Fuel Tech Inc (FTEK) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 Fuel Tech Earnings Call. My name is Jeremy and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Tracy Krumme, Vice President of Investor Relations and Corporate Communications. You may proceed ma'am.

Thank you, Jeremy. Good morning everyone and welcome to Fuel Tech's first quarter conference call. By now, all of you should have received a copy of today's release. If you have not, please call 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 these results to differ 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 Web site 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 everyone. We appreciate all of you joining us on this call. Our results for the first quarter of 2007 includes $16.3 million in revenues that's down 5% from the $17.1 million in the first quarter of 2006. Net income was $0.8 million, or $0.03 per diluted share, down from $1.4 million, or $0.06 per diluted share in the first quarter of last year.

Now, as we look at the details of this quarter's results, we find our capital projects, our Air Pollution Control segment, have revenues of $8.6 million versus $12.4 million in 2006. Now, while this is a substantial decrease from last year, it is in fact not significantly out of line with our business plan expectations for this segment for the first quarter. The APC business segment is by its very nature lumpy, as projects are signed and then worked through. As we had looked at our backlog of existing signed contracts and the expected project wins in the first quarter, we had anticipated a slower start to the year in this area. Our expectations for this segment are for significant growth throughout the year and we are encouraged by the $8.9 million in new APC contracts announced in the first quarter, which was the best ever first quarter for our Company.

In contrast to the typical lumpiness of our capital projects business segment, our specialty chemical business segment, known by the trademark FUEL CHEM name is generally characterized by consistent revenue streams. Now, while our first quarter results of $7.7 million were up 61% over last year's revenue of $4.8 million, these results were considerably below our business plan expectations. To understand what happened here, one needs to remember that our clients use our FUEL CHEM programs only when their plants are operating. When our clients shut down their plants to do major maintenance, then our FUEL CHEM applications are also shut down. In the first quarter, almost one-third of our operational FUEL CHEM utility coal units shut down for significant outages, which reduced our expected revenues by about $2 million. This impacted our profit significantly too as this business segment as a relatively high margin.

Since a portion of our direct costs for these programs such as the salaries of our operational teams at each plant continues even during outages, this further depresses our corporate margins. In addition to all of this, we also had one significant program (inaudible), which ran through much of the quarter, but whose success was not declared until the first part of April. This $300,000 (inaudible) success will be recognized in the second quarter, but has the impact of moving these revenues and profits out of the first quarter and into the second. A really good news from all of this is that FUEL CHEM business segment is off to a great start overall. These outages, which were unexpectedly early for us, would have been taken sometime during the year. So, the effect is expected to be generally one of timing.

Our contract announcements so far this year include six utility coal units and two biomass units. Now, several of these new applications will be for SO3 mitigation, which tend to yield higher revenue applications. This is the best first four months of announcements we have ever had in FUEL CHEM for coal utility units, and our progress so far in 2007 has already exceeded, well exceeded that for the full year of 2006. As we look at the geographic breakdown of our revenues, our foreign revenues were $2.3 million, down from $4.2 million in the first quarter of 2006. Now, this is on the APC side of the business, and largely reflects the latter stages of our two major China contracts, which were signed in 2005, which were being worked in 2006 and are now being installed. We are very pleased in the first quarter of this year to have signed two new APC contracts for ULTRA projects in China, which are on a fast track status to be done this year.

The future of our Company appears bright. On the APC side of the business, our proposals and prospects have never been more plentiful domestically, or overseas especially in China. Our FUEL CHEM business segment is one where we finally appear to be achieving the utility coal unit market acceptance that we have long sought. Now, the task ahead of us is to translate all this business potential into signed contracts in both areas. Now, I would like to turn the call over to our Chief Financial Officer, Vince Arnone, to further discuss the financial details of our results.

Thank you, John, and good morning, everyone. As John mentioned, net sales for the first quarter were $16.3 million, down 5% from $17.1 million in the prior year. Net income totaled $0.8 million or $0.03 per diluted share compared with $1.4 million or $0.06 per diluted share in the prior year. The first quarter results include $0.9 million in stock-based compensation expense versus $0.2 million in the year ago period. This increase is due principally to the value of stock options granted in 2006. Additionally, the first quarter results reflect $0.4 million and $1.1 million in income tax expense, virtually all of which is non-cash.

Net sales for the NOx reduction technology segment were $8.6 million and $12.4 million respectively for the quarters ended March 31st, 2007 and 2006 while revenues are down from the prior year due primarily to the winding down of two NOx reduction projects in the People's Republic of China, which were signed in 2005 and which contributed significantly to revenues in 2006. This segment's performance was in line with our expectations. As John noted, we had contract announcements of $8.9 million in the first quarter. Our backlog is approximately $13 million at the end of the first quarter, a slight increase from year-end. This segment is positioned well to capitalize on the next phase of increasingly stringent U.S. air quality standards, and interest in Fuel Tech's retrofitable suite of technologies, both domestically and abroad, has never been greater.

With the compliance for the Environmental Protection Agency's SIP call regulation beginning to wind down, utilities and industrial facilities across the country are planning for compliance with the Clean Air Interstate Rule, the Clean Air Mercury Rule, and the Clean Air Visibility Rule, which take effect in 2009, 2010, and 2013 respectively. Thousands of utility and industrial boilers will be impacted by these regulations and Fuel Tech's technologies will enable utility and industrial boiler owners to attain compliance.

Sales for the Fuel Treatment Chemical technology segment were $7.7 million for the quarter, versus $4.8 million in the prior year. This 61% increase is indicative of the continued market acceptance of Fuel Tech's patented TIFI, Targeted In-Furnace Injection technology, particularly on coal-fired units, which represents that largest market opportunity for the technology domestically and abroad. While year-on-year growth is substantial, growth in this segment did not meet our expectations, as revenues were hampered by utility maintenance outages in the first quarter of 2007, which as John mentioned, reduced revenue performance by approximately $2 million. In addition, revenues and gross margin were negatively impacted by approximately $300,000 as risk share revenues related to a successful demonstration that commenced in the first quarter will be recognized in the second quarter.

The outlook for the Fuel Treatment Chemical product line is superb. Thus far in 2007, Fuel Tech has added six new coal fired units to its customer base, bringing the total to 30, and that represents a 25% increase in installed base. The increased utilization of higher slagging coals, such as those from the Powder River and Illinois Basin areas, the emergence of the important SO3 mitigation market, and the increased global focus on the reduction of greenhouse gases all bode well for incremental growth in the future. Fuel Tech's FUEL CHEM program offers numerous operational, financial, and environmental benefits to owners of boilers, furnaces, and other combustion units around the world.

The gross margin percentage for Fuel Tech for the quarters ended March 31, 2007 and 2006 was 45% and 47% respectively. The gross margin percentage for the first quarter for the NOx reduction business decreased to 42% from 44% in the prior year due to the mix of project business. For the Fuel Treatment Chemical business, the gross margin decreased to 49% in the first quarter of 2007 from 55% in 2006. This decrease is due to the timing of revenue recognition on cost share demonstrations and to the loss of some leverage on fixed cost related to the utility outages noted previously.

SG&A expenses for the three months ended March 31, '07 and '06 were $5.9 million and $5.4 million respectively. This increase is predominantly attributable to the recording of $0.9 million in stock compensation expense in accordance with Statement 123R versus $2 million in the prior year as I had noted previously.

$0.2 million.

Versus $0.2 million in prior year as discussed previously.

R&D expenses for the three months ended March 31, 2007 and 2006 were $0.6 million and $0.4 million respectively. Fuel Tech continues to pursue commercial applications for its technologies outside of its traditional markets and the development and analysis of new technologies that could represent incremental market opportunities.

The increase in interest income in the first quarter versus the prior year is driven by higher average cash and short-term investment balances versus those experienced in the prior year. And as noted previously, net income for the first quarter ended March 31, 2007 reflects [0.4 million] in income tax expense versus $1.1 million in the prior year, virtually all of which was non-cash.

The balance sheet continues to show significant strength resulting from the leverage of Fuel Tech's business model. At March 31, 2007, Fuel Tech had cash and cash equivalents and short-term investments of $31.6 million and working capital of $42 million versus $32.4 million and $38.7 million at the end of 2006. Operating activities used $1.3 million of cash in during the three months period ended March 31, 2007 primarily due to the change in working capital from year-end.

Investing activities generated cash of $7.3 million during the quarter, as the decrease in short-term investments provided cash of $8 million, of which $0.7 million was utilized to support and enhance the operations of the business principally for equipments related to the Fuel Treatment Chemical technology segment.

Fuel Tech generated cash related to the exercise of stock options in the amount of $1.2 million. Of this amount, $0.5 million represents proceeds derived from the exercise -- price of options exercised in the first three months of 2007 and $0.7 million represents the excess tax benefits realized from the exercise of stock options in the first three months of the year.

Taking as a whole, business activity is more robust than ever before. While the first quarter results did not meet our internal expectations, we reiterate our prior guidance for 2007 and we expect revenues to range from $90 million to $95 million for the year. The NOx Reduction Technology segment is expected to generate $50 million to $52 million in revenue while the Fuel Treatment Chemical technology segment is expected to generate $40 million 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, and 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. Now, with that, I would like to turn the call back over to John.

Thanks, Vince. In summary, we are off to a bit of slower start than expected this year, but our prospects for the year we believe still remain excellent. And with that said, operator, can you please open the line up for questions?

Certainly sir. (OPERATOR INSTRUCTIONS). And sir, your first question comes from the line of John Quealy with Canaccord Adams. You may proceed.

Hi, John.

Hey, John.

Good morning folks. Can you hear me?

Yes.

Yes, we can.

Great. First off, on the FUEL CHEM side, I just want to make sure I get this correct, in terms of the numbers that were shut down, did you say a third of the units were shut down, or the third of the volume was shut down?

Third of the number of whole utility units, which is what we focus on here were shut down for various maintenance reasons, mostly for the early outages to prepare for the summer. Yes, a third in the -- just the shear numbers of units. But our normal cash flow from those units that depressed revenues in that area about $2 million. And then you had the other $300,000 risk share that got completed like the first week in April, but that becomes the second quarter.

Okay, and a follow-on to that, so with a third of the units were down, can we assume that some of the higher volume units were still up because your revenues were only down about 8% quarter-on-quarter? See the point I am trying to make here?

Yes, it's hard to --

Your revenue is still pretty good.

It's hard to do a full quarter-on-quarter there and a number of the units that were down were actually of the larger revenue, couple of those were our largest revenue customers. You had some others in start-up. But, we had counted on those kind of start-ups, the ones that were down were -- we didn't fully expect that mainly to come off that early.

I think you talked about the best four months or three months ever for coal fired FUEL CHEM order flow. But, can you talk a little bit at least qualitatively on the pipeline or the trials that you have ongoing? How does that pipeline look vis-a-vis previous periods?

It's never been more robust. We have got six that have been announced this quarter, this past quarter, and that are either already starting in that trial or start-up period. In addition, there were some that were announced at the end of the fourth quarter. We had at least one in the fourth quarter of last year that was just doing the start-up in the first quarter of this year. So, we haven't yet seen the revenue impact from all of these units and we won't even in the second quarter. Some of these are going to be late second quarter kind of start-ups and they are going to contribute more in the third quarter for revenue there. But, we have never had so much activity and so many discussions still ongoing with potential new clients.

And John, the mix of those clients lately, well, the last release seemed to be a brand new customer, but lately in the last quarter, it seems like you had decent penetration of existing customers. Can you talk about your focus right now? Obviously, my guess is you would like all of new customers to come on as well as existing, but is there a preference right now or a focus on existing penetration versus just brand new clients?

No, really, John, it is -- we will take whatever we can get and we are trying on both fronts. I am encouraged that we have had now more than one customer. In fact, our largest customer has recently allowed another utility to come down and visit their facility. That customer is using us for SO3 mitigation, and I think that visit helped seal at least two of those earlier announcements we made in the first quarter for SO3 mitigation results. That is a great step forward as we get more clients willing to let other follow competitors if you will and that electric utility market come in and take a look at our systems in operation and give their own personal testimonials, and that is a huge step forward. We have always had the one client out in Oklahoma that's done that for the last six months, but this is a new one, and that helps get that market acceptance.

My final question on FUEL CHEM, in terms of activity internationally and for non-coal units, can you comment in terms of the pipeline or the trial pipeline? We have chatted in the past about Asia as a potential FUEL CHEM market. You have had some great success recently in Mexico on the oil fired market. Can you just give us an update on what the international landscape looks for you as we move through '07?

In the FUEL CHEM side of the business, I think the major area that we are going to be focused on internationally is China. India would probably follow that. I know we got Mexico going on. But, we will have not met my expectations personally for the Company if we don't have one or more applications in China running this year. So, I want to get the Chinese operation of FUEL CHEM up and going. That is a huge market potential for us. That's big or bigger than the U.S., and the current prospects and discussions with clients including recent visits here in Batavia by major clients on that subject have been very encouraging.

Great. My last question. In terms of the overall guidance in relation to the APC business, backlog picked up a little bit, still a very lumpy business. As you look forward and give us that $50 million to $52 million of guidance, can you comment on how quickly you can turn an order for APC? And then secondly, what you are hearing from your customer base, clearly a lot of good macro related to clean coal on the NOx side in the U.S., but if you can just give us an update on how you look at that opportunity especially within the context of your guidance for the year now that we are in May?

We can do. We, if you note, we had like $46.5 million in revenue last year on the APC side, and we only guided to 50 to 52. We didn't guide up significantly on the APC side. We have looked at this earlier. Most of our guidance growth, the vast majority was on the FUEL CHEM side, which is where we are experiencing it. Our APC side of the business, the prospects and the discussions and negotiations with clients still look very strong for announcements between now and the end of the summer. That's when we really need to make announcements and contract signings. We can -- we typically have said that six to nine months is when we would work off a contract signed.

If you look at, installing equipment say next spring to meet the Ozone Season starting in May 1 of '07, utilities would typically want that equipment delivered by around March 1 to be in those spring outages. If you back off from that six months says you should be signing the contract Septemberish. On nine months, you should be signing it in June. There is really very little reason for a client to sign with us early and they don't. They wait until the last minute to sign the contract. So, we had expected the first quarter for -- actually first quarter five months of this year to be our slowest period. Our real goal is between now and say it again the September to make significant signings. And if we get that, we can recognize revenues -- significant revenues from a project even signed at the very end of the third quarter. So, we wouldn't still be holding our guidance, if we didn't believe we were going to achieve that. But, until you sign a contract, it's not signed, and we clearly, even with backlog up a little bit, looking at revenues achieved this year and the $13 million in backlog, we don't have the contracts under signature today to achieve those results. We got a lot of work to do on that side, but it looks real promising.

And Vince, I am sorry, two last housekeeping questions. First, any thoughts on a cash flow of operation number this year in calendar '07? And then, secondly, you gave us a stock comp impact per share, that was a little bit higher than I thought this quarter, is it basically straight line from here on out, or does it vary quarter to quarter?

I will answer your second question first, it does not vary, what I would call, significantly from a base amount quarter to quarter. There is one exception, okay. Quarters one, three and four will be similar in nature. Quarter two, we have an annual grant of options to our directors that does it in accordance with our annual meeting, and those grants vest immediately. So, you will see an uptick in stock comp expense in the second quarter of the year, okay. And then, quarters three and four will tick that down again, okay. And what was your first question again, John, I apologize?

Any thoughts on the cash flow generation in calendar '07?

Yes, we anticipate, fully anticipate significant positive cash flow. At this point in time, I wouldn't be in a good position to give you an approximate number as of today. But, we anticipate if we come anywhere near our guidance figures and we expect to do that, we will generate significant positive cash flow this year.

Great, thanks very much guys.

And your next question is from the line of Michael Molnar with Goldman Sachs. You may proceed.

Hey guys, how are you?

Doing good, Michael.

Good. Just a couple of quick ones. On the FUEL CHEM business, obviously, you got a good amount of orders in and I can definitely appreciate that it will be lumpy. When I do an average over say the last eight quarters, it looks like you are signing on average maybe 2 to 2.5 a quarter of new contracts or subscriptions. Is that the way you kind of think about it going forward? I am just trying to think going forward over the next, over the next four quarters, are you looking at ten new units? I know it will be lumpy quarter to quarter but would that be reasonable, is that unreasonable?

Michael, are you talking about ten units for the year?

New units.

Ten units for the year?

Yes, let's say, over the next four quarters, how many would be signed?

Well, we signed six, plus two biomass units in the first four months. I am hoping that pace will pick up. Now, you never know where that goes because you have to get it in the utilities budget. [Further] or not, our utility is going to have a blue plume from SO3 when they start these SCRs up, starting up now. Usually, when you see something like that, there is a cry for help quickly from the utility. So, some of those can come out of the blue at us very quickly, but I think we are beginning to see market acceptance. We have had a much better, much better first quarter in signing contracts than we had anticipated when we prepared our business plan.

Okay. And that's where I am kind of getting, I know you had signed six now. Before that, you were one, zero, two. It's just lumpy. So, I am trying to think of the next four quarters, not necessarily the year.

I wish my crystal ball was clearer than yours, but it's not right now.

Okay.

There is a lot of good stuff, I would tell you that the real wildcard in that is how quickly we can really get that ball rolling in China, and we are doing a lot of work in that regard in the FUEL CHEM area.

Okay. And just the final question is, for the APC segment, did you say backlog at the end of the quarter was $13 million, I just want to make --?

Yes.

Great, thanks.

That's up a little bit over the end of the year.

Yes, thank you very much.

Thank you.

And sir, your next question from the line of Mark Tobin with Roth Capital Partners. You may proceed.

Good morning guys.

Hey, Mark.

Hey, Mark.

A quick question, kind of following up on John's on the APC, it seems like the execution of the orders, based on the guidance you are going to be back-half loaded, as far as executing those from a work flow standpoint and a capacity standpoint, if you will, are you prepared for that or do you need to add personnel?

Both. I think we are prepared for that. We are looking at -- we always look at where clients have entered into discussions with you and have shared plans and have indicated their planning on giving you work. And then, we will try to start looking at our staffing and our work load around to make sure we can accommodate that. Right now, we do not appear to be resource limited, but I fully anticipate that we will be adding -- we have one or two engineers here and there along as we grow, and our staffing plans and our equipment manufacturing capabilities all look to be fine. In fact, if there was a single area that we will be strained in, but we will succeed in, is actually FUEL CHEM, if this things picks up like it might. We are putting, we have upped our number of units on the shelf from two to six, but -- because we want to be ready to go when a client signs up for it. But that would, I guess, be the one area that I would say we are focusing on the closes. On the APC side, right now, it looks like we can meet what we think we might get.

Okay. Can you provide some more color on the relative delays in the APC orders? What's going on out there that's --

Well, I think it's mostly just what -- when John was really asking the question about contract work off, the other implied part of that question was, okay, when should we expect clients to be signing up for a project? And the vast majority today of our work is SNCR, selective non-catalytic reduction units, and ULTRAs. And both of those don't take more than -- we can typically do one in six months if we need to, nine months would be about as early as they will contract, and that's why you don't see a lot of those kind of contracts happening in the sign thing until about, to be honest with you, about June. Now, as we make some market penetration, which I hope we will, with our CASCADE technology, which tends to be a bit larger, then those contracts might -- would occur on a little different time span. That will be a bit more work and considerably larger revenue dollars from one of those awards. But right now for us to achieve our results, we really need to sign contracts between now and the end of the summer, basically. That's when we expect to do most of our contracts signed. If we haven't done it by the end of -- we haven't done it by our second quarter call in August, then we have got some -- we have to take a relook.

Okay. And what is the status of the CASCADE demonstration that you have going on?

It went fine and it met our performance criteria, and results that project has been hampered by the contractors because it was a multi-contractor, multi-technology demonstration, but our results achieved what we thought it was going to, and we are pushing that technology hard.

Okay, thank you.

Okay, thanks, Mark.

And your next question is from the line of Jesse Herrick with Merriman. You may proceed.

Hi, Jesse.

Hi, Jesse.

Jesse, are you still there?

I am sorry, Debra Fiakas is on the line.

Okay. Hey, Debra.

Hi, Debra.

Thank you. I was just hoping to maybe ask a couple of clarifying questions. You mentioned a 0.9 figure in terms of stock compensation, is that a pretax number, you have [583] as the post-tax?

Yes, 0.9 is a pretax figure.

And the pretax from the year-ago quarter results was 0.2?

That's correct.

Okay, very good. And then just to sort of summarize, the number of FUEL CHEM installations that you have in total, the coal fired has reached what number now?

Our number of coal fired utility customers has reached 30; 28 in the U.S. and 2 in Italy. Just for grants, our number of total installed customers of all kinds, oil and like the biomass units in Italy, the total number is 61.

Is that in the U.S. and Italy?

It's around the world, wherever.

Okay, very good. So, there are in the U.S., in Italy, and what are the other countries?

Well, our three units in Mexico, those are oil fired units that we have talked about, those aren't coal. We have Jamaica and I think those are the ones that we have -- in Puerto Rico, and I guess that's in U.S. but -- and the others would be in Europe.

Excellent. And then, just go back to this timing issue of the earlier than expected apparently shutdown -- or plant shutdowns for the coal fired units here in the United States, you are not expecting a similar type of situation in the second quarter, or do you anticipate that another third will -- another unusual number will be shut down in anticipation of this summer?

Debra, there will be some. They typically take outages in the March, April timeframe. A number of them started in February, which was -- what was surprising about that. We still have a few down. The second quarter would be probably the next lowest quarter for us on the FUEL CHEM side, and then the third quarter will by far on a way be our strongest quarter, and then the fourth quarter should be pretty strong on the heels of that third quarter. So, that gives you a little bit -- it's a little bit early right now. And the clients don't -- for competitive reasons, they don't preannounce on their coal units when they are going to come offline and they keep that pretty close to their vest.

So, there were no unusual circumstances. Now, of the third -- the number that were offline this quarter, are they back online or are these outages extending on into the second quarter time period?

Well, I think they are all back online. Some of them did cross into the second quarter, which was April 1. So, there were a few of them that crossed into the second quarter, but those units are back online today.

All right, very good, thank you.

And your next question is from the line of Michael Carboy with Signal Hill. You may proceed.

Good morning, ladies and gentlemen.

Hi, Michael, how are you?

Hello, Michael, how are you doing?

Terrific guys, and you as well I hope. Let's talk a little bit about the typical size you are seeing for FUEL CHEM deals going forward, with the move toward SOx mitigation?

The SO3 mitigation is a larger typical application. As a side bar, actually when you apply it with a little higher amount, going after the SO3, you actually get even better results on slag and on efficiency gains, the units that are usually in our stuff, the most -- are benefiting the most. But, we had two announcements this past first quarter through April on SO3 mitigation. One of them was the new unit -- one of them actually was of -- we tend to give you a feel for our -- I think at a conservative approach, we had an older customer from the early days of FUEL CHEM, which -- it only goes back to about '03, but they -- we had been applying partially, Michael, in the lower [boiler] of two units, and to be honest, only about 200,000 a year in revenue from those two units. So, we counted that as one, and it was on the low end of even one. They have come back -- they had announced earlier the one unit that we had announced on SO3 applications this year, and they come back and I think our announcements called out for two; we counted that as one addition. To give you a feel for the revenue difference, that went from $200,000 each to, I am guessing, it will be $1.5 million each. So, it went from like $400,000 to $3 million for those two units. So, when you go for an SO3 application, and that's an annual kind of expected revenue dollar, it jacks up pretty quick.

Okay. And if we think about the backlog that was established here in Q1, that was roughly $12.8 million of backlog, we have talked before about the opportunity for those contracts to actually scale up in size as the year goes on. Do you see that being -- continuing to be the case or is that known backlog you have pretty much what you think will ultimately come to revenue from those specific deals?

With those specific deals, that's the revenue. But, we do expect -- we have hopeful expectation that some of our contracts that we are in discussions with clients for, will be of a larger size, that we will be able to bring under contract and put into backlog and into revenues, we will recognize significant portion of this year over the next four months. So, yes, some of our other applications other than SNCRs like some ULTRA applications and especially CASCADE are indeed a good bit larger in size, and some of the Chinese deals can be substantial even with CASCADE. And we have, we have never had so many proposals outstanding and discussions going on the Chinese side as we do right now. And they actually don't meet quite that same necessary contracting guidelines that we have here in the United States. But all times, the Chinese work on a faster pace, the two contracts we signed in the first quarter, most of that stuff is going to be done by mid-summer.

Can you elaborate a little bit on the -- you mentioned before the likelihood of CASCADE deals being, some may -- could take a little longer to unfold, but albeit at a much greater scope. Could you maybe put some numbers on those two parameters?

I can't yet, because we need to get a track record or some wins in that regard. But, those kinds of dollar figures, for example, I mean I can't give you anything specific, but a typical unit, call it 300 or 400 megawatts is going to be $10 million and if they had multiple units for clients, say, they wanted to put a couple or two to three on smaller units, bigger units, you might be talking somewhere in the $15 million to $20 million for one site. Well, that's considerably up from $5 million or $6 million, if you just put SNCRs on those.

Right, right. And then, sort of my last question following up on the prior listener's question, I think you had said, John, that you expect, did I hear you correctly in saying that you thought that the Q2 FUEL CHEM would be less than Q1, Q2 would be the strongest, and the Q4, slightly less than Q3?

No.

The outages would be less.

Yes, what I was trying to say and God only knows, tongues can get slipped in here (inaudible), what I was trying to say was that Q2, we are going to see some outages also. So, it will be depressed from a full run rate, revenue kind of stream. But I would expect, I sure hope it's going to be better than Q1. We don't give quarterly guidance, but it's in general, you kind of expect these outages to have been split between quarter one and quarter two. We solve more in quarter one than we had expected. Hopefully, we will see pure outages in quarter two. Quarter three is when you -- we would expect our strongest revenue stream, and then quarter four would be probably second in line to quarter three.

Okay. And last, we have talked before about trying to scale the business by using some sort of, shall I say, part time employees on the O&M side for FUEK CHEM, people who might have recently retired or left the utility customers that are known to them. Could you update us there as to whether you have actually had an explicit discussions with some of the utility customers, and are you comfortable that they are comfortable having people who might have left their operations, come back in, in a vendor capacity?

Actually, Mike, once they retire, the people can do, can be hired, and that is not unique. I mean almost every vendor, the boiler manufacturers and designers at construction companies do that. That's where you get your most experienced base. But, it's clients who actually love that approach. When you have that, you have somebody who knows the way around the plant, they know what's going on. And to be honest, we try to hire not only the part time technicians, but a lot of our project engineers on that side, we are actually trying to hire very experienced utility folks who can go back and provide consulting service basically as part of our program, and we are having extraordinary success in that regard with some clients, who -- the feedback is quite incredible. If you were to read the notes that I have read from our clients on the appreciation because we will go in there and help them in areas. They don't really have anything to do with us, but since that person is there, looking at efficiency from our point of view, we will look at efficiency in all kinds of other areas and offer them free advice and consultation as part of their program cost with us. There is nobody out there in the industry that does that. We think that is a huge leverage for us in keeping quiet even if somebody else had a technology which doesn't exist out there right now, but if somebody else were to come up with some technology that could approach our performance, we will say don't approach us in the overall value we bring to that client. And, Michael, on both fronts, on hiring the part-time techs and getting experienced utility folks to be more about the higher level project engineers, we think those are a huge success story so far.

Okay, thank you very much.

Okay.

Thank you.

Your next question is from the line of Jesse Herrick with Merriman. You may proceed.

Hey, Jesse, we lost you last time.

Yes, I'm actually here this time.

Yes you are.

Nice. I actually just wanted to clarify the $2 million depression in revenues on the FUEL CHEM side of the business for the quarter. Now is that $2 million lower than you were expecting internally, or $2 million from a max run rate?

That's $2 million from what those clients have -- if you took a look at their normal monthly revenue stream from those clients that were out during that period, and you just used their normal monthly revenue stream, that's the impact of the revenues in the first quarter from that.

Okay.

And the margins are on those and so some of those are big units, are on the higher end of the range.

Okay. I was actually curious just the way these FUEL CHEM units are installed. When you're treating slag or SO3, those are actually different. Are those two separate systems?

No, actually it is one and the same. We used to, maybe before I got here, the thought process was that FUEL CHEMs really were just slag applications and really applicable to the Power River Basin. Hopefully, maybe I've helped a broaden that view, I had personal experience while I was running [AEP suite] with needing to mitigate SO3 when we put in the first big SCR at Gavin, and the [mega-jocks] was something that we knew worked, and we tried it, albeit not economical because we didn't use a model or anything.

We looked at the results. One of the things I'd asked our team was to look at the results from our FUEL CHEM applications, and we saw dramatic decreases in SO3. We then had a client, (inaudible), and installed our FUEL CHEM program specifically for SO3 mitigation, and that particular client, the blue plume went away immediately. Then they're looking in their observation ports even during that 60-day trial period, and what used to be slagged-over tubes, were now bright and shining clean, and that client became an instant convert and actually installed us on other units at that station right away.

So, no, they are one and the same. You tend to have to dose up a little higher because the [mega-jocks] will not only interact with the SO3 in the blower and in the tube bundle, but it will actually react with it across an SCR and through the air heater, and to get that chemical reaction all the way through the air heater, takes a little bit higher dosage.

So, it is actually injected through the same port?

Absolutely. It is the same system and if a client is using us for slag control, they're not going to have an SO3 problem and vice-versa.

Okay. And then, moving over to the ULTRA projects that you guys are working on in China, you mentioned that those are sort of on a fast track. Now typically for the China projects, you guys have talked about sort of 12 to 15 months. What kind of timing can we look at for those two projects?

Be it done by late summer.

Yes. The equipment deliveries are actually scheduled for the July-August timeframe, so to John's point, these are definitely fast track.

Okay. Those things are moving very quickly, then.

And the difference is that the earlier ones that we signed in '05, that are national demonstration programs for those technologies, that the Chinese government is looking to, by the way, once they document the results that we've achieved, that the costs that we've incurred, they are using those to develop their rules and guidelines when they go in and prepare budgets and rules for their 12th five-year plan, which kicks in 2011. Those were new construction units, we had to wait actually on the units to finish being in operation.

These ULTRAs were systems that the Chinese had intended to use and have this ammonia. Once they have recognized the danger of that, it was a fast retrofit where they said, "Oops, you guys cannot go forward with the ammonia even though you're planning on it for those units." So, they hired us for kind of an emergency retrofit to the ULTRAs, and they are on an extraordinary fast track basis.

Okay. Can we expect that kind of fast tracking for ULTRA projects going forward?

Well, I hope not because that's a real strain, but not exactly, but I can tell you that clients' expectations are all over the board. Some clients give you early contracts, and then some wait until after the last minute, and expect you to move heaven and earth. And the supplier, you do your best to move heaven and earth. So, it comes in all shapes and sizes here. But, we hope that we don't have some quite that fast.

Okay. Now, is there a difference between the amount of time it takes to construct say an SNCR versus an ULTRA? Is it more intensive?

Not really. The ULTRA, there's different components, but it's about the same kind of timeframe. The ULTRA is actually a bigger vessel, it's a single vessel but without all these injectors, but the other side you've got more pumps and all the rest.

Okay. And lastly, we talked about the seasonality of the APC signings, saying that earlier in the year they typically won't sign. Do you see any sort of similar trend with FUEL CHEM or perhaps offset to a different quarter, or is that --?

It's still a little bit early. If you have a customer who is thinking about us and has visited somewhere else and they want to get it into their budget cycle, then you would expect contract signing in the first part of the year from those customers because they've got their budget approved now and utilities will be getting their final approval from their Boards of Directors, in like January of a year. So, they will be signing, like we have seen some of those.

But you have other situations like an SO3 issue that emerges and a utility needs you to be in there right away. Or, they're looking at switching to a new coal contract in their coal procurement. The coal procurement guys get a really nice, attractive offer on one of their bids, and oops, that has a higher ash content and some stuff that will cause them slag. Then, they're going to come at you very quickly with those kinds of needs. So, it's really all over the map. I wish I could give you a little better feel for that. But, we don't have a good feel for that yet.

Okay. I think that's pretty much it. I look forward to seeing you guys next week.

Thank you, and we do too.

And your next question is from the line of Paul Cheng with ThinkEquity. You may proceed.

Good morning, guys.

Hey, Paul.

Hey. Looking at your revenue guidance for '07 and it looks like for you to hit your mid-point of that range, now you're $2.5 million, you guys will have to deal about $25 million on an average for the rest of the year. And I'm trying to understand what's those catalysts will (inaudible) I thought you would understand that FUEL CHEM seems to be still going well despite the utility outage. But the guess from my perspective it looks like the next couple of months will be pretty important in terms of booking some orders related the various kind of regulation compliance that's going to kick into effect in 2009. Can you guys talk about what's happening on that front, that would give us a little bit of, I guess, better clarity in terms of how the APC (inaudible) improves that would help you meet the guidance range?

And you're right about what an average gets you there. But, for this year we never anticipated, and I would tell you that going forward, in future years if we grow like I want us to grow and we hope to grow, the years are not going to be like a monthly run, they are going to be ramping up with lower revenues in the first part of the year, up to higher revenues at the end of the year. Our business plan is not for a $25 million per quarter kind of ramp. We had anticipated all along that this year was going to be back-end loaded and that we've got a lot of work to do.

Now, to date, we're ahead of our expected contract signings on the FUEL CHEM side of the equation, and we're behind that on the APC side but not remarkably so. We always won contracts earlier, but the potential out there is in line, albeit may be a few weeks later than anticipated on the APC side. Now, it may or may not happen. Until you sign a contract it's all talk. But, we certainly expect a much, much better second half than the first half.

We fully understand the lumpiness of that business and I think within our model it's definitely a little bit more back-end loaded, but just kind of comparing the last three months or rather the last three quarters' average for the last year, it was about $19.3 and it just seems like we will have to grow revenue on a year-by-year basis using those averages, up about 30% (inaudible) backlogged that is still taking some time to trend back up, and we're just trying to see kind of how likely, how probable you'd be able to meet the guidance in kind of some light of what's happening in your business so far?

I got your question. The single biggest issue that helped the first part of last year was actually on the APC side. The second quarter in '06 was the strongest quarter, and that was really coming out of those contracts we signed in '05, at very strong, you have $15 million in contracts signed with China, and we have a lot of work going through. Our goal now is to build this business so that one contract signing is -- we're not so dependent on the one. Now you take it at however you get it. But, we didn't (inaudible) this being a ramp up from the first three in the lowest, all the way up to the fourth.

Paul, I don't know that I can help more than to say, we've got a lot on our plate right now, that we hope to bring to contract signature in the next few months, and if we do that, we will be fine at the end of the year. If we don't, we won't.

Well taken. And what would be some of those obstacles? I guess it seems there's some kind of more aggressive assumptions going on now. Can you talk about kind of certain obstacles that can prevent you from meeting those goals?

There's always stuff in signing. We had a, and this was last year, actually about mid-year, in China we had been verbally awarded a contract, a pretty major one, and right before signing, our competitor came in and offered an incredible deal to the client and the client turned around and switched. Anything can happen in contract negotiations when you're bidding and it's a very competitive market. Sometimes people try to buy market share on you. So, it's not ever a done-deal until it's a done-deal, even on stuff that we think we have in the bag.

But, we've got a lot of stuff that we're working on right now that we hope we can bring to closure. But those are the kinds of things that can get in your way. It's really on the APC side it is competition, it's a change in the plans for the utility. Some utility might be planning on using an ULTRA and may be even a FUEL CHEM on a new plant, and that plan gets cancelled, well that contract negotiation just went away. But that same customer might turn around and say, "Oops, these three older plants that I was planning on shutting down when I had the new one, let's talk to you about how we can deploy SNCR or CASCADE on those." And, you go right into those kind of discussions. That's the kind of thing that can swirl around our contracts before they are signed.

Thank you.

And your next question is from the line of Richard Wesolowski with Sidoti & Company. You may proceed.

Good morning.

Hi, Rich, how you are doing?

Good morning.

Pretty well. John, you mentioned you've finally reached the degree of market-awareness with the FUEL CHEM product. Have you gotten to the point where some of the clients are calling on you for the orders, rather than you guys reaching out canvassing and you're pitching them in the projects?

We have gotten to the point where now, it's not quite there, although I think we've had a few of those occasions that have actually now happened. But, still the majority, we're having to make those calls on the clients. But, the biggest single change, Rich, is that we have now, existing clients who will allow their other utilities who are actually competitors in the market to them, to come in and see the systems and operations. And the feedback that they've given to those folks has been quite extraordinarily nice and complimentary, and that is a big change. Some of the recent contract awards as I said earlier, were enhanced because of one or more visits of that nature, that kind of took the utility over the top and said, "Wow, let's go use these guys" and has led the same utilities in other plants. Our biggest customer is looking to deploy us in other stations now, in their own fleet, as they've looked at the advantages there and I think that will emerge there. For many of our clients we will become the choice for all units, all stations that they have to at their fleet. That's the very best marketing that we could be doing right there, and we're starting to actually see that begin to happen now with a couple of two or three clients.

Okay. Staying on FUEL CHEM, have you negotiated or do you expect to negotiate sometime in the near term, a new contract with the chemical supplier, and if so, what kind of inflation do you expect there?

I don't know the answer to the last part of the question. Our contract runs beyond to the end of next year and we'll be having discussions with them. Our relationship with them is mutually very, very positive. We have good relations and we don't anticipate an issue. Who knows what the competitive price position will be, going forward. There are other suppliers out there, but my strong [brothers] would be to stay with people we know and like and with whom our relationship has been extraordinary, and to give them applaud, that's (inaudible), they are an excellent group of folks.

Okay, thanks.

Okay.

Your next question is from the line James Cappello with Kern Capital. You may proceed.

Hey, good morning, everyone.

Hey, Jamie.

Hi, Jamie.

In terms of the FUEL CHEM revenue stream going forward in the next couple of quarters, can you guide us more to maybe ranges? You mentioned $2 million miss in the March quarter. Should we be thinking around on $9.7 million then for June?

I can't give you that because we haven't done that. But, to be honest with you, what we're trying to do is to provide you with all the inflow you need to make that guess about as good as we could. Actually, (inaudible) I debated how much data we would reveal about our business plan as we talked about it. But we thought it important that you understand what our expectations were for the quarter for the various business segments.

If you look at our announcements, we have said in the past, we achieved $1 million to over $3 million per unit per year in revenue on the FUEL CHEM side with SO3 applications tending to be on the higher end of the normal spectrum. And in announcements we try to tell where customers are applying us for SO3 mitigation and where it's primarily a slag mitigation. We've also tried to indicate where units are large, like we'll say over 600 megawatts or something like that, which would be indicative of a large unit where applications tend to be higher. I think with all of that Jamie, to be honest, you probably have all you need to do the kind of numbers that you're talking about doing.

When you set the internal guidance for FUEL CHEM, did you see, so that you had 9.7 for March, did you see that sequentially up in June, so the trajectory was heading up starting from March to December?

Well, it doesn't march directly but, yes, we think the third quarter will be the highest, that the summer load and even clients who are on a steady stream will usually shrink up to those a little bit because they absolutely don't want any slag issues or SO3 plume issues during the very hottest part of the summer when the prices go from like $50 a megawatt hour, currently today in the Mid West to $200 a megawatt hour. Those profits for them can be millions and millions of dollars. They can't afford to have a unit offline if they can help it during that time period.

So, third quarter tends to be the largest in the FUEL CHEM segment every year, especially with the hot summers. It's driven by the air-conditioning load.

Okay. And in terms of the June quarter, there's still some outages, but it's not nearly as much as the March quarter. So --

I don't think it will be. There will be some because that's typically taken in that Aprilish and usually April and May, but my sense is that most of our clients will have gotten their outages done before May 1, this year. And we will see, we will know later this month how that's actually going. But I would anticipate that the first quarter -- and my expectation is that first quarter is going to be the weakest quarter for the year. It was our expectation in the business plan, it was actually weaker than our expectation by the amounts we've given.

Okay. So, in the last week or so you have gotten some data points that some units are back on stream?

Yes.

Okay, great, thank you.

Thank you.

Thank you, Jamie.

(OPERATOR INSTRUCTIONS). And your next question [Scott Turkle with Turkle Investments]. You may proceed.

Hi John, good morning.

Hi Scott.

Hi, Scott.

Can you go back, someone was talking about I think that [Norris] was talking about the 2011 Chinese opportunity in ULTRA systems. What is the total adjustable market, what do you think you can do in terms of share? Can you just talk a little bit more macro longer term stuff?

Absolutely, Scott. Right now, the Chinese are adding about 1000 megawatts of new coal fired generation per week. They tend to do that in smaller unit sizes like 250 megawatts. So, that's four 250 megawatt units are coming on per week, largest growth anywhere in the world. Most of those new units are having some sort of environmental pollution control devices, normally scrubbers for SO2, and around the big cities, they're putting some sort of NOx controls on today, typically SCRs because their labor and steel costs are lower than here in the U.S.

The Chinese have recognized the very serious dangers of anhydrous ammonia, shipping and handling, and they have been converting those plant SCR systems to ULTRAs or some competitor on a great rate. That market is, they're drafting their regulations on what they want to see compliance in NOx and SOx and other issues right now. The couple of thousand units that already exist, those existing units are going to be addressed in the next five-year plan, in the 12th five-year plan, they're in the 11th right now. The 12th five-year plan starts January of 2011. In that plan they're going to go back and retrofit over the next two plans, they're going to retrofit those couple of thousands of units that already exist out there.

For us, that is a huge market potential, that's in the billions. In between time, we hope that our ULTRA technology will be the accepted technology for SCR applications between now and then. But, I think in the interim, we've got those national demonstrations for SNCRs and for SNCR CASCADE. Both of those projects are on tap to prove how much we can do and we've guaranteed how much we can do. They want to see it, and at what cost. Hopefully, that's setting the stage for what they're going to base their regulations on.

In the interim, between now and then, it's ULTRA for us and FUEL CHEMs in China. That's the near term addressable market. We think that market is still enormous, but the mother load, Scott, really picks up in 2011.

Can you talk about the competitive landscape in this area?

It's pretty intense as you might imagine. Lots of other people in the world see this. There are other techniques for reducing NOx. We think we're the best and most cost effective expenses for retrofit plan. But, each of these bids is intensely competitive. Dr. Linda Lin, is our Head of China in the Pacific Rim. And as you know, she is Chinese, got her undergraduate degrees over there and PhD at Texas A&M, and is responsible for a whole lot of our hundred-plus patents in the U.S. and around the world.

Linda is working real hard to establish Fuel Tech as the name in NOx reduction in that country, and I think we're off to a great start in that. But, there is none of that guaranteed. Every one of these bids is fiercely competitive by other kinds of technology, there's other ways, there's one outfit that has been rotating over fire air. It has some advantages, it has some serious disadvantages in the power usage. But, there are folks out there that bid on these all the time.

Are you talking about the GEs of the world or are you talking about sort of companies?

No, I'm talking about the [mob attacks] of the world and the ACTs, although I am not sure ACT is over there, but on the ULTRA side it would be Ammonia On Demand is a competitor for that. Now their system has some serious weaknesses in that you typically need to use (inaudible) urea which is something we don't have to use, and that's a pretty significant cost adder. Once clients do know the difference in those two technologies, I think they see our advantages. But, no, these are not the GEs of the world. There really aren't any big names in that regard that are competitors to ours.

Thank you very much, John.

Okay, Scott.

Your next question is from the line of Preeti Dubey with Thomas Weisel. You may proceed.

Hi John, hi Vince. I would like to actually focus more on the APC segment, and I'm looking at 2008 and I would like you to kind of discuss the opportunity that you see coming out of CAIR compliance, and maybe compare this opportunity with what you saw out of [SIPCOL] in terms on the number of units that you expect will require retrofit. Also if you could discuss what you see are the prospects for CASCADE when CAIR regulations kind of starts taking shape. Thanks.

Okay, Preeti and it's a pleasure talking to you. First off, we don't give specific items but I can help you in the general context of what I think you were asking. The three rules that are out there. The SIPCOL was 19 States in the Mid West. CAIR really expands it, everything along and east of the Mississippi River, all the states, along and east of the Mississippi River, plus Texas. And that regulation will lower -- It includes a lot more states that were never in the SIPCOL. It also lowers the threshold for what the average NOx you need to get to, down just a bit, and so it makes it tougher, and it will impose once it kicks in, year-round operation.

Currently, from the SIPCOL, NOx is a seasonal event. It starts, in the Ozone Season, May the 1st, to September the 30th. That's the only time you keep track of it and units today, they are really shut down during the other months of the year. Ozone is a summer happening. It takes ultra-violets and volatile organics, heat and NOx. The new regulations are going in to address more than just Ozone, you're looking at air quality and acid rain kinds of issues. That's driving a lot of units. It also goes and starts including industrial boilers and smaller size industrial and university boilers.

The other two, the Clean Air Visibility Rule and the Clean Air Mercury Rule actually are a lot closer coupled than you might think of, just on their name reading. The Clean Air Visibility Rule is trying to address NOx and SOx and particulars. And the Clean Air Mercury Rule is after Mercury, but the very best way to control Mercury and the two ways out there, but the very best way is to have an SCR or our CASCADE could do that, and a scrubber. With that combination, the SCR or the CASCADE oxidizes the Mercury and the scrubber can take it out. If you don't have a scrubber, the other way to take out Mercury is activated carbon. Activating carbon is impacted seriously by SO3. So, if you're using activated carbon, a FUEL CHEM application from us could be just the ticket for you to achieve the results. So, all of those combined, Preeti, really say that our technologies are actually becoming more inter-related, FUEL CHEM and APC, but the units really are in the thousands. Lot of these industrials were never included in those earlier regs and those regs are moving down in size. The exact threshold that the EPA is going to force on industrials is still being negotiated on a couple of those regs. But the units, there's many, many units out there. What we find exciting is that in most cases our technologies are the presumed kind of compliance technologies. They are not going to force smaller industrial units to put on an SCR and a scrubber, but our SNCRs are right in the sweet spot of what the regs are currently being anticipated to go to.

Just a follow-up question. Sir, do you think that [SOx reduction] may become more of a bit or rather a stronger driver for FUEL CHEM revenues in future, as compared to say falling and slagging which has been driving FUEL CHEM sales in the past?

I think it's going to get more and more and that's a very good question for two reasons. One, there's a lot more SCRs being deployed around the country and as you put on an SCR and a scrubber, people are going to be switching, even people who have been using Powder River Basin coal, because of it's lower sulfur content and they've had big slag problems with that. Now, they're going to be able to burn higher sulfur coals that they haven't been able to burn in a while, and the scrubbers can very effectively remove all that stuff out of there. But those coals, those very coals have the potential for creating a severe blue plume or brown plume and SO3 plume when coupled with an SCR, which most of them will be. So, I think you'll see that as people move to like Illinois Basin coals, you've got a lot more SO3. But those coals have pretty high slag too, so they're going to be treating for both.

And then on the flip side, I think, as I talked about, for smaller units that are trying to use activated carbon injection and I presume you've looked at the Illinois regulations, and I think the Illinois regulations for their utility is basically, and they're pushing early Mercury reductions, they basically say, "If you use activated carbon, you're presumed to be in compliance" even though we're not quite sure what level they're going to get. But if utilities go that route, that's going to be good enough. Well, that SO3 mitigation is going to be a big deal for making those happen. So, I think those two items are going to push a lot more customers to look at us, to help mitigate SO3.

The other real thing out there is the CO2 issue. As you look at operating your unit, we can typically give units a 1.5% to 2% efficiency gain which is that same amount of CO2 reduction. Now that may not sound like a lot, but I don't know of any other technology out there today, anywhere on the market, that gives you CO2 reductions because that can cost you an arm and a leg. We actually can do that and save you money at the same time.

Thank you.

Okay.

(OPERATOR INSTRUCTIONS). And your next question is from the line of [Arthur Terry]. You may proceed.

Hi, Arthur.

Hello. I'm a long-time small stockholder in your good company and I have two questions. What's going on in Europe where you only have something in Italy? How about the rest of that big market?

We actually have a number of stuff in Europe. The FUEL CHEMs right now are only in Italy although we are having discussions with others especially, Arthur, municipal solid waste burners in Europe. They tend not to use as many land fills and do a lot more municipal solid waste burning to control garbage and our new targeted corrosion inhibition technology that was announced late last year and patented and is now being pushed on the market especially in Europe, they have just got a lot of interest, in England and in a number of other countries over there, for not only reducing slag problems they have, but especially for reducing the intense corrosion, those of you that experience when they try to burn plastic bags like grocery bags, that pretty high chlorine and that chlorine attacks the tubes at a great rate.

I think we're the first technology that's been introduced into that market that can really make a difference. And we can get better than a 50% reduction in the corrosion rate. So, on the FUEL CHEM side, we do expect broader application. On the APC side we've actually been in a whole bunch countries over there. We've got eight countries or something we've got APC applications in today. It's the FUEL CHEM that have been more limited.

Thank you.

Thank you for your question and thanks for being a shareholder.

You bet.

Your next question is from Eric Stevenson of Hunter Investments. You may proceed.

Good morning, John.

Good morning, Eric. Good to talk to you.

Hi, Eric.

And likewise. John, can you provide some additional color on the winding down of the two APC projects in the PRC and what your plans are for replacing that revenue stream?

Yes. Those two projects are being installed right now and we're going through that start-up phase along with the units as the units start-up as a new unit, and right now we're in the testing mode. I anticipate, one of those stations had anticipated doing an SNCR but having a follow-on CASCADE for that project. We have not actually gotten the purchase order to move forward with the CASCADE aspect of that national demonstration, but we hope that that will happen.

What I think will be replacing those, we've signed the first ULTRA units over there a couple of months ago. Eric, I think this year you're going to see a lot more if we're successful, but we hope to see a lot more ULTRA contract signing this year that would, if we do what we hope to do, we'll be in a lot better shape than the size of those two contracts we're working on. And I think on the FUEL CHEM side, I'm very hopeful with some more recent developments that we're going to be seeing, hopefully, more than one FUEL CHEM application go into operation this year in China, and that would be huge news.

So, early on, those were SNCRs that, one of which, we hope the Chinese will do the follow-on for a CASCADE. The other is the ULTRAs, and I think you'll see ULTRAs replace those. They're just not going to do very many of the SNCR, that's more of a retrofit technology. The new plants that are being NOx controlled are mostly going to SCRs over there right now.

Perhaps, you could just provide some additional background on those two units. Were they demos and then they had an option to wind them down?

No, no. They are installed operationally. When I'm saying national demonstration, Linda has done a -- Dr. Lin has done a great job of getting them to understand NOx control and where our technologies fit in. They view those as the NOx compliance for those units. The demonstration is they're using these as a kind of a national certification, if you will use that to say, "Ah hah, you can expect SNCRs" and we guarantee our performance for using SNCRs to get whatever that number is, 30% reduction, and it will be this price. And thus, if this is what we want to achieve for all of those couple of thousand units out there in the retrofit market, we will put in the five-year plan. We're going to do X numbers of units in the 12th five-year plan and we'll assume X dollars per installation and this is the level of NOx that we think we will reduce. So, it's in the national verification of the available technologies.

Got it. Just going back to the competitive landscape over there, referring to the question that was asked earlier, are you seeing GE bets in China at all?

No.

Okay.

No. That's a market, they're really after water treatment in that company in general, but they spray on stuff and I've not seen that work and I doubt that GE wants to push that in the Chinese market.

Okay. All right, thank you.

(OPERATOR INSTRUCTIONS). And next you have [Robert Peterson]. You may proceed.

Hi gentlemen. That was the question that I was just going to ask about those two units, the projects in China, and that was part of the answer, I guess, but I still don't quite understand exactly why these projects are, you said, they're winding down?

They're being completed. When I say winding down, this is a capital project site, Robert, where we design, build, install, and then once we get it up and running and it meets its performance warranty in start-up, then the client owns it and it just goes into operation. The controls are set on automatic. The systems follow the load of the plant on how much they inject to get. So, when we say winding down, our portion of those, and maybe that is not good terminology on our report. Our work is being completed. Let's rephrase that. Those projects are being completed, installed, checked out and final payment will be received in the not so distant future.

So, they can operate completely independently of Fuel Tech?

Absolutely. That's the way all of our APC projects are worked. The clients then own them, they go, the systems are designed to be run on automatic with the plant controls without having the people there to operate it. And the power plant folks will know how to operate and maintain it and if they have any questions, they can always come to us. But, we've had over 400 applications of that around the world. We've never missed a warranty and we're the only people in the SNCR space that guarantees our performance in our contracts on NOx removal. But our term, our use of winding down means our portion of it is coming to, the project is being completed.

Well, this sort of brings up a question that I asked a couple of weeks ago at Morning Star, meaning, how concerned are you that -- about infringement of your proprietary rights in China?

Well, two issues, Robert. Obviously, it's a concern, but we think it's addressable. Our patents have been filed for in China and a number of them have been received, the rest are patent pending in China. The other part of that, in any country, whether it's China and obviously, because of the size the market, that is a huge issue there, the biggest single protection we have is that the key to working our technologies both on the APC side for SNCRs or CASCADE, and on the FUEL CHEM side, is that the modeling is the secret to success. And our modeling is unique in the world and the patents are mostly processed patents, the very idea of using the models project. If you don't have a model that absolutely accurately can project where you need to inject this stuff you're guessing and you will not achieve the results. On the NOx removal side, if you guess wrong, you'll actually generate NOx. On one side the temperature is known and if you're on the other side, you're just going to generate ammonia that's going to come out the stack and cause health problems.

So, you really have to know exactly where you're injecting. The secret to that IP protection is our modeling capability. One of these days if you'd like coming in to our shop in Batavia, we'd be happy to let you put on the 3D glasses and be a fuel particle and fly through a boiler which is what all of our clients do and it's a Disney world kind of experience. But, it is the secret to our IP and it does not leave Batavia, Illinois, for any project anywhere in the world.

So, then the Chinese plants are completely independent except for the modeling?

Well, I don't mean what you mean by completely independent.

They rely on your modeling, they still rely on your modeling?

Absolutely, every application, we do the modeling here. They send over the drawings, whether it's China or India or anywhere else. They send us the drawings, we'll then go in and take infrared maps of the plants and exactly model those units. The plant managers typically fly in from China and sit down and go through the experience themselves here so that they'll -- we'll show more, we'll put in injectors. And since every plant is really unique, you can't use the results from one and just guess with the other one.

I finally understand.

Come by and see it. We'd love to let you.

I'm living in Vienna; it's not that far a trip. I'll certainly give it a -- try to make it sometime.

If we have our trailer here, we'll show you how an SNCR works, we'll may be even inject a little water in the pocket line for you.

Oh boy. That sounds terrific. Thank you.

You're welcome.

And with no further questions, I'd like to turn it back to management for closing comments.

Well, thank you very much for your interest in Fuel Tech. Again, I declare our results were a little lower than we anticipated but we fully expect this to be a banner year for us and we're working and doing our best to make that happen.

Thank you very much and have a good day.

Thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.