Fuel Tech Inc (FTEK) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2005 Fuel-Tech N.V. earnings conference call. My name is Colby and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Tracey Krumme, Director of Investor Relations. Please proceed, ma'am.

Thank you, Colby. Good morning everyone and welcome to Fuel-Tech's third 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 statements. The factors that could cause these 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 call is broadcast over the Internet and can be accessed at out 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 third quarter of $12.8m, a 33% increase over last year's third quarter, with net income of $1m or $0.05 per diluted share, which equaled the performance of year ago quarter.

The third quarter revenues were $36.7m, an increase of $13.6m or 59% over the same period last year, with net income of $5m or $0.22 per diluted share, compared to net income of $0.2m or $0.01 per diluted share last year.

Both revenue and net income exceed prior year annual highs. Our Air Pollution Control revenues continue to lead the Company and I am very pleased with our performance in that segment.

Starting with Air Pollution Control, we continue to be excited about the order flow as bookings year-to-date have been about $38m, bringing the total over the last 12 months to over $40m, a truly outstanding accomplishment.

Of particular note are the two major contracts we received in the Peoples Republic of China. Also the commercial scale demonstrations at TVA we mentioned last quarter have been successfully completed and we are in discussions about possible future requirements for our technologies.

Initial orders were also received from one of our domestic utility alliance partners and from an industrial facility in Italy. Obviously we are very excited about the contracts we recently received in China. The first contract, announced in early September, calls for the installation of our NOxOUT Selective Non-Catalytic Reduction Technology on four 600-megawatt boilers, while the more recent order calls for installation of SNCR on two equally large units, coupled with the design to upgrade the system in the future by adding Downsize Selective Catalytic or SCR Catalysts to further reduce NOx. The latter project is being developed in conjunction with China's National Power Combustion Center and will serve as a national demonstration project.

As we mentioned, independent sources have projected a significant surge in electric generation capacity over the next 5-plus years in China, much of it being provided by large coal fire boilers. We have a team in China now, meeting with selected utilities to discuss possible business arrangements for the future.

I'm very pleased to announce the FUEL CHEM revenues were $6.1m for the third quarter, a record and an increase of 62% over last quarter, even though rail issues continued to cause significant problems with Powder River Basin coal deliveries and risk-share dollars have not been collected from two demonstrations as yet. Hopefully, the rail problems will be solved as we move into 2006, as these issues have definitely had a negative impact on our momentum this year.

Since the last earnings conference call in early August, we have announced three new Targeted In-Furnace Injection demonstration orders and the start-up of two boilers at existing customer sites, one in South EEastern U.S. and one in Italy. Two of the demonstration orders are from a new targeted utility burning PRB coal, while the third was from another major utility burning primarily Illinois Basin coal.

As many of our customers have been struggling to find alternatives for PRB coal in the short term, due to delivery problems, we have also been seeking other opportunities where our technology can provide value. Successful slag control on certain Illinois Basin coals is a very important step for us, as the use of this plentiful high sulfur energy source is expected to ramp-up considerably as new regulatory controls for sulfur dioxide go into effect later in the decade, requiring a significant number of scrubbers to be installed.

We also reported that a TIFI installation has been temporarily decommissioned on a boiler that previously had used the technology on an interim basis, as coal quality and load conditions warranted. Due to reduced capacity requirements, the technology is no longer required on this unit, although it could be reactivated in a short period of time, if needed. Revenue from this account has not been material in 2005.

With the new demonstrations and the additional units at existing customers coming online, we now have the technology installed or being installed on 19 coal fire boilers, inclusive of the two in Italy. We expect one or two more systems to be installed by the end of the year.

As we have discussed in the past, the regulatory accounting approach taken by the utility industry through the State Utility Commission policies can be an impediment to FUEL CHEM's growth. 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 have provided that package to several key customers and prospects, and know of one case already where the package has been utilized in conjunction with a utility's request for permission to pass along the cost of our program. We are very hopeful that the request will receive a favorable ruling.

As to our efforts outside the U.S., we are very pleased to have expanded the use of TIFI to the second unit at our customer facility in Italy and have been awarded a grant from the Italian Government to further develop automatic control for the technology.

In Mexico, our progress has been delayed by the recent Government requirement to not only improve the viability of the fuel treatment program on the units selected for full-scale testing, but to add significant capital improvements to completely control particulate emissions as part of the same contract. Based on discussions with our partners, the capital has just been approved and we expect to receive the necessary documents in the near future.

As to our Targeted Duct Injection technology for acid gas control, initial testing has been completed and the data is being analyzed, both technically and with regard to market requirements. We are in discussion with other potential customers about their needs, even though the ozone season has ended, resulting in the shutdown of most selected catalytic reduction systems, a major source of acid gas emissions.

I'm also very pleased to report that Fuel-Tech has been featured in the October issue of Power magazine, a key publication of the global power generation industry. The cover of the magazine has a snapshot from one of our Computational Fluid Dynamic Models of a PRB coal fired boiler and there's also a two-page article describing the TIFI technology and its benefits to our customers. Reprints of the cover and article are now available on our website and in hard copy. Vince?

Thank you, Steve, and good morning everyone. As Steve mentioned, net sales increased 33% to $12.8m, a $3.2m increase over the third quarter of 2004. Net sales for the nine months increased 59% to $36.7m, a $13.6m increase over 2004. Revenue for the quarter was a record for the Company and year-to-date revenue represents a new milestone achievement for the full year for the Company.

Net income for the quarter was $1m or $0.05 per diluted share, which was the same level as the year ago quarter. Net income for the nine months was $5m or $0.22 per diluted share, versus net income of $0.2m or $0.01 per diluted share for the nine-month period of 2004.

Net income for the quarter included tax expense of $914,000. This amount is comprised of $793,000 in deferred tax expense related to the utilization of net operating loss carry forwards and $121,000 in current state income tax expense.

Net income for the nine months included a net tax benefit of $191,000. This amount is comprised of a $2.2m non-cash income tax benefit recorded at June 30, 2005 related to the anticipated utilization of net operating loss carry forwards in future periods. Largely offsetting this amount was $2m in income tax expense, $1.8m of which represented deferred tax expense and the remainder representing current state income tax expense.

The third quarter results reflected outstanding performance for the Company. Revenues from our Air Pollution Control business were $6.7m, which represented a $2.3m increase over the comparable period of the prior year. On a year-to-date basis, revenues from this business segment were $23m, an increase of almost $12.5m over the prior year. Approximately $38m in orders has been received thus far in 2005 and the backlog as of this date is approximately $30m, also a record for the Company.

Utilities and industrial facilities, both domestically and abroad, continue 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 Treatment Chemical business segment generated revenues of $6.1m for the third quarter of 2005, a record quarter for the business segment. FUEL CHEM began to exhibit some strengthening in this third quarter versus comparable year earlier periods, reflecting the benefits of new accounts and a third quarter pick-up in oil fired business due to heat-related electricity demand. On a year-to-date basis, revenues were $13.6m versus $12.5m in the prior year.

Revenue gains year-to-date have been limited by the following circumstances in the first nine months of the year.

First, there were four demonstration programs during the first nine months of the year that have not yielded commercial revenues. One was a no-cost demonstration at a critical coal fired utility and one was a demonstration in a large coal fired facility, offered at 50% of commercial value.

The other two demonstrations were structured on a cost share basis; one on a coal fired unit and one on an oil fired unit. Under cost share arrangements during the demonstration period, Fuel-Tech will invoice the customer at a specified percentage of the commercial price. 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 that commercial price.

These latter two demonstrations are expected to reach their evaluation date in the fourth quarter. If Fuel-Tech had invoiced all four demonstrations at commercial levels, revenues would have been enhanced by almost $1m.

Second, as Steve noted, coal supply chain issues hampered the first nine months of the year. One critical western coal fired utility unit was significantly and unexpectedly de-rated for an extended period, due to transportation-related shortages of western coal deliveries to the plant. If Fuel-Tech had been feeding chemical at standard dosage for this unit, an additional $500,000 revenue would have been realized.

Rail -- sorry, rails disruptions in the Powder River Basin have impacted several utilities, while maintenance and repair work on key rail lines is expected to impact coal shipments in several parts of the country for the remainder of the year.

Lastly, the high price of oil has resulted in reduced oil fired electricity generation in the United States. Fuel-Tech's oil fired business was negatively impacted by this market dynamic, particularly during the first half of the year, when cooler weather enabled production from high cost generating units to be curtailed.

As Steve mentioned, the outlook for the FUEL CHEM business remains extraordinarily exciting. Due to its lower costs and lower pollutant content relative to eastern coals, western coals are being burned in larger quantities and in an increasing number of facilities. In addition, we now have two demonstration units fuelled by coal from Illinois Basin mines. We perceive these demonstrations as effectively opening a new market opportunity for Fuel-Tech.

Gross margins for the Company as a whole, for the third quarter and year-to-date period ending September 30, were 50% and 48% respectively. While these gross margins for the Company as a whole are at parity with comparable periods of the prior year, margins for the business segments require further explanation.

For the Air Pollution Control business, margins have improved on a year-to-date basis, to 49% from 44% in the year ago period. The improvement is attributable to the mix of projects and to the superb performance of the Air Pollution Control sales and engineering teams.

For the FUEL CHEM business, margins have declined on a year-to-date basis, to 48% from 51% in the year ago period. The erosion stems largely from program demonstrations that have not yielded commercial revenues, as we discussed previously.

SG&A expenses for the third quarter and year-to-date period were $4.1m and $11.9m 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 on a year-to-date basis are slightly greater than the prior year. Fuel-Tech continues to pursue commercial applications for technologies outside of its traditional markets, from both an industrial and geographical perspective. Third quarter R&D expenses included the funding of a successful TIFI demonstration in Mexico, with a research facility owned by the Mexican Government.

As noted previously, on a year-to-date basis Fuel-Tech recorded a tax benefit of $191,000. This tax benefit is comprised of a $2.2m non-cash income tax benefit recorded at June 30, related to the anticipated utilization of net operating loss carry forwards in future periods. Largely offsetting this amount was $2m in income tax expense, $1.8m of which represented deferred tax expense, and the remainder representing current state income tax expense.

The balance sheet is showing the increased strength afforded by the leverage of Fuel-Tech's business model. We ended the quarter with $11.8m in cash, working capital of $16.3m and no debt.

As mentioned previously, business activity is accelerating for both the business 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. And reviewing our outlook for 2005, we are modifying our full year outlook to reflect revenues in the $48 to $50m range. We expect the FUEL CHEM business to generate $19 to $20m in revenue and the Air Pollution Control business to generate $29 to $30m in revenue.

Our pre-tax net income for this revenue range will be from $0.25 to $0.28 per diluted share. That's over to you, Steve.

Thanks, Vince. In summary, we are extremely excited about the record revenues and profits we posted through the first three quarters of the year, especially considering that both have exceeded historical annual highs. Eclipsing the $40m mark for APC bookings in the last 12 months, including two major contracts from the Peoples Republic of China, is an accomplishment to be proud of and we anticipate receiving more orders in the near future.

On the FUEL CHEM side, our business is definitely on the rebound after a slow first half, as evidenced by the record revenues in the third quarter. Activity in this segment is very strong and we are looking forward to receiving additional orders from new customers in the next 30 to 60 days.

Overall, our businesses are looking extremely healthy, both domestically and abroad.

Operator, please open the call for questions.

Yes, sir. [OPERATOR INSTRUCTIONS]. Your first question comes from the line of Doug Thomas with Jet Investment Research. Please proceed.

Good morning.

Hi, Doug. How are you?

Pretty good. Vince, I guess I wanted to ask you just, if you could, on the $1.5m in additional incremental revenue that you could have -- that you might have booked this quarter, can you pose an idea what sort of margins that might have come at if you would have been to, for example, bill at the commercial rates for the $1m, and if you hadn't seen the impact from rail shipments for the $0.5m you talked about?

Right. Well, as relates -- let's talk about the $1m piece first that relates to the demonstrations. Of that $1m piece, we're expecting between $500,000 and $600,000 of that $1m to come back to us in the fourth quarter of this year. Now, when that dollar amount comes back to us in our profit and loss statement, that's going to be at basically 100% gross margin, because we've actually recorded the cost of sales related to the shipment of chemical already. Okay?

That's the way the demonstration programs work. We can't officially record the revenue on those types of cost share demonstrations until there is official customer acceptance on the program. So, of the $1m, $600,000 is expected to come back to us -- $500,000 to $600,000 is expected to come back to us in the fourth quarter.

Now, the remaining piece, the $400,000 differential, was really what we consider as being a cost of doing business for the Company, in order to gain business with some of these larger utilities. Again, we'll offer a no-cost program for utilities to go ahead and start the program with us. And one case was a no-cost program and the other case was actually at 50% of the commercial value of the program. So, we won't see that $400,000 coming back to us.

By the way, that no-cost program that Vince mentioned, that utility is now on the program, so that's why we do that.

okay.

Now, as it relates to the additional $500,000 that we talked to related to the Powder River Basin shipments or lack thereof, we know those revenues would have been recognized at our standard gross margin rate, which would have been in the 50% range.

Okay. And then, Steve, just quickly on the Chinese contract, which I know was a result of a lot of hard work. The utility you referenced is one, as you mentioned, five of the top utilities in the country. When you talk about more business from China, is it likely that this utility and the other four will wait to see the demonstration of this technology there before going ahead and moving forward with additional orders, or is that not the case?

Well, that's hard to say. I think there will be some lag period, I think. And again, our business model in China is really in its infancy, from the perspective that I think it is clear that we know that you're not going to be able to continue to sell U.S. equipment at extensibly U.S. margins in China in the long term. And that's really why we're going to have a team there now that's going to be discussing potential other future ways to work with these major utilities. And I really can't elaborate on what that might be at this point.

Okay. And two other quick things. It seems to me like Mexico moving ahead and -- you brought it up. And then the Italian contract, where you've been given a grant to develop automated technology. That seems to me like something that will be right up your alley.

Yes. It's been a priority of ours from the R&D perspective for a little while. And we have made some progress and this is just going to speed that progress up a little. Mexico, again, it's been a long wait. It's worth it, in my opinion. We have not seen the paper yet but we certainly anticipate it. And we do know for sure that the capital required to do this additional improvements on those utilities that we're talking about, those units that we're talking about, has been granted. So now it's just a matter of, again, struggling through the bureaucracy.

Yes. I know how things -- how slowly things work in Mexico. Listen, thank you very much, good quarter.

Thanks, Doug.

Your next question comes from the line of John Quealy with Adams Hartman. Please proceed.

Hi, good morning. Just a couple of quick questions, more qualitative. Steve, you mentioned, in terms of the number of targeted utilities you had. Can you at least talk qualitatively about how many are on that list? Or, if you don't want to get that specific, where you are in terms of penetration with actual units on site with these customers?

Well, yes, I think you're talking about FUEL CHEM and Target In-Furnace Injection, I assume?

Correct.

Well, again, when you talk about targeted utilities, it's just about every major that's burning PRB and now we've expanded that, it looks like, to Illinois Basin, although we do have some work left to do on that one. But you're talking AEP, Southern Company, Ameren, Cinergy, Xcel, Veeco, right down the line of people burning that type of coal. Every major utility is on our target list. So I don't want to be -- seem arrogant or flip about it, but we're looking at it from anybody that's burning the stuff is certainly an available prospect for us.

And in terms of the penetration thus far, is that up to your expectations, given the wide base of potential buyers or users?

Yes, I guess it's been slower than any of us would like to see. But I'm convinced, now more than ever, that the momentum in that marketplace is finally taking hold. And one of the things that slowed in 2005 we addressed briefly on this rail situation. There were people that were struggling just to get enough coal to operate and they were switching to eastern coals and de-rating and all sorts of things because of that, and people who wanted to increase their usage of PRB weren't able to do that. But our understanding is that those issues are soon to be solved and that should speed things up just by the fact that now these folks can build their inventories and get back to doing business in the way they want to do it.

Okay, great. Thanks.

Your next question comes from the line of Sheryl Skolnick with Fulcrum. Please proceed.

I apologize but I missed the guidance, that's my first question. So can -- I hate to do this but can you repeat it, please?

Sure, Sheryl, how are you?

Good, thank you. How are you?

Good, thanks. The guidance on the revenue line, $48 to $50m.

Got it.

The breakdown is FUEL CHEM $19 to $20m, Air Pollution Control $29 to $30m, and then pre-tax net income we're giving guidance of $0.25 to $0.28 per diluted share for the full year.

Okay. On a pre-tax basis?

That's correct.

But is it therefore likely you will again record a non-cash tax amount?

There will be some recorded in the fourth quarter, yes.

Okay, good. Alright. I guess I'm not sure that you addressed specifically what the issue is in Mexico about the capital required, but then you said that it got approved. So who's spending the money and who approved it and what does it mean?

Well, what it means is that the situation in Mexico is, again, the oil being burned at these plants is very poor quality.

Understood.

And when you burn it you a lot of acid emissions and other particulate emissions as well. Our program is designed to control the acid emissions and some of the particulate emissions, however not all.

So what has happened is that the pressure to improve overall emissions has been so great, especially at this one facility where we hope to get our foot in the door, that the Government has been under enough pressure to say "Wait a minute, the fuel treatment chemical will help us significantly but we need to do even better." So they needed to spend actual capital dollars instead of just expense dollars, like we are. But it took a little while longer than our partners had anticipated to get that part of it.

That wasn't an initial requirement. That came a little later. So that slowed the bidding process for us down, because now we're involved in the total contract. It will be us and some capital improvements to get even more complete particulate control.

Okay.

And that capital has now been approved and we expect to get the documents required to go forward soon.

Okay. So I think I understand that now. Alright. Can you give us a rough idea how many more opportunities you have to install TIFI, if you're focused on Illinois Basin and PRB?

Well, again, Illinois Basin is pretty new to us. We're on two units now. We're analyzing. We've got a very good database, again, like we've talked about before. There's roughly, in the last 12 months, based on our data about 62m tons of Illinois Basin coal has been burned. And out of that 62m tons, the top 25 facilities have burned about 80% of it, the typical 80/20 rule.

So we're looking at different mines, as to what the constituents are that cause these slagging issues. We're looking at different boiler designs to find out which boilers can handle it, which can't. I guess, Sheryl, it's a little too early for us to say that it's going to add a $50m market, or whatever it is, to our existing market. But it's going to be significant and I think the key is that, looking down the road two or three years, it's going to grow even more because, as the EPA clamps down further on sulfur emissions, people are going to be putting in scrubbers and people are going to be burning additional high-sulfur Illinois Basin coal compared to what they do now. The projections are for significant growth in that particular market. So that's going to do nothing but help us.

Right. And it does make me feel a little bit more comfortable that you're not reliant on the railroads to make sure that you have -- your customers have fuel going forward.

Hopefully, that problem is fixed as well, or will be.

Yes, okay. And I guess just a comment to verify some numbers on the cash flow. It looks like net cash from operations was about $7.2m for the quarter. Is that right?

Let's see here, Sheryl.

It was $6.6m for the nine months, if my numbers are right. I think that is right because I do get a very significant increase in cash.

No, that's absolutely correct, Sheryl. We did have a substantial increase in cash in the third quarter period itself. I'm just verifying the number myself. But you're in the ballpark.

If that's in the neighborhood, okay. The order of magnitude this quarter was the most -- contributed the most positive cash flow of any of the year, by many orders of magnitude?

Absolutely. And in fact, it probably is a record historically as well, from a cash generation perspective.

I would think so. And that underlies this thesis. So I guess where I'm left with is you've done an excellent job of booking these orders. You're at record levels. It's delightful to have a third quarter conference call where we're not backing away from a year-end guidance number. So congratulations on all of that hard work.

But what I'm curious about is, of that $30m in backlog, that takes about a year to work through. Is that about right?

That particular backlog will probably take us, I'd say, a year to a year and a half to work through.

Okay. Because it includes some projects that start -- that really go through '07?

That's correct.

Okay. Alright. So we've got some good visibility on that side, at least the APC business. Is that both APC and FUEL CHEM?

That's solely APC.

That's what I thought. Okay.

It's APC, Cheryl.

Okay. That's what I thought and that's consistent with the way it's been. Terrific, then. Thank you very much, that's great.

Thanks, Sheryl.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of George Gaspar with Robert W. Baird. Please proceed.

Yes. Good morning and congratulations on an impressive quarter.

Thank you, George.

Thank you, George.

The first question relates to the contracts that you're getting in China and just from an engineering fundamental understanding point of view. Is this going to allow -- these systems that you're going to sell, will these be positioned so that your FUEL CHEM injection process can be part of these systems or is that outside of what you're doing?

It's really outside of what we're doing, George. But certainly that market potential is something we're interested in and our folks are asking questions of these major utilities. When they're talking about the Air Pollution Control side, they're also certainly going to be probing about issues relative to slagging. But the two are really not related in these two contracts.

Okay. So does the systems work that you're undertaking, does it -- is it a technology that wouldn't necessarily eliminate the potential for FUEL CHEM sales or not?

No, no. In fact, the design process for both technologies, both the SNCR injection of urea to control NOx and the slag control and Targeted-In-Furnace Injection are designed exactly the same way. And they're both based on injection of chemicals to furnaces in certain temperature zones and flow zones. So no, they're not mutually exclusive by any means, but they're not necessarily coupled either.

Okay. And then, you're starting to see a little momentum on the chemical FUEL CHEM side going into the fourth quarter, with natural gas being what it is and maybe a push to utilize more coal where possible. The inference here would be that chemical sales would tend to pick up into '06.

That's exactly right.

Okay. And then what about your gross margins? Look pretty good on both sides of the ledger. How do you -- what's your sense for gross margins going forward beyond the third quarter? Can you improve on them into the 55, 60% range?

No, I wouldn't necessarily see an improvement in gross margins. From the Air Pollution Control business perspective, we're at what I would call historical highs at this point in time. If anything, I would anticipate seeing those tick down a little bit closer to our historical averages, which would be in the, say, lower to mid 40s range on the Air Pollution Control projects. Then again, that can vary with the mix of projects that we have.

FUEL CHEM at the 48% level. We may see a little bit of an uptick in that business, particularly when you factor into the equation that there was the impact of demonstrations on that 48% level. So it wouldn't surprise me if that came up to the 58 -- sorry, to the 50% level. But I don't think we're going to be seeing margins in the 55 to 60% level, by any means. That would be a little bit too high for us to be able to maintain.

Okay. And then a couple of other quick ones, one on R&D. Any further thoughts that you can give us on your -- the missed injection in the stack technology?

Yes. That's Targeted Duct Injection. I did mention that we have completed that demonstration. It was successful. And again, we're out analyzing the data and the market, because we weren't the first to be in this market. There are a couple of other technologies of injecting different chemicals in a different way than what we do. But we need to take a good look at our data and our costs, at what the competition is doing.

And during all this, we're actively calling on customers and there's two that are very interested right now. So we're very optimistic that we'll see some commercial activity with that technology in the relatively near future. But no guarantees, as it is new.

Okay. And then on your estimated earnings, the $0.25, $0.28 now. That's judged to be a pre-tax number or how -- whatever that is, $0.25 to $0.28 up, and I assume it's fully diluted. I think you referred to that.

That's correct.

What kind of a -- what's your tax ramification going to be when you look at a $0.25 to $0.28 number? Can you guide us at all on what the tax ramification would be?

Well, George, at this point in time we're still being sheltered by net operating losses.

Okay.

Okay? So the majority of the activity you see on the income tax line is non-cash activity. Okay? We did take a tax benefit earlier in the year, related to the anticipated utilization of those NOLs. And offsetting that, we've been recording some non-tax on deferred income tax expense.

Alright.

And so, for the remainder of this year, again, the impact on that line is a non-cash impact. The exception being a small amount of state tax expense that we will have to pay. Now, at the end of 2005, we will have about $7.4m in net operating losses that will carry forward into 2006 and the future. And then, to the extent that we obviously continue to generate taxable income, and we will, we will utilize NOLs again to shelter income and we will continue to record non-cash deferred tax expense on that income tax line. But as -- with the growth of the Company, it's foreseeable here in the near term that we will be an actual cash taxpayer some time in the near future.

Okay. And based on these numbers, it looks like your return on equity is likely to, well, exceed 20%.

I don't have that calculation in front of me now, but obviously as we continue to grow the business, I mentioned that we have great leverage on our incremental revenue dollar. But the return on equity is just going to increase nicely as well.

Okay. Thanks. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of [Tom Herenberg] with [Carl Henning]. Please proceed.

Morning, fellows. Great quarter.

Thank you very much.

You talked about the possibility of reflagging this Company back to the U.S. What's the status of that?

Yes. That's a project that we're actively involved in looking at, at this point in time. And we're putting together the necessary information, just to determine the actual cost of the project and any tax implications, if any, of doing so. But at the Board level, it's a project that we are looking at actively as we speak, and we'll be taking a decision on that, I would say, some time within this next quarterly period of time. And if we did do it, it probably would happen within this next year timeframe.

Very good. Thanks so much. And again, congratulations on a great quarter.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question is a follow-up from the line of George Gaspar. Please proceed.

Yes. You may have mentioned something along the line on this, but considering this penetration that you're making, both in Italy and in China at this point, what are the prospects here on Mexico?

Well, Mexico, we've estimated that market to be about -- between $25 and $35m. It's prime. There's really two entities in Mexico where the action would be. And one is the national utility, CFE, and the other is the national refiner, Pemex. Again, I've mentioned many times that the oil quality there is really poor and is not appearing to get any better. The price of oil, they certainly want to sell their higher quality fuels on the open market. Obviously that country can use the money for social purposes.

So we're very optimistic about the future there, it's just taking a long time to get through the bureaucracy. But we're moving and we think we're quite close to getting started.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. At this time, there are no questions appearing in the queue.

Again, well, thank you all very much for joining us today for our third quarter discussion.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.