to expand on the industrial applications in terms of the size of the market.

Because I know a lot of people are really grappling with "Well, if it's only a $200 million market, on the one side and the other market we don't really have a good sense of size of the ATC market," you're still under penetrated on Fuel Tech, but how close are you on the ATC side? Those are the kinds of questions I'm going to get to.

The first question is, you said, Vince, that the gross margin has actually improved from 44% to 49% in the ATC business and that was due to mix; does that mean that of the book of business that you have going forward for the next three or four quarters that the margin is likely to come down a little bit or is the mix in the book of business that you have in place and that you are banking on being able to record in the second half of the year similar to the first half?

In answering your question, basically what we have experienced here in the first half of the year we would consider as being exceptional gross margin realization for the air pollution control business. We have had a couple of project, in particular, which have been quite favorable for Fuel Tech. In answering your question in terms of these --

Did you say quite favorable for FUEL CHEM?

Fuel Tech, I'm sorry.

For Fuel Tech generally, for the company? Okay.

As we look at the book of business that we do have in hand, the $17 million in backlog, I would not expect the same level of gross margins on that business compared to what we have realized in the first half of the year. If you take a look at how we forecasted for the remainder of the year, although we are approximately showing a doubling of revenues, not showing a doubling of performance at the bottom line, the primary reason being is I don't expect that very positive gross margin realization to recur for air pollution control.

Right, I got that, and your guidance is comfortably around my estimates, anyway, with the upside in the quarter, which was significant. Which brings me to my sequential set of questions.

In the first quarter, I think I understand the cost of revenue that is related to the mix of business, just simply a higher margin on the ATC side, but on the SG&A side I noticed you had about a $300,000 reduction in SG&A expense from 1Q to the next. It doesn't sound like much, but it's a 7.5 or 8% reduction given the size of your budget, so is there some attention being paid, is there an unusual item there? Is this sustainable going forward, or is it just part of the recording of sales expense for ATC is lower than it is and it's related for FUEL CHEM and related to mix?

Really, the primary factors, Sheryl, is what we call engineering expense utilization. Because of the high level of project business that we've had in the air pollution control business, what happens is our engineers, I should say the cost of our engineers, ends up being reclassified into the cost of sales line item. Because of the high level of engineer utilization we've had, we have actually had a little bit of a quarter-on-quarter reduction in SG&A expenses overall because of that fact.

So they're not overhead, they're actually productive resources?

Absolutely.

So they shift up?

Exactly. That's difficult to forecast from quarter to quarter.

Which makes your cost of revenue even more spectacular, sequentially. So that's what happens?

That's the primary reason, yes.

Okay, so again that SG&A then would not likely be sustainable for the rest of the year either and we’d more likely to see it revert to more of a first quarter level of about $4 or $4.1 million?

That's correct.

Okay, I promised you a sell-side question, so now I got those.

Now going back to the question of the market size, we've got a sense that Mexico could be big, the targeted duct could be big with the acid reduction and clearly that may have implications in Mexico much longer term because things are fairly acidic down there as we know, and then the potential for high sulfur eastern coal. It's $200 million north on the utility-based business. What is it on the industrial business and there, obviously, you are getting some improvement in traction in Italy and in Europe, so can we dream a little bit there?

Really, I think we're talking about two different things here, Cheryl. On the industrial side, the announcements we've made on the industrial side are basically those on the air pollution control business. In other words, those cement kilns and --

Okay, I was confused then, because it was very hard to hear.

Yes, I'm sorry. All those industrial announcements are air pollution control related, not FUEL CHEM related. We do have a small base of industrial units on FUEL CHEM, however our emphasis is definitely in the utility industry just by the size of the market available to us for the future. Again, we're not stressing the smaller industrial units, although we do have business in the paper industry, physical solid waste, various things like that, but the future for us is the electric utilities.

Okay, and on the ATC side, is there any way to quantify the market opportunity?

Yes, we've talked about it before. Let's talk about the existing regulations, that's what you have to do in the SIP Call and that impact is roughly 700 electric utility boilers, that's the number of industrial units. We've said for the last four years that I can remember, that we thought we would get about 100 of those 700.

And where are you now?

We are north of 60 and we still think that we are going to get to that 100. If you look at the average size of a unit, from a revenue perspective it's somewhere between $1 million and $2 million. That is what’s out there.

Okay, now, that's just the SIP Call, but then there was that little rejiggering of things that seemed to expand the market for you a little bit and the regulations?

Well you've got the CAIR rule coming down the pike, but that really is compliant 2009.

So it extends the life of your business?

It does, absolutely. There are roughly 150 additional utility units impacted by the CAIR rule. There is no, as I understand it, there is no industrial units impacted by that particular rule. However, the thing about the CAIR rule is, you're talking units that are primarily west of the Mississippi, there are some others there are included, but those units, a lot of them burn western coals which are inherently lower producers of nitrogen oxide. There has been a lot of experience, not all of it good, out there already on selective catalytic reduction, the catalytic here.

We're stressing, and we always have but it’s particularly important there, in a combination of technologies.

Right because if they don't need the big guns to come in, you should be relatively more attractive, have relatively more market share of 150 than say of the 700.

Better than I could. That's exactly right.

Okay, that's very helpful. I guess, with the 200 for the Powder River Basin, the $200 million there, and for the other three potential market opportunities in FUEL CHEM, you can't give us a measure yet? I know the duct stuff you can't, but on either Mexico or the high sulfur eastern coals, can you give us any sense at all what the market opportunity is there?

Well on Mexico, we've said that we think it's between $25 million and $35 million. That's the best I can do for you with that situation. We haven't really bet on our first unit yet, which will help us clarify that.

On the eastern coal, again, we just got our –- well, Midwestern –- we just got our first large scale demonstration on a non-Powder River Basin, or a non-western coal type unit (multiple speakers), so that's going to tell us some things, as well. Our database will be analyzed to see which mines match this one where we are having the issue and we'll be able to dress that up a little bit better than we can today, but again, if you look at the coal industry, and fortunately we've got some very bright people internally, as you well know, that understand that industry pretty well.

Some of these high sulfur coals that I said will be coming back into play a little bit more once the scrubbers are required and so forth to get out the SO2, two things are going to happen. One, those coals, some of them have lower fusion points, which means they are going to cause some slagging, and a scrubber does not take out acid gas. In other words, the SO3 that our new technology is addressing will not be taken out in a scrubber. Those units, the high sulfur coals that have SCRs and scrubbers are going to be a market place for us, we think. Again, I can't even think about defining that yet, but I want to tell you what we think is coming down the pike and the reason we think that this targeted duct injection technology is so important.

Right. I appreciate the fact that you are letting me push you on these items because it is a question that I get all the time and I want to make sure that -- it sort of nips it in the bud if you say it rather than me.

I understand, no problem.

Okay, thanks very much.

Your next question comes from the line of Tom Herrenberg of Carl M. Hemic, Inc. You may proceed.

Yes, good morning Vince, Steve, congratulations on a good quarter. When we were out visiting here about a month and a half or so ago, you had expressed a little disappointment that you had met with an unnamed utility, five executives or five V.P.s that were all capable of making the decision, and you hadn't received that decision yet. With this announcement that you came up with on the 26th of July, did that include one of those three projects that you got?

No, not yet.

This one is still hanging out there, then?

It's still hanging out there, but we haven’t given up.

Good luck, that's my question, thank you.

[Operator instructions]

You have a follow up question from the line of Robert Kirkpatrick with Cardinal Capital. You may proceed.

Thank you. How much of the backlog that you reported is nearly –- of about $17 million was booked in this quarter so far?

Just an approximate number on that one, Rob, I would say more in the $5 million to $7 million range. In terms of a little follow up to your earlier question in terms of the spread of that $800,000 impact of demonstrations, you were correct. The impact of that total $800,000, $500,000 was in the first quarter, $300,000 in the second quarter, for that total of $800,000.

Secondly, is there anything about the seasonality, or is there any seasonality to the ATC business in terms of, as I look at your projections for the year, and the amount of revenue that you have booked in the first half, why the second half revenue would be less than the first half revenue?

One possible reason would be that SIP Call, as you know, is a seasonal rule. It requires people to be in compliance May 1st, so typically people would order to have things shipped and installed by February or so. That's been going on, so that's one possible reason.

Okay, so there is a seasonality to it driven by the customer responding to the regulatory requirements?

Right, if they wait until the last minute, that's how they are going to do it. Some do and some don't. What you'll see when the CAIR rule comes along in 2009, that is an annual requirement so the seasonal stuff is going to go away.

Okay, and then your pre-tax estimate of $0.18 to $0.22 per share for the year, your first half number that you are using to get to that $0.18 to $0.22 is what?

$0.12.

Great. Thank you very much. Continue to keep up the good work.

[Operator instructions] At this time there are no questions in the queue. I would like to turn it over to the speakers for closing remarks.

Thank you very much, and thank you to everyone who was on the line. We appreciate your interest in Fuel Tech.

Ladies and gentlemen, this does conclude your session. At this time you may disconnect, and have a good day.