Fuel Tech Inc (FTEK) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fuel Tech 2006 fourth-quarter and year-end conference call. My name is Eric and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of the conference. (OPERATOR INSTRUCTIONS). I would now like to turn our presentation over to Ms. Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Please proceed.

Good morning and welcome to Fuel Tech's fourth-quarter and year-end conference call. By now all of you should have received a copy of today's release; if you have not, please call our office at 203-425-9830 and we'll be happy to send you one. Joining me on the call this morning is John Norris, President and Chief Executive 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 results to differ materially are included in our filings with the SEC.

The information contained in this call is accurate only as of the date discussed and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call and, as a reminder, this conference call is being broadcast over the Internet and can be accessed at our new website address, www.FTEK.com. With that said I would now like to turn the call over to John Norris. John, please go ahead.

Thanks, Tracy, and good morning to everyone; we appreciate all of you joining us on this call. We are very pleased to report another outstanding quarter and full year for Fuel Tech. For the quarter our revenues were $18.1 million, up 11% from the fourth quarter of '05. Pretax income for the quarter was $2.3 million or $0.10 a share, down slightly from $2.4 million or $0.10 a shared last year. For the full year our revenue was $75.1 million, up 42% over last year. Our pretax income for the year was $11.8 million, up 64% from last year's $7.2 million. Both revenue and pretax income were above our guidance for the year.

Our CFO, Vince Arnone, will discuss our financial results in much greater detail in a few minutes, including a discussion of the after-tax earnings and the impacts of various tax and other charges, such as 123R stock compensation expenses, which affect year-over-year income comparisons for us between 2006 and 2005. Vince will also cover our balance sheet in detail, but it remains exceptionally strong with no debt and with cash, cash equivalents and short-term investments increasing to $32.4 million which is roughly double the end of '05 amount of $16.4 million. Our business model continues to generate revenue, profit and cash growth at exceptional rates.

Now I'd like to tell you a little bit more about the Company business behind these outstanding numbers. As most of you know, Fuel Tech is a fully integrated company that uses a suite of technologies to provide boiler optimization and efficiency improvements and air pollution reduction and control solutions to utilities and industrial customers worldwide. For reporting purposes we broadly group these technologies into two productlines -- a specialty chemical business we call FUEL CHEM and our Air Pollution Control or APC capital projects productline. Again this quarter we have both productlines generating significant growth in revenues while margins have remained excellent.

Our APC capital projects business sector saw revenues of $46.4 million for the year, a 42% increase over '05. Gross margins for the year at 43% were down slightly reflecting a larger portion of turnkey projects, but are generally in line with our expectations for this business sector going forward. The revenue growth in this business sector benefited from work on our two major projects in the People's Republic of China and from ongoing progress in booking and fulfilling orders from a variety of domestic utility and industrial customers.

The selective noncatalytic reduction, or SNCR, systems for our Chinese projects are on schedule with deliveries that occurred in '06 and will occur in the first part of 2007. This technology continues to have success in the marketplace as clients look for cost-effective means to reduce nitrogen oxide or NOx emissions.

In addition, our first NOxOUT CASCADE hybrid system was installed this past fall and is currently in startup and testing. We believe this technology can offer significant advantages over other NOx removal technologies depending on the site-specific configuration of the unit.

Also our ULTRA technology which converts urea to ammonia for use with selective catalytic reduction, or SCR systems, is getting much interest from utilities especially in the U.S. and China. Our ULTRA system allows clients to avoid the use of Anhydrous and Aqueous Ammonia, which are very hazardous substances, to transport, offload and store for use with an SCR system at power plants. We were pleased to announce in January the contract awards for two major systems at power stations near Beijing in China and we are engaged in significant bidding opportunities to further deploy this technology in the PRC.

Our backlog at the end of the year was $12 million. Now although down from $14 million at the end of the third quarter, we have already added $5.4 million in January and we anticipate a strong first half of contract awards. As you know, our capital projects purchase orders are somewhat seasonal and not uniformly distributed in neat quarterly segments. Overall in 2006 we announced $31 million in new business in this business segment and we expect it to grow significantly in 2007.

Our FUEL CHEM specialty chemical productline had a great fourth quarter with revenues of $8.3 million, up 26% over the quarter last year. For the year we had FUEL CHEM revenues of $28.7 million, up 41% over last year. The growth in revenues for the year is especially remarkable when you take into consideration that shipments to our U.S. utility oil fired customers are down $4.6 million relative to 2005 as the high cost of oil has kept many of those units offline most of the year.

The surge in FUEL CHEM revenues is from utility in the U.S., U.S. utility coal-fired power plant customers, and reflects the rapidly growing market acceptance of our products in reducing slag problems in boilers and in reducing the SO3 plume issues utilities are encountering as they install SCRs to control NOx. For the year revenues from coal-fired units are up 165% relative to '05; now this is exactly the market in which we have worked so hard to gain acceptance.

At the end of a year our FUEL CHEM programs were installed on 24 cold utility units; since then this year in '07 we have announced two additional units. Included in these announcements was a three-year contract for all three units at a major coal station that has the potential to be the largest contract ever signed of any kind in our company's history. Margins for this business sector for the year were 58%, up considerably over last year's 50% level. This is probably a bit high for this business segment going forward as we focus on bringing added value to major clients. But we do expect margins to be in the mid-50% range. We also anticipate significant new orders in this business sector in the near future.

As we look at the geographic breakdown of our revenues we note that our international revenues at $17.5 million in 2006 were up 56% over 2005, the major portion of this revenue growth is from Asia, especially from our China projects. Our marketing efforts in China continue in earnest with much interest being shown by potential new customers there. We have already announced this year two major contracts there for our NOxOUT ULTRA technology and we hope to expand on that market success this year. This important market is a major focus for us in 2007.

Other key international markets for us are Mexico and India. Our Punta Prieta project in Mexico has just started up this quarter and the ugly plume coming from those units caused largely by SO3 has been dramatically reduced. Visitors from other stations and other countries are now visiting that site to see these results and we hope this will lead to new projects in Mexico and other parts of South America this year.

In India there is much interest in our FUEL CHEM program, not only to mitigate slag and SO3 plume problems, but primarily for CEO reductions. Our FUEL CHEM technology can typically deliver about a 1% efficiency gain for a client, which means about that much reduction in CO2 for the same generation. Now that much reduction, even at 1%, without major plant modifications is tough to do in a power plant. Using our Italian office for FUEL CHEM initiatives in India will hopefully allow us to participate in monetizing those reductions on the European Kyoto exchanges. We hope to get our first order in India as soon as possible this year.

Finally, we continue to work on new products and services in our R&D area and some of those appear to hold much promise. In 2006 we announced our new targeted corrosion inhibition technology which is aimed at the municipal solid waste boiler market. And this was but one of seven patents that were applied for or awarded last year for us in the U.S. plus another 12 foreign patent filings. We have refined and expanded our efforts to fully characterize the benefits of our FUEL CHEM technologies to enable our clients to achieve and take credit for emission reductions in things such as CO2.

We have also noted that our FUEL CHEM system might be crucial in enabling other injections such as activated carbon to remove mercury. Activated carbon has been shown to have reduced effectiveness in the presence of SO3 and we're just the folks to help remove that roadblock. We are not stopping there, but we are looking at several ways to expand our program offering so that we can help clients solve a range of operational and environmental challenges. That should expand our already huge market potential and enhance our value to our clients.

Now I'd like to turn the call over to our Chief Financial Officer, Vince Arnone, to further discuss the financial details of our results. Vince?

Thank you, John, and good morning, everyone. As John mentioned, net sales for the fourth quarter increased 11% to $18.1 million, up $1.8 million from the prior year. Pretax income totaled $2.3 million in the quarter or $0.10 per diluted share, down slightly from $2.4 million or $0.10 per diluted share in the prior year. Net income totaled $1.5 million or $0.06 per diluted share compared with $2.6 million or $0.11 per diluted share in the prior year.

Net sales for the 12 months rose 42% to $75.1 million, up $22.2 million from the prior year, exceeding the revenue guidance that we had given previously which was a range of 70 to $74 million. Pretax income totaled $11.8 million or $0.49 per diluted share, up 64% from $7.2 million or $0.31 per diluted share in the prior year. Our pretax prestatement 123R result was $0.56 per diluted share which exceeded our guidance range of $0.50 to $0.53 per diluted share.

Net income for the 12 months totaled $6.8 million or $0.28 per diluted share compared with $7.6 million or $0.33 per diluted share in the prior year. The fourth-quarter and year-to-date results include $0.5 million and $1.8 million in stock based compensation expense, reflecting the January 1, 2006 adoption of statement 123R share based payment. Full year pretax income was impacted negatively by $0.07 per diluted share as a result of the adoption.

Additionally, the fourth-quarter and year-to-date results reflect $0.9 million and $4.9 million in income tax expense, virtually all of which is non-cash. Net income for the 12 months of 2005 was favorably affected by the recording of $4.3 million in non-cash tax benefits related to the anticipated utilization of net operating loss and tax credit carryforwards.

The increases in net sales for the quarter and 12-month periods were driven by strong growth in both technology segments. Net sales for the nitrogen oxide, or NOx, reduction technology segment were $9.7 million and $46.4 million respectively for the fourth quarter and 12 months ended December 31st. The latter representing a 42% increase over the prior year. This segment benefited from revenues associated with two projects in the People's Republic of China and from ongoing progress in booking and fulfilling orders from a variety of domestic utility and industrial customers.

This segment continues to derive order activity from utilities and industrial facilities that are impacted by the EPA's SIP Call regulation and other recently introduced regulatory mandates as Fuel Tech technologies are an important element of their ongoing regulatory compliance strategy. Fuel Tech also continues to work towards developing alliance agreements with selected customers.

Quarterly and 12-month sales for the Fuel Treatment Chemicals technology segment were $8.3 million and $28.7 million, the latter representing a 41% increase over the prior year. This technology segment gains versus a year ago are principally the results of new customer accounts at major coal-fired Midwestern And southeastern U.S. utility plants. As John noted earlier, partially offsetting these gains was the adverse effect of rising crude oil prices which has limited chemical application by some domestic utility customers with oil fired generating units. Fuel Tech's oil fired revenues for the 12 months of this year were down $4.6 million versus 2005.

The outlook for the Fuel Treatment Chemical productline is exciting. Today 26 coal-fired utility units are being serviced by FUEL CHEM programs, 24 domestically and two internationally. The increased utilization of higher slagging coals such as those from the Powder River basin and Illinois basins and the emergence of the important SO3 mitigation market bodes well for incremental domestic growth in the near future and, as John mentioned, the opportunity for international expansion into Mexico, India and China looks very promising.

The gross margin percentage for Fuel Tech for the quarters ended December 31, 2006 and 2005 was 49% and 50% respectively. The gross margin for the fourth quarter for the NOx reduction business decreased to 39% from 47% in the prior year due to the mix of project business. For the Fuel Treatment Chemical business the gross margin increased to 61% in the fourth quarter of 2006 from 54% in 2005. The increase is driven by improved leverage on fixed costs resulting from the incremental revenues generated by large coal-fired units.

The gross margin percentage for Fuel Tech for the 12 months ended December 31, 2006 and 2005 was the same level at 49%. The gross margin percentage for the NOx reduction business decreased to 43% from 49% for the same reason noted previously and for the Fuel Treatment Chemical business the gross margin percentage increased to 58% for this period from 50% in the prior year. In addition to the reason noted previously, the full-year percentage was impacted favorably by the timing of revenue recognition on cost share demonstrations which served to reduce the prior year margin percentage, but at the benefit of 2006 margin percentage.

SG&A expenses for the three months ended December 31, 2006 and 2005 were $6.3 million and $5.5 million respectively, while these expenses for the 12 months ended December 31, 2006 and 2005 were 23.9 and $17.4 million respectively. The $6.5 million increase in SG&A expenses for the 12-month period is attributable to the following. First of all Fuel Tech recorded $1.8 million in stock compensation expense in accordance with Statement 123R.

Next, Fuel Tech realized an increase in revenue related expenses in the amount of $1.5 million as both technology segments had significantly improved revenue growth versus the prior year. Next, Fuel Tech recorded an increase in human resource related expenses of approximately $1.8 million as staffing levels were increased in several areas to accommodate the additional business growth.

And finally, Fuel Tech realized incremental expenses related to audit tax, consulting and recruiting fees a large portion of which represented our recent domestication as a U.S. domiciled company. Research and development expenses for the three months ended December 31, '06 and 2005 were $0.6 million and $0.3 million respectively while these expenses for the 12 months ended December 31, 2006 and 2005 were $2.1 million and $1.2 million respectively.

Fuel Tech has established a more focused approach in the pursuit of commercial applications for its technologies outside of its traditional markets and in the development and analysis of new technologies that could represent incremental market opportunities. The increase in interest income for the fourth quarter and 12 months ended December 31st versus the prior year is driven by higher average cash balances and market interest rates. And as noted previously, net income for the fourth quarter and 12 months ended December 31, 2006 reflects $0.9 million and $4.9 million in income tax expense, virtually all of which is non-cash.

As John noted before, the balance sheet continues to show increased strength resulting from the leverage of Fuel Tech's business model. At December 31, 2006 Fuel Tech had cash and cash equivalents and short-term investments of $32.4 million and working capital of $38.7 million versus $16.4 million and $19.6 million at the end of 2005. Operating activities provided $8.2 million of cash for the year primarily due to the favorable operating results of the business segment.

Investing activities on the year used cash of $4.0 million as short-term investments were increased by $2 million and $2 million was invested to support and enhance the operations of the business principally for equipment related to the Fuel Treatment Chemical productline. Financing activities during this period generated cash related to the exercise of stock options in the amount of $9.8 million. Of this amount $3.8 million represents proceeds from Fuel Tech's stock options exercised in the 12 months of 2006 while $6 million represents the tax benefits realized from the exercise of these options.

Overall business activity continues to trend favorably for both business segments. As guidance for 2007 we expect revenues to range from 90 to $95 million. The NOx Reduction Technology segment is expected to generate 50 to $52 million in revenue while the Fuel Treatment Chemical technology segment is expected to generate 40 to $43 million in revenue. Our net income for this revenue range is expected to fall between $0.41 and $0.46 per diluted share. The impact of Statement 123R on Fuel Tech's net income is expected to be approximately $0.12 per diluted share on a full-year basis in 2007. Now I'd like to turn it back to John.

Thanks, Vince. In summary, we're excited about the record results that have been achieved as well as the significant growth opportunities ahead of us. With that said, operator, would you please open up the lines for questions?

(OPERATOR INSTRUCTIONS). John Quealy, Canaccord Adams.

Good morning. Congratulations on the quarter and a great year. A couple questions. First, on FUEL CHEM, and I think you talked a little bit about the margins and they were abnormally high this quarter. But if we go back the last three quarters, we're above 57% each quarter. Was that solely the cost share mix, if you will, in the year or can you just comment on the trend of margins here for FUEL CHEM?

I think this is really reflecting bigger coal units that are using us at a rate that's a little bit higher than we were giving guidance for on the average of $1 million per year per customer. Still not comfortable yet with coming off of that. When we get twice as many customers we can probably give you a better breakdown of this is a large coal unit, this is a medium coal unit, this is a smaller coal unit with some better revenue guidance, John.

But, no, I think those one-time events that happened at the first of the year really aren't what's driving it up right now, but rather the effect of FUEL CHEM being used a little bit more heavily by the larger coal units.

John, just one thing that I'll add to that, the fourth quarter at 61% does reflect a little bit of an anomaly that really needs to the weighted across the full year. We kicked into a volume discount tier with regard to our raw material purchases that gave us a benefit in the fourth quarter that I'd like to look at it as a benefit that should be weight averaged across the entire year. So there was a little bit of a benefit, 2 to 3% in the fourth quarter that drove that up to that 61% level.

Okay. And that raw material better pricing started in Q4, is that correct, Vince?

That's correct.

So next year is it fair to say on the material side or the cost side for you you have a little bit extra room of about what -- 3 to 4% or maybe 2 to 3% year-on-year?

I look at that as a onetime impact here in 2006. We start the year fresh every year and obviously we do expect our volume and utilization of chemicals to increase substantially in 2007. However, there may be some offsetting price increases that we'll look to experience from our supplier as well. That's just something that we really haven't factored into the mix yet. To a certain degree that's why we still target that mid-50s range as a gross margin target for the FUEL CHEM business.

And to John's point though, when we do and the larger coal fired units, some of that can generate revenues on an annual basis and at a $3 million per year run rate those are going to give us leverage on the FUEL CHEM gross margin. Could we ultimately hit a 58% weighted average number? It's a possibility, but we're not guiding towards that right now.

Okay. And then John, coming back to you on this question of the mix of business for the coal fired boilers for FUEL CHEM -- of that improved pricing or utilization you're seeing, I imagine some of that is SO3 related, but excluding SO3 for the pure slag customers, why do you think they're using more chemical than you thought, if I'm reading that right?

I don't know that I'd break it out that because folks like both benefits, John. Hopefully as we move into a CO2 constrained world our CO2 benefit will become even more important. I think customers who initially used us primarily trying to burn PRB coal to drive down their coal costs, and to reduce their SO2 emissions, have greatly benefited from that, but they're also seeing those other benefits. Typically without an SCR installed they're seeing a little bit of a NOx reduction from the FUEL CHEM and so it's really a combination. They're seeing a lot more benefit, they use it a little bit heavier to keep the boiler even cleaner. So it's not really just one of those things.

Okay. And then my last question on FUEL CHEM -- you talked about the potential for new demonstrations and your history suggests demonstrations turns into orders. Can give us a relative feeling of the number of customers that you'd call a hard target that have started to do customer referrals at this point versus this point last year, just to give us a --?

John, I won't give you a number, but I will characterize it as we've talked in the past about trying to get the snowball rolling on customer acceptance because that's so important in the utility industry. They don't like to be first to market with a new technology, they don't want to be last either. We've now started having clients come out with testimonials about the benefits at conferences and that really is awesome.

We have an incredible amount of interest in the U.S. right now -- far greater than we've ever had in our history, and that continues to build. So that will be evidenced in the new orders. These first two this year were mighty fine wins but we're not going to stop there. Overseas the interest on FUEL CHEM for CO2 reduction is far beyond what I would have anticipated. We're getting a heck of a lot of interest, especially in China and India, in that regard and in Mexico I hope our project there is going to cause us to grow in a number of markets that we actually hadn't anticipated.

And I'm sorry, just one last one on FUEL CHEM. For your FUEL CHEM guidance, 40 to $43 million in revenues in calendar '07, if you look at 8.3 in the Q4 period and add on two more units post quarter that are incremental, you're at this sort of 36 to $38 million run rate depending on what size and if there's SO3 or big coal. You're within striking distance of that guidance with just several incremental adds here. How do you think the adds will go through the year, John? Do you think it's lumpy as always? Do you think it's first-half, back-half weighted? Any indication on how those projects progress for new orders?

It will be lumpy due to outages, John. Outages in the spring and the fall are going to make it a little lumpy. Our guidance is our best guidance that we know of right now. By the same token I hope you are recognizing a management team that doesn't like to overpromise and underdeliver.

Surely. My last question -- APC, there's obviously a significant blow back, at least recently, for new generation for coal in this country. Anecdotally John, I know it's very early and mostly talking about it in the papers and the press. What are your customers saying or what are you hearing from your larger APC relationships about scrubbing existing coal capacity and any change in mind set that you think might be happening?

I think what's happening, John -- and that's a really good question -- I think what's happening right now is a lot of turmoil with clients because their plans for putting on new coal fired units and retiring some of the older ones is up in the air. I mean, there's been high visibility cases at TXU and in the Cliffside unit down at Duke, but this kind of sentiment is of concern to most utilities in the country. That has a couple of effects. If they're putting on a new unit they're going to be putting on the latest controls which is typically an SCR and a scrubber and our ULTRA technology would be greatly applied there.

If they're not able to add the new units they're probably not going to shut down the older units that they had anticipated which means they're going to have to clean them up a lot more than they have which means more NCRs and I believe CASCADEs. I really think CASCADE may be the hottest new technology we have patented in a long time and we're really excited about that, especially for older units that may be retained now but may have to clean up far beyond what they thought they were going to be able to do.

Great. Thanks, folks.

Jesse Herrick, Merriman.

Congratulations on a great quarter. Just wanted to touch on the gross margins on the Air Pollution Control side. I was just wondering if you could just go through why those were down from the year ago period.

A large part of it is that our alliance partners, especially one really big one, tends to want us to do turnkey work there. And when you're doing the turnkey work, the part of that job -- part of it is the modeling and the design of the injectors and the fabrication and delivery of those that are going to be installed, but the installation, the construction labor to install that has a pretty low margin. You're not looking to get ever more than about 10% in that.

So you take those extra revenues, we're happy to get them and we'll be glad to do the work, but the combined overall margins for a project like that is going to be down from an equipment only kind of sale. I think that 43% kind of range that we came in for the year, that's probably as good a number going forward for that business sector as I know of. We'll see how we do in China and with our margins, but so far those are holding in that range too.

So there's obviously been quite a trend towards these alliance partners grouping together.

We like that, by the way. It helps when we don't have to bid for each one of those but are included in their plans, Jesse, and we're sitting there with them and working with the client to show them perhaps better and cheaper alternatives they can get a more reduction for less cost by working collaboratively with us. We really like that approach.

So with this trend and the increase in alliance partners, are we going to see more of this turnkey work that's going to be generating slightly lower gross margins?

Well, I don't know -- I honestly don't know. I just think since it seems to have settled into that kind of range for us on the APC side, that's about as good a guidance as we can give and I think that's where we should expect that going forward. And I think there will be more turnkeys, but I think also in areas like China and other places there's going to be competition that's going to keep it down there. And I think the overall effect of both of those is going to have margins in that low 40% range for that business sector.

How are the margins panning out in China? Are we going to see a dramatic difference as the volume starts increasing there? Because obviously they have different cost structures with labor costs and whatnot.

That's a good question. It is different. We have a Hong Kong office and are waiting probably in the next few weeks to get approval for our Beijing wholly-owned foreign entity. We plan for all of our future work in China, for all of that to be done in China except for the modeling and stuff that we'll always do here to protect our intellectual property. But we're planning to hopefully keep our margins up by being at the same cost basis as anybody who's out there competing with us.

Okay. And you mentioned in the press release that it was pretty highly competitive bidding over there for the urea to ammonia conversion technologies. I'm wondering who you were seeing in those bids?

You see, there are others out there, but there is a competing technology for that that uses hydrolysis to heat the urea to give off ammonia. If you just looked at the capital cost of that, we're roughly in line with that capital cost. The difference for our technology, which is a direct heating approach, is that we don't have problems around formaldehyde which is used in most urea.

If you get formaldehyde free urea, that will cost you about 30% more. If you use hydrolysis you have to have formaldehyde free urea or you're going to have all sorts of operational problems so on an ongoing basis we are real competitive in that market. But you know, the competitors are there and, like in any good competition, they're trying to tell their side of the store and we're trying to sell our side.

And is that hydrolysis-based technology the closest competitor that you guys are seeing?

Yes. And there's a company in the U.S. called Ammonia-On-Demand or U2A, they use the same thing and have been kind of fussing over the patent for a long time. Those are the competitors there. But again, I think ours -- it's just in the last eight months -- six months, eight months that the market has realized the requirement for formaldehyde free urea for those kinds of systems. Some earlier systems I think had those kind of problems. That actually is a pretty big advantage for us.

Okay. And switching over to FUEL CHEM, could you maybe just go through the breakdown of installed FUEL CHEM units? I know that you said there were 24 coal-fired at the end of the year.

Yes, 22 in the U.S. and the two in Italy. And then we've added two more since then in January.

And what was the number of oil fireds?

Standby one here. I didn't give that -- U.S. utility. There's oil utility and oil industrial and -- I think there's 20 oil fired utilities and there's probably that many non-utility oil fired and then there's a number of other industrials in other places. I could give you that breakdown if you want to. Those dollars tend to be much smaller, we don't tend to focus on that, Jesse.

Right. And then one more question for you before --

Vince has got -- I was trying to add them up here. Go-ahead, Vince.

I've got the specifics for you. The utility oil fired, we've got 13 units right now. That's a specific number. And other miscellaneous units, waste facilities, that type of thing, nine units at this point in time.

Okay.

13 oil utility and another miscellaneous nine.

Michael Carboy, Signal Hill.

Good morning, ladies and gentlemen. Congratulations, John and Vince, on the good quarter. I'd like to talk a little bit more about China and potentially India in that you've had tremendous success driving the APC product in the China market at this point. And I'm wondering how do we think about you slip streaming FUEL CHEM into that? I know, John, you've talked before about the Chinese can digest only so much at one point, but given the greenhouse gas issues and the pressure that all the major coal burners are under to address that, one would think that it would be an easy solution for them to deal with right now?

Well, today as we speak, Dr. Linda Lin, who is head of our China and Asia-Pacific Rim, is over in China having these very discussions. The Chinese have a special approach that they're taking to the whole CO2 Kyoto accord they call P2E2 which is for pollution and efficiency gains. And our technology fits like a glove into that and there is much interest in Taiwan and especially around Hong Kong about doing something. Having said that, until you actually get a contracted it's all talk.

India is also keenly interested in doing FUEL CHEM programs, both the government and some nongovernment independent power producers there primarily to monetize the CO2 credits. We're trying to do all that through our Italy office which Italy is a signed or to Kyoto, so we can participate in that CO2 monetization. Those discussions are going great. Again, those interests -- one would think that there would be a lot more interest on slag reduction because that can be a very effective way of creating new generation, if you will.

There is interest there, but there's such a world -- rightly or wrongly there's such a world focus on CO2 that that seems to be the driving factor. I think they're going to get some huge ancillary benefits from us on this effectively new generation forum. But when you take a plant that might be running at 70% availability due to slag and SO3 related problems, we can take it up substantially more than that by cleaning all that mess up, that looks like free generation.

With regard to FUEL CHEM, any insights or updates with regard to how FUEL CHEM is being treated before several different public utility commissions for ratebase inclusion?

Those are obviously handled by each utility involved. We've had a few successes, one setback, but they're going back to reapply --

Was that Illinois?

I can't really say. The answer to that is no, but I can't really tell you who that was otherwise. But I think that will prompt me in my address and just my opinion versus hard data. I think as this whole debate around CO2 evolves and the impact that our technology can have on CO2, I think there will be a lot more willingness -- I would suspect a lot more willingness by state regulators to include the cost of our FUEL CHEM program in a fuel pass through cost so that everybody can get the political and the environment can get the benefit, but everybody can get the recognition of the CO2 achieved.

So I think the future probably bodes well in that regard. It's not a principal driver one way or the other today. Clients see -- many of our clients are seeing well north of 7 to 1 kind of benefit from using us. That's the principal driver.

In the past you've talked about SO3 mitigation as sort of just an extra bit of icing, if you will, on the FUEL CHEM story. But what I'm hearing this quarter is that customers are viewing this more as a fundamental product feature. AM I hearing that correctly?

Absolutely you're hearing that correctly and part of that is we're beating that drum, but it's a big deal. The only other effective mitigating strategy out there is to use a substance called [Trona] with a Duct Injection. It's a sodium-based product; one of the principal drawbacks of that is that it messes up ash/flash sales -- you really can't use it to make concrete.

Again, in a CO2 constrained world, flash sales that go to a concrete producer offset the production of Portland Cement, which causes about one ton of CO2 to be emitted for each ton of Portland Cement created. Thus, the sale of flash can be a significant CO2 offset. Our product doesn't bother flash sales. In fact, we think it makes the flash even a little bit better as we are trying to lower the carbon content of that ash. I think that is a huge advantage of our technology over Trona. SO3, as you deploy more of these SCRs and you try to burn higher sulfur coal when you put a scrubber on, it becomes a huge issue.

Paul Cheng, ThinkEquity Partners.

Good morning, guys, and congratulations on a good quarter. A few questions. First, as your percentage of revenue from international sales increases, what sort of impact if any does that have on your margins going forward?

I hope the answer to that is none significantly. Our foreign revenues are growing and I think they are continuing to grow. As a percentage of income, they actually went slightly down, but they grew in the raw dollar figure. We are working real hard to grow that business internationally as fast as we can all over. Now, we will see what that does, but Paul, for right now we don't anticipate significant margin degradation.

Perfect. A few more questions. Within the context of your revenue guidance for the NOx business, $50 million to $52 million for the year, can you talk about the backlog? I think you guys ended the quarter at $12 million. What sort of uptick in sales activity given the lumpiness of the business and the long sales cycle would lead us to believe that backlog will start trending up again or at least kind of stabilize helping the declining trend in recent quarters?

Right on. It is lumpy. We are in bids and negotiations with more folks than we have ever been in our history. We think we have great prospects for bringing those home, but that is all talk until you do it. We wouldn't have given the guidance with the increase if we didn't think that we could make that happen.

If you look at that guidance, it's going to call for, on an average -- and it won't be smooth. APC work is going to be more lumpy than any of it, but that would call for a run rate of $13 million a quarter. We add $12 million in backlog and we have added another $5.4 million plus this year so far. We need to be winning and announcing work at a $13 million plus per quarter kind of rate and build that backlog.

Sure. And I think that would be more probably back-end loaded. On an average it's 13, but I would think it's more back-end just kind of given where things are now, is that right?

I hope that in the first half we're going to see some good results still in this. To be honest, the earlier question was talking about all the changes that have happened just in the last couple of months and the turmoil in the industry over planned coal additions and all the rest. That has actually caused folks -- procurement folks to do a quick pause on some of those plans just to make sure they see what the playing field -- but the due dates on getting NOx reduction in are going to drive folks to complete these transactions, these contracts one way or the other. So we hope for a strong first half in that area and an even stronger second half.

Okay. And quickly, just really two more. There have been some concerns about economic slowdown in China. Have you heard any chatter about maybe orders being pushed out, canceled or --?

I find it amazing what they do to try to -- in the Chinese to try to stop speculation in markets where people are borrowing money to invest and they're saying they're going to try to stabilize growth, what, I think they said 8%. That is enormous for a country to grow at 8% and they are already behind the power curve. They need a lot more power than they have today and then to grow at 8% per year is enormous. They're adding coal units today at a rate of 1000 MW a week.

So they're bringing on basically one 1000 MW coal station which would have three 300 and some MW or four 250 MW. They're bringing one of those stations on a week today and those are going to get cleaned up. The new units are all getting SCRs and scrubbers and as they get to those they are converting most of those ammonia supplies for the SCRs to a urea based approach. We think it was a huge win for us to get those first two right around Beijing which were the first two left out there. We have high anticipation for that, but no --.

China is way behind in cleanup. The power sector first, then they'll go later after the industrial sector for cleaning up NOx and SO2 especially. This is just the very beginning of an exciting market and we don't see any evidence of that. In fact, the government seems to be more bent on trying to go further with all the publicity that has been out there about the smog that is really choking the city.

And one last question, a bookkeeping question. I think at the end of Vince's prepared statement he alluded to a $0.12 per share commentary right after he talked about the EPS. Can you clarify that? I missed the commentary around that number?

That was just referring to the impact of 123R on net income for 2007.

Thank you.

One of the things to note is that we've tried to guide around pre EBIT, pre 123R for comparisons between 2005 and 2006 because we weren't using in 2005 the 123R kind of stock compensation expense. 2006 and 2007, all of that goes away as does that 2005 tax credit versus tax charges this year. So I think going forward we ought to be able to look just right at the bottom line and not be having to explain the EBIT line.

Mark Tobin, Roth Capital Partners.

Good morning. Real quick, a bookkeeping question. What's your NOL at the end of the year here?

It's actually just around $6 million. Actually just for your information our 10-k is going to be filed by the close of business today, so there'll be all sorts of additional disclosure related items related to our deferred tax assets. But the NOL piece is approximately $6 million at the end of 2006.

Okay. And then looking forward as far as how you see this business scaling, what type of investments on the SG&A line do you anticipate going forward? You're looking at some pretty strong growth. I'm just trying to get a feel for how you expect it to scale?

Let me start and I'll let Vince finish. One of the things, Mark, that we have said in the past that we want to do is to grow our top line, our revenue line, at a faster rate than our SG&A line grows. And that we want to increase our operating margin from the 12, 13% kind of range -- I think in '05 it was 13.5% -- up and we're up almost a percent to 14.3%. If you look at the EBIT margin we're up from 13.5 to 15.7% in 2006. We want to take those margins up to around 20% as quickly as we can get there in the next few years which means growing the top line. And our SG&A line will grow as we add people for clients, but we want that growth to be a slower rate than our revenue growth.

Okay.

Definitely the case and actually, if you excluded the impact of 123R on 2006, that operating margin percentage actually kicks up darn close to 16.5% in 2006 versus that 13.5% in '05. So to John's point, yes, in a pure dollar sense the SG&A is definitely going to grow as we continue to add staff to support the growth. And as John noted previously, we are going to be opening up our operational office in China approximately early April, mid-April time frame and we'll add the necessary SG&A that we need to support the growth of the business.

On an overall basis what John says is accurate. We're targeting to use the leverage of the business model whereby we don't have any manufacturing responsibilities, we don't have any capital investment responsibilities for this company that are of significance. And with the sale of our technologies we should be able to target that 20% level from an operating margin percentage not too far into the future.

And as far as your supply chain goes, I assume it's able to flex and grow along with you without too much of a problem?

Absolutely. Martin Marietta provides our magnesium hydroxide; they're expanding as we expand. It's a great relationship with those guys. Those guys are a true pleasure to do business with. Likewise we have manufacturers on our APC side that are chomping at the bit for additional orders. We don't manufacture anything, we're not in the capital intensive segment of our business and we can use other suppliers if needed to be. So we're not constrained on the supply chain side.

Yes, we're looking to develop the similar relationships that we have in the United States in places where we're going to be doing business internationally as well. So as John previously, we're looking at developing those contractors/supplier relationships with chemical and equipment manufacturers in those parts of the world.

Thank you.

You're welcome.

Debra Fiakas, Crystal Equity Research.

Most of my questions have been answered, but I would follow-up on the previous person's questions about SG&A. Could you tell us what your headcount was at the end of December?

At the end of December we're at just about -- well, exactly 137 employees. That's up just around -- just under 20 employees year-on-year when you compare to the end of 2005. Half of the additions to were -- I think, Debra, we've talked previously about what we do when we actually gain a new FUEL CHEM customer whereby we add a part-time employee to actually monitor our chemical feed at the plant site. So half of the approximately 20 additions were those part-time employees. The remainder additions to the remainder of our Company whether it be engineering, sales, administrative, other.

Excellent. So we can expect perhaps a similar increase or perhaps even a greater increase in the headcount in 2007 particularly given the growth that you're anticipating in the FUEL CHEM segment?

Absolutely, Debra. And it's good to talk to you. As we grow, as the Company grows, both on the APC side and on the FUEL CHEM side we're going to need to add folks on the APC side as we get more projects we have to have more engineers to design those. We'll need to add modelers to our modeling capability. We have to add field engineers to go out and install and get those systems up and running. And on the FUEL CHEM side, as Vince said, we typically will have one or two part-time according to the size of that project. And if it's a large enough client we'll be putting a full-time project manager in there in addition. But again, those growth in people are going to come after we get the revenue growth.

Okay, excellent. And then in regard to R&D spending, you alluded to some product development activities in your opening comments. Should we anticipate an increase or level spending on research and development?

Right now we're spending $2 million'ish a year. I think that's probably about right. We might go up or down, we're not going to be bureaucratic about this if we see something. And there's a number of areas that we really want to get better at and provide more products and services -- on the mercury reduction technology, on SO2 reduction technologies, and there are some others especially if the Feds look at heavy metal. And we also want to help clients to become more efficient in their use of carbon in their fuel.

So there's a number of areas. We're not going to, again, be bureaucratic about it. If we need to spend it to develop it we'll do that; we're not going to spend it if we don't see something worthwhile. It's a very focused effort. Our R&D efforts when we identify an activity is treated like a project; we projectize it, we capture the cost associated with that and sometimes those generate tax benefits.

Excellent, thank you.

Shawn Boyd, Westcliff Capital Management.

Good morning. A couple just clarifications I think at this point. When you talk about revenues in FUEL CHEM being up 165% year-over-year --

For the coal utility unit.

Understood and that's exactly my question. Within the full $29 million for the year, how much of that was just from the coal-fired units?

It's in the 75 to 80% range.

Okay, great. And if we go back to '05, just roughly how much was that? Of the $20 million in '05?

Pardon me.

Of the $20 million in FUEL CHEM revenues in '05, how much was that?

It's probably going to be closer to the 50 to 55% range.

Okay, great. So in '06, just to be totally clear here, we exited the year with 24 units and that's already up two more so far in the first quarter?

Right.

Okay. Now the other thing I'm trying to struggle with -- you know what, I'm going to leave that for now in terms of -- you already gave the breakdown in the other units. You had 13 oil fired and then nine other -- kind of the waste treatment in those other types of units.

That's correct.

The seasonality -- how should I think about the seasonality in FUEL CHEM?

FUEL CHEM seasonality comes by a different ways, Shawn. First, when we announce a project it usually takes us about six weeks to get that up and running. We have to do the model, we'll show the client the model, agree to where the injectors are going to go, have the injectors delivered and installed and then get it up and running. And we have to work with the client for when they'll have a -- it doesn't take much of an outage, but for safety reasons most clients would take an outage to install the injectors in the boiler.

Now, once you're in there you're injecting when the unit is running. Most power plants will come down for a major outage typically once a year. Typically those happen in the spring or fall. There's a lot of them in the spring, as they get ready for heavy summer use they'll try to phase them down. It's like a stock car race where you're coming in and there's this busy three to six week period where it's all hands on deck and everybody is working 24 hours a day and then you get the unit back up and running and you try to time your outages so that you can't have all your units down at once so there's an intense scheduling situation.

When those units are off-line we're not pumping any chemical. Our programs are -- on the FUEL CHEM side are paid on chemicals delivered. So that's why it causes a seasonality. And it's especially -- summer will be a heavier impact than fall because the folks really are trying to tweak their units up to get them ready to run hard during the summer.

Okay. So that would basically be Q1 and Q3?

Yes. It depends on the units. Some -- there will be a little bit in Q1 and a little bit in the first part of Q2, and then Q3 and the first part of Q4. And which of those quarters is more heavily impacted really is derived from the schedule of clients. So I might say it would be the first quarter which I think it will be this year that will be down a little bit more and the second quarter will be better because folks are anticipating a heavier summer load earlier.

So then the other thing to think about, going right back to your press release here is that you have a bit of an impact when we get a milder winter and the plants are off for a little bit -- or not quite utilized as heavy which is what happened in the fourth quarter?

Yes, but you know it's making -- and a number of them took outages early this year and weren't anticipating this really heavy winter that evolved. This may turn out to be a below normal winter overall for the country. I'm sure tired of it here in Chicago, I can tell you that.

I understand. Last point on that issue is in terms of the fourth quarter -- you haven't seen any statistics in terms of overall plant utilization plant activity have you? In other words, relative to a normal Q4 it was down 10%?

No, no, no, nothing like that. What is impacted though are the oil units which are down substantially, as we talked about. They used to make up a large portion of our revenue stream for FUEL CHEM. Those units right now with oil at $60 a barrel, you're probably talking breakeven fuel cost for an oil fired unit is probably mid 60s, $65 or so. An average market during the year where most of these markets like PJM or the Midwest ISO or Southwest Power Pool are going to be in the $50 or less kind of range. Now it peaks in the summer and the winter, but most of those units have been way out of the money. If they tried to operate the price they would get would be less than their fuel price that they were consuming so they won't operate.

Got it. On the APC side of the business, it sounds like from an earlier question in terms of seasonality not too much. There's a little bit, you're looking for a better back half, but it's fairly linear throughout the year?

Yes. Right now the NOx market itself for when the units have to comply is seasonal. The ozone season by reg runs from the 1st of May until the end of September. Because ozone is created with NOx and volatile organics and ultraviolets in the presence of higher temperature which is a summer phenomenon. The new regulations like the Clean Air Interstate Rule and the Clean Air Visibility Rule are going to require year-round NOx compliance starting in '09.

So the regs are going to take the seasonality out of it here in another year or so. Right now as people are signing up for new NOx controls, they're really targeting the '08 season, it's too late to order a NOx control for this May 1st. But they're ordering them now so they can get them delivered in the winter and then installed and ready to go before the '08 NOx season.

All right, got it, okay --.

Shawn, you cut off. Operator, are we still on?

Rich Wesolowski, Sidoti.

Good morning. Forgive me if this came out a little earlier in the call, but how many different customers do you have on the 26 TIFI units on coal-fired utilities?

Approximately 15, 16.

And the awards that you expect to see over the immediate future, two quarters say, are those at all unevenly weighted between the existing customers or new customers?

We hope to have some new customers in there, but we really like it when -- and I think you're going to see number of existing customers who've used it on one unit and are going to more broadly apply it on other units in their fleet and at the stations involved. But we work real hard on both trying to acquire new customers for those as well as -- and I really can't give you a breakdown, I don't know how it's going to turn out. Until you sign them it's not a done deal.

Okay. And secondly, is the regulatory pressure that the U.S. utilities face that would incentivize them to buy a product like Ultra, is that as great as the regulatory pressure faced by Chinese power generators?

Well, there's no today regulatory -- well, I say no -- there's little regulatory push for Ultra today which is a safety issue, it's a huge safety issue. Now the proposed regulations by the homeland security with regard to the transport of anhydrous and aqueous ammonia in or around major cities is going to have a huge impact. Those are just proposed today and are being commented on by rail -- CSX, Norfolk Southern and the rest, but are going to have a really big deal.

In China, when they recognize the significant safety issues of handling and transporting with the centralized major government there, they just issued an edict and said you're not going to have it around the big cities, within 90 kilometers around those big cities changeover. So it reflects a little bit -- they moved quickly once they identified it as a major risk. Here in the U.S. I think we've been more accepting of the transportation of hazardous materials in and around major cities in the past. Personally I think that's going to come under reconsideration here in the U.S.

Okay, thank you.

Preeti Dubey, Thomas Weisel.

Most of my questions have been answered, but there is one question that relates to new orders in the Air Pollution Control segment. I tried to calculate what the growth in new orders were this year as compared to last year and I get (indiscernible) something like 15% growth in new orders, that's for the domestic market. Now when I look at 2007 I'm trying to understand what is your expectation for the growth in new orders in the U.S. market and do you think you will be able to match the kind of growth that you had in 2006 in 2007?

I think that that growth on our APC side is going to be substantial in the U.S. and oversees, especially China. China will be our primary -- although we hope to win some in Europe, I think there are some good opportunities out of our Italy office in the European market. But mostly in China and the U.S., if we didn't believe that we wouldn't have given the guidance that the majority of our '07 revenues we anticipate are going to come from the APC side of the business.

So you made a comment early in the call that you expect a strong first half of contractor work. Just a clarification here, is a large chunk of these orders in the first half going to be coming in from China or are you expecting the mix to be kind of 50% U.S., 50% of your international?

I don't know what the percentage is but we were expecting both. I won't characterize that as a 50-50, but we're expecting substantial orders on both sides of that.

When I look at the guidance that you have provided for the Air Pollution Control segment and counting the fact that you are expecting strong first half for new orders, just want to understand how critical it is for you to kind of have a really strong order growth in the first half of the year to meet with your guidance levels? In other words -- go ahead.

I think you're right on target in that once you sign a contract there's a certain period -- six to nine months is what we typically said -- to work through those revenues. So if they're going to contribute substantially to 2007 revenue recognition we're going to have to sign them in the first half or at least the first 60% of this year.

Okay. Then in the FUEL CHEM segment can you tell me what the total number of demonstration related clients were at the end of the year?

Yes, at the end of the year -- not demonstration but FUEL CHEM clients -- were, and we lump all of those together, but there were 24 all total, 22 domestic U.S. coal units online with that and two in Italy. Since the end of the year we have added two more U.S. coal utility units.

Okay, all right. I just want to understand the market that you mentioned specifically related to SO3 plumb reduction markets, which is kind of related to improving efficiency of activated carbon in controlling mercury. Is that a market that you see kind of happening in 2007 or that's a market that kind of has more potential going forward in 2008 and 2009 but not really something that will add meaningfully to the revenues and 2007?

Yes, SO3 mitigation, just to stop plumb-related issues -- and I had, fortunate or unfortunate as the case may be, the experience of experiencing that firsthand when I was leaving the AEP fleet and we had the first major SCR installed and we experienced that. Your option -- there's no tonnage allowed. You have to get it down to where it can't be seen and you can either fix it or shutdown or go to jail. So units that are faced with that have to fixed.

Now on the SO3 related issues around mercury reduction, that market will start to come in as regulations kick in for mercury removal and those are coming in in 2010, those first ones start coming in. So that is probably a year or two away before there will be a major push to mitigate SO3 to enable activated carbon if that's the technology of choice. If a utility has an SCR and a scrubber, that will probably accommodate most of the mercury mitigation that they're going to have to do.

But the addition of that SCR with any higher sulfur coal is probably going to require mitigation of SO3 from a plume point of view. So I think the SO3 mitigation, whether it's for activated carbon facilitation, mercury removal or to mitigate SO3 created around and SCR, are going to be significant for us and we're real excited about those opportunities.

Thank you.

Michael Carboy, Signal Hill.

Just one last question here. You've got so much ground to plow here in terms of not being fully penetrated in the U.S. or the international markets, yet you're talking about sort of new product development. Tell me about how you sort of balance the Company's intellectual power in terms of developing new products versus just going out and getting the block and tackle business done of winning new contracts and winning new customer relationships?

Right. And good to talk with you, Michael, again. We have at our R&D center two extraordinary talents in Dr. Bill Sun and Chris Smyrniotis. Dr. Sun holds about half of our patents on the Air Pollution Control side and Chris was one of the founding fathers of our FUEL CHEM side. And they lead our efforts on those two productlines on R&D efforts. And they also assist in selling.

One of the things that we're trying to do is to listen to our clients, Michael, and to be out there and as we talk to clients we want to know what do they need? They may have an issue, for example, with SO3 and they'd like to sell slag, but their scrubber might be undersized a little bit and they'd really like some SO2 trim reduction. When we hear that sort of thing from a client we're going to go off and try to see if we can find a solution because that's a market need that we're going to try to help solve.

So we're not trying to be off in the side in a vacuum thinking of products that somebody might need. We're really trying to listen to our clients and develop solutions. We want to stay ahead of everybody else in this business. We think we've got a running start in most of our areas and we're going to expand that lead if at all possible. So I think it's at both ends. We really cannot just sit there with our existing products and services and not move rapidly with the market.

And with regard on the FUEL CHEM side, you've talked before in the past about sort of a total market opportunity here in the U.S. of I believe it was about 1400 units. Could you take a crack at sort of segmenting that unit population into those that you think really are targets versus those that are long shots and how would you think about it in terms of how does that fleet segment -- smalls, medium and large?

What we had said, there are roughly 1500 units out there today, coal utility units and that nobody gets all of them. So if you figure that 1000 would be a reasonable target we've talked in numbers like that. The reality is that slag is an issue for just about everybody, although some folks are able to accommodate better than others and they may be burning coals that the unit was specifically designed for. So they may or may not have a need in that regard.

Some units may not have a need right today, but as soon as they put an SCR on they're going to have that need. Again, in a CO2 constrained world it's real hard to get CO2 reduction, there's not very many ways to do that. I think our FUEL CHEM approach to where we can get 1%, sometimes a little more, reduction of CO2 and fuel cost at the same time, that's pretty significant.

It's because we have a variety of applications that can solve a lot of different needs that people have that we believe that the total U.S. coal utility unit market is our playground. We know that not everybody is going to need but we see according to how the market evolves, I really think it's reasonable to believe that two-thirds of the units out there could be potential clients.

Okay, thank you.

I hope that answered your question.

(OPERATOR INSTRUCTIONS). Shawn Boyd, Westcliff Capital Markets.

Since I got cut off before I figured I'd give you one real easy one this time. Just on the guidance for next year, what's your tax rate that you're assuming?

It will be a 38% effective tax rate.

All right. And the point on the options is you've got $0.12 a share in there. So if I really wanted to back them out, basically it's $0.53 to $0.58?

That's correct.

All right. And this year you had roughly $0.04 after-tax and options?

After-tax, that's approximately right.

Great. Thanks a lot, guys.

Jesse Herrick, Merriman.

I actually got cut off as well, so I thought I'd throw one more question at you.

That was on purpose for you, Jesse.

Thanks, Vince. That's great to hear. I was actually just wondering -- we focused a lot on the domestic market and the Chinese market. I kind of wanted to just touch on the opportunity in Mexico and perhaps India as well and just what kind of an issue did you guys have in place there?

Well, what we wanted out of our Mexican market was to demonstrate the effectiveness of our technology on cleaning up those units. And it's been extraordinarily effective. It's met our expectations down there in a big way and the clients are seeing a dramatic improvement. Literally within days of turning us on the plant workers were coming up and saying, wow, the sulfur smell is gone and the plume is -- you can't see it anymore. And it was this big brown or blue cloud according to which way the sun was shining that emitted from those.

I think that sort of proof is in the pudding that we were well on that heavy sludge fuel that they're burning and is burned in a number of countries, not only Mexico, is something we had to do before we would get market acceptance. Again, we think in South America, perhaps Brazil and some other areas there's keen interest and at further deployment in Mexico.

In India, again we think that that's going to be a primarily FUEL CHEM market for us for the foreseeable future and we hope to get something going -- just like Mexico, what you really need is one project there that gets going, people there are going to see incredible results. And as soon as they do so we believe that market will expand. But those are not the only countries we're after.

You might see us go into Saudi Arabia or Indonesia and a number of other places that we've not mentioned in the past and I wouldn't be bringing up now if there weren't significant opportunities there. So we're really trying to push hard. The team is pretty excited on the sales side. The folks out of our Italian office are fired up and looking at broad international markets, especially with their ability to monetize CO2 benefits.

Okay. And do you have any idea of as far as timing or size of the --?

No, every time I keep saying it -- those markets can be big, what you really have to do is get that first one in there. Once you get the first one in there and it's a success that just breeds success. So the real crucial thing will be watching for us and we'll announce it, when you see us start announcing wins in these areas, those are going to be awfully important.

Okay. How about just as far as sort of the sales effort. I know that you guys have been really ramping up in China. But for particularly the Mexican market, do you guys also have people in place for that?

Yes, we've got a distributor down there that's in country that's working hard and its great relationships. Our business model is a little bit -- how we approach it for marketing is a little different in each one of these countries and in Mexico we have a distributor relationship with local companies down there.

All right. Well this has been a pretty lengthy call so I'll let you guys go.

(OPERATOR INSTRUCTIONS)

If there are no other questions -- are there any other questions?

It appears we have no more questions in queue.

I'd like to thank everybody for your interest in Fuel Tech and we look forward to making these projections happen. Take care and have a nice day. Bye-bye.

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