Fuel Tech Inc (FTEK) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2007 Fuel Tech, Inc. earnings conference call. My name is Mike and I will be your operator today. At this time all participants are in a listen-only mode and we will be taking questions at the conclusion of the presentation. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Ma'am, please proceed.

Thank you and good morning everyone. Welcome to Fuel Tech's second-quarter conference call. By now all of you should have received a copy of today's release. If you have not, please call 203-425-9830 and we will 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 on this call and as a reminder, this call is being broadcast over the Internet and can be accessed at our 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 everyone. We appreciate all of you joining us on the call. Our results for the second quarter include $16.2 million in revenue, down 18% from $19.8 million in the second quarter of 2006. Net income for the quarter was $0.3 million down from $2 million in the same quarter last year. For the first half of 2007, our revenues were $32.5 million, down 12% from the $36.9 million last year. And our net income for the first half of this year was $1.1 million, down from $3.3 million last year.

But our results so far this year are below our expectations. But they are the result of timing for both our business segments rather than a fundamental shift in the market for our products and services. As we look at the details of the results by business segment, we find our capital projects, our Air Pollution Control segment, had revenues of $7.6 million in the second quarter versus $13.2 million last year. First half revenues in this business segment were $16.2 million versus $25.5 million last year. The decline is due to delays in new contract signings this year and the winding down of two large China projects which contributed heavily to last year's results.

Looking at these specific items, our contract announcements for our Air Pollution Control segment for the first half of 2007 were $10.9 million of which $5.4 million were for two contracts in China for ULTRA Systems. Last year, our announced contracts in the first half were $16.7 million with no China awards. The clear delay has been in domestic sales announcements.

There is no doubt that the current political debate over various state and federal environmental regulations and over potential greenhouse gas regulations or taxes, have indeed caused utilities to rethink their plans for new coal powerplants and delay contract signings until the last possible minute. It is also true though that existing coal powerplants are now viewed as much more valuable by these utilities and will play a larger role in supplying power longer than anticipated into the future. That will involve adding more pollution control equipment to bring them into compliance with ever increasing regulations.

Now the next such major regulation is the Clean Air Interstate rule whose restrictions start January 1, 2009. Utilities and many industrials will need to contract this year for pollution control equipment to be installed in outages next year. We are in serious discussions and advanced negotiations for more work by far than at any time in our corporate history. And we expect to sign many of those contracts soon. We had expected more of them to be signed and announced by now and to be contributing to our income but that has been delayed.

We knew our results would be more heavily weighted to the second half of the year but the delays in signings are a bit later than we had expected. The really good news in all this is that we have not lost much at all from the work we expected and those have been far more than made up for by new business opportunities we now have.

Revenues from all these expected contracts will either deliver substantial 2007 revenues or create a very large backlog going into 2008 or both. We expect the fourth quarter of this year to be very strong. How well we do in the third quarter will likely depend on how early in the third quarter our expected new contracts are actually signed. A contract is not a contract until it is signed and executed, of course. But the future has never looked brighter both domestically and foreign, especially in China.

For our FUEL CHEM business segment, our revenues for the second quarter of this year were $8.6 million, up 30% from last year's revenue of $6.6 million. For the first half, revenues this year were $16.2 million, up 43% from last year's revenues of $11.4 million. In addition, we have announced contracts for seven new coal unit customers so far this year, far surpassing last year's two announcements in the first half and increasing our announced FUEL CHEM coal powerplant base by 30% to 30 units.

Yet as impressive as those numbers are, our revenues from this sector were substantially below our business planned expectations. This was caused by significant maintenance outages our customers took this past spring to prep their powerplants for the peak summer season and by customer dictated delays in actually getting our systems installed and operational on our new customer units. Due to circumstances beyond our control, only two of these seven new systems began feeding our chemicals in the second quarter and those did not contribute significantly to revenues during the first half.

Two others have recently started up. We expect the rest of our new systems to be put in operation during the late third and early fourth quarters and we expect new FUEL CHEM announcements to be made in the second half. Now how much these will contribute to 2007 results remains to be seen but they will contribute to a substantially larger revenue base for 2008 at a minimum.

Now while we did not materially benefit from the revenues from our new FUEL CHEM customer units, we did incur costs associated with them and those helped depress our margins for the quarter and year-to-date. Again nothing fundamental has changed for the expected profit potential or the margin expectations for this business sector going forward.

Our business efforts in China have taken great strides to becoming a major high-growth business area of our Company. On the FUEL CHEM side, our business initiative with ITOCHU is moving forward with lightning speed. The sales force has completed training, the client prospect list is long and very impressive. We expect to have our first customer in the very near future.

On the APC side, our new Beijing Fuel Tech Environmental Technologies Company is open for business and we have a very impressive team in place led by our new general manager, Mr. Li Jun Kou, and by our administrative general manager, Mr. Robin Yan. The final execution of our current projects is being transitioned to this new team and they are working hard to win new work. We have a number of significant bids already in place in China and the Pacific Rim and we expect to win new contracts there in the second half of this year.

All of these new business initiatives cost money, time and effort to get into place. Yet even with all that, our first half SG&A expenses would have been down from last year except for our 123(R) stock option expenses which were $1.6 million more than the first half of 2006.

Now our CFO, Vince Arnone, will discuss this in detail here shortly. However, the major reason for the increase in the stock compensation expense was the onetime stock option grant given to all employees in December of last year to better align the interest of all employees with those of the shareholders. That was the right thing to do and I believe it will benefit all shareholders in the future. But there is a near-term impact on earnings especially with the stock price appreciation we've seen.

All of these current actions are designed to build this Company for significant long-term, very profitable growth. There will be some bumpiness in our business in the short term. But the future has never looked brighter.

And with that, I'd like to turn this 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 second quarter were $16.2 million, down from $19.8 million in the prior year while net sales for the first half were $32.5 million, down from $36.9 million in the prior year. Net income for the quarter totaled $0.3 million or $0.01 per diluted share compared with $2 million or $0.08 per diluted share in the prior year. Net income for the first half was $1.1 million or $0.04 per diluted share compared with $3.3 million or $0.14 per diluted share in the prior year.

The second quarter and first half results include $1.8 million and $2.7 million in stock-based compensation expense versus $0.8 million and $1.1 million for the comparable periods of the prior year. As John just mentioned, this increase is attributable to the awarding of stock options to all Fuel Tech employees in December of 2006 and to an increase in the fair value of the options granted which is being driven by an increase in the price of Fuel Tech's common shares. On a full-year basis, the year-on-year after-tax impact of the additional expense is $0.04 per diluted share. Additionally, the second quarter and first half results reflect $0.1 million and $0.5 million in income tax expense, all of which is non cash.

Net sales for the nitrogen oxide reduction technology segments were $7.6 million and $13.2 million for the quarters ended June 30, 2007 and 2006. First half revenues for this segment were $16.2 million compared with $25.5 million in the prior year. Revenues are down from the prior year in part due to timing on the receipt of new NOx reduction orders domestically and in part due to the winding down of two NOx reduction projects in the People's Republic of China which were signed in 2005 and contributed significantly to revenues in 2006.

Although revenues are down, 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 retrofittable suite of technologies both domestically and abroad has never been greater.

With the compliance for EPA's SIPCALL regulation beginning to wind down, utilities and industrial facilities across the country are now 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.

As John noted, we have had contract announcements of $10.9 million in the first half of the year and an additional $3.7 million was recently announced last week. Our backlog is approximately $9 million at the end of the second quarter. Revenues for the fuel treatment chemical segments were $8.6 million for the quarter versus $6.6 million in the prior year. For the first half, revenues are $16.2 million, up from $11.4 million in the prior year which is a 43% increase year-on-year. The 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 the largest market opportunity for the technology both domestically and abroad.

While the year-on-year growth is substantial, this growth is, as John had noted previously, did not reflect the impact of all seven coal fired unit that Fuel Tech has added to its customer base thus far in 2007. In fact, only two of the seven units contributed on a marginal basis in the first half with the remainder scheduled for startup in the third and fourth quarters.

The outlook for FUEL CHEM continues to be favorable both domestically and internationally. With seven new coal fired units added to its customer base in 2007 bringing the total now to 30, there has been a 30% increase in installed base. Internationally, Fuel Tech signed an exclusive teaming agreement with ITOCHU, one of the world's largest companies, with an extensive sales force that sells a variety of products and services to customers in China. The agreement has had as its sole purpose the penetration of the Chinese marketplace for FUEL CHEM. We fully believe that this agreement will accelerate penetration of the Chinese market by at least five years.

On a global basis, the increased focus on the reduction of greenhouse gases bodes well for incremental growth in the future. This fact combined with the increased utilization of higher slagging coals such as those from the Powder River and Illinois Basin areas and the emergence of the important SO3 mitigation market continue to lead us to have high expectations for the FUEL CHEM program which offers numerous operational, financial, and environmental benefits to owners of combustion units around the world.

The gross margin percentage for the first half for the Company as a whole was 44% in 2007 versus 48% in 2006. The gross margin percentage for the NOx reduction business decreased to 40% from 45% in the prior year due to the mix of project business. For the fuel treatment and chemical business, the gross margin decreased to 49% in the first half of '07 versus 57% in 2006. This decrease is due to startup costs related to the incremental units that were signed on board that I mentioned previously without the realization of related revenues as only two of the seven units contributed revenues during the first half of the year.

SG&A expenses for the quarter ended June 30, 2007 and 2006 were $6.6 million and $6 million respectively while these expenses for the six months ended 30, 2007 and 2006 were $12.5 million and $11.5 million respectively. The $1 million increase for the six months was due to the recording of $2.7 million in stock comp expense versus $1.1 million in the prior year as I mentioned previously. And then when excluding the impact of the stock comp expense, the remaining favorable variance in SG&A expenses of $0.6 million is due predominantly to timing on revenue related expenses.

R&D expenses for the six months ended June 30, 2007 and 2006 were $1.1 million and $0.9 million respectively. We continue to pursue commercial applications for technologies out of our traditional markets and we also pursue the development and analysis of new technologies that could represent incremental market opportunities for us. The increase in interest income in the first half of 2007 versus 2006 is driven by higher average cash and short-term investment balances versus those experienced in the prior year. Again as noted previously, net income for the second quarter and six months in 2007 reflected $0.1 million and $0.5 million in income tax expense all of which is non cash.

Our balance sheet continues to show strength from the leverage of Fuel Tech's business model. At June 30, 2007, Fuel Tech had cash and cash equivalents and short-term investments of $32.6 million and working capital of $44 million versus $32.4 million and $38.7 million at the end of 2006.

Operating activities used $1.1 million of cash during the first half of '07 primarily due to the change in working capital from year end. Investing activities generated cash of $6 million during the first half of the year as the decrease in short-term investments provided cash of $8 million of which $2 million was utilized to support and enhance the operations of the business principally for equipment related to the fuel treatment technology segment.

Fuel Tech generated cash related to the exercise of stock options in the amount of $2.2 million. Of this amount $0.8 million represents proceeds derived from the strike price of options exercised in the first half of 2007 while $1.4 million represents the excess tax benefits realized from the exercise of stock options in the first half of 2007. Lastly, $1.1 million was provided by the issuance of directors deferred shares of stock.

Fuel Tech's market interest and sales activity has never been stronger. Timing on the receipt of NOx reduction orders and on the startup of new FUEL CHEM accounts has delayed our short-term revenue recognition. However, as John noted, we do not see this as indicative of any fundamental change in our business outlook.

The timing issue has necessitated that we modify our full-year guidance. We have adjusted our revenue guidance for 2007 to $80 million to $85 million. The NOx reduction technology segment is expected to generate $45 million to $47 million in revenue while the FUEL CHEM technology segment is expected to generate $35 million to $38 million in revenue. As John had noted, our expectation is that these revenues will come later in the year based on timing of receipt of APC orders.

Our net income for this revenue range is expected to fall between $0.30 and $0.35 per diluted share. The impact of stock comp expense under 123(R) on Fuel Tech's full-year net income is expected to be $0.12 per diluted share.

Now with that, I'd like to turn the call back over to John.

Thanks, Vince. In summary, delays and signings of significant contracts in our APC business segment have caused us to be off to a slower start this year than we had expected. We believe we will see significant contract volume for that business segment in the second half and that the FUEL CHEM client base will continue to grow with new customers this year. Again our long-term fundamentals for both business segments as well as margin expectations remain unchanged.

With that said, operator, can you please open the lines for questions?

(OPERATOR INSTRUCTIONS) John Quealy, Canaccord Adams.

Good morning, folks. John, if we can just drill into this APC push out issue a little bit. First of all in terms of the addressable orders that you are out there chasing right now, can you give us a characterization of what size is in the population? Are we chasing a lot of $1 million jobs or a couple of big ones? Can -- first thing can you just give us a little background on how many and how much we are chasing?

We chase obviously anything. But what we are expecting to sign and what we are in discussions or negotiations with are for numerous large orders and by those I mean more than $5 million; $5 million to $20 million range per order.

Okay. When you look at your guidance for APC, if I got it right, 45 to $47 million for the year. Let's estimate next quarter is a similar type result -- I mean that is a huge number for Q4. So my question is, what gives you confidence that you can hit that Q4 number which would be a magnitude better than you've ever done and why is it different than your thought process before when you had the guidance intact? Do you see my point here?

I do. Before, two things, we thought and fully expected some of these contracts that we've been in discussions with on a couple of key clients here would have come in before this conference call, we're expecting them a month ago or more. That delay in signing the contract does impact our ability to deliver X amount of revenues this year. We've taken as good a look as we know how to take, John, at looking at when now we expect these contracts and then at looking at how much we can get done this year versus last. And we went through an exhaustive effort looking at this project by project on when we expect to sign new contracts now and how much we can get done.

There's a tremendous amount, we can do a lot in the fourth quarter. The real secret is how quickly some of these contracts get signed in the third quarter. If we can bring some of these in in August, then there's more time and we can get more done this year. If they slide into September when we announce them, there will be some less that we can get done in the third quarter and that will impact the total. There's just a certain amount you can get done in a year.

In either case right now with what we're looking at and expect to win, we think the fourth quarter is going to be exceptionally strong, the third quarter is the question mark. The end of year backlog should be incredible. It is more back end loaded. We had expected to be honest, that any shortfall in this nature would be made up by our FUEL CHEM awards. And due to stuff completely beyond our control -- we'll give you a for instance on the FUEL CHEM side.

A customer that is with our largest customer is starting up a third unit, has already given us a contract for this and we are ready to go. That customer is waiting for the original equipment, the original boiler supplier, to fix a number of things that are wrong and under warranty. They won't install us on there until those warranty matters are resolved.

Right now, in the middle of the summer, they can't shut the unit down due to power requirement needs to do those warranty. We are standing by and we're stuck in the middle of a summer when they want us desperately, but they are having to limp along with that unit because they can't afford to shut it down right now.

That is the kind of dilemma that we are in. Now, that customer alone would have -- that and one or two others just like it would have generated several million by now, and expect it at a pretty high margin. So those expectations right there, delays on both sides put us into the situation we have now of needing to downgrade our guidance to 80 to 85 with the $0.35 -- $0.30 to $0.35 per share earnings target.

Hey, John -- John Quealy. Just one additional comment on the APC orders. We are gearing this company up to be able to handle, I would call not just a one-time influx of new order business, but to have this continue into the future, into '08 and into the future as well. So we have been working internally, obviously, to insure that we have the resourcing in place that is going to be able to deliver execution on this large influx of orders that we are expecting during the remainder of this year.

So this is really everything that we've been waiting for and wanting to happen. To John's point, this is just purely from our perspective a one or two-month delay in the receipt of orders, and in many cases these orders are orders which we are the only bidder. So you talked about a point of confidence. The point of confidence comes from the fact that many of these orders are really designed to be Fuel Tech orders because of how they were bid.

So our confidence comes from that fact. It comes from the fact that we are planning to be able to bring these orders in-house and execute them to meet our customer requirements and to make them happy customers, but to also meet all the goals that we have internally for this company as well.

Just a quick follow-on. Of the larger orders in the pipeline, are they all past regulatory issues and permitting issues, or does he still have to go to that part of it?

Well, they're in various situations. One client does need a final permit, which should be just straightforward, and they're expecting it within a couple of weeks. Most of it has to do with clients just waiting until the last possible minute to sign these things.

And with a number of decades as a utility guy myself, I've seen this before. We saw it when the SIPCALL -- right before it came out when the utilities were battling that in court. Anytime there is uncertainty, the utilities go into a mode of waiting until the last possible minute to sign any capital project, and they are just doing that here.

Okay. If I could -- just one more sort of financial question. On the guidance, Vince, I don't think I heard you in terms of any expectations for the margins between the two segments. Can you give us an idea, APC or FUEL CHEM, what you think those are trending for the full year? FUEL CHEM based on those numbers in the EPS sounds like it is -- you had some one-off stuff in '06 that boosted the margins. So my guess is margins at FUEL CHEM are down year-on-year?

Yes, margins at FUEL CHEM are down year-on-year. And that is purely related to all of the startup effort that we've been going through here internally in the expectation of having all of the units that we signed up and running. Our fundamentals relative to margin on FUEL CHEM have not changed. On a full-year basis, we will see that margin jump into the lower '50s. So no issues on that line. We are basically being impacted by a timing issue relative to gearing up to have our customer counts feed chemical and generate revenue, but that just hasn't happened yet here in the first half of the year. So second half of the year, we should see an uptake in FUEL CHEM margins.

Air Pollution Control is down as well year-on-year, and the primary reason is because most of the backlog that we had left at the end of 2006 that we're bringing into the profit and loss statement here in 2007 is related to projects just that by their design were lower margin in nature. They were turnkey projects with lower gross margins. So that is running through the profit and loss statement now.

The new business that we're anticipating bringing on here should also bring APC margins up a little bit as well throughout the second half of the year, up on an overall basis to around that lower 40s range. So our overall margin perspective assumptions are really the same as they always have been. We are being impacted by timing issues right now.

Okay, and just a last point on those APC margins. Can you comment on pricing? Is the pricing in line for some of these larger jobs? You would expect with such a small concentrated sales force that once you get those jobs, the recovered margins would be quite high on a high ASP order. Can you just walk through that thought?

I mean, that is true. However, a lot depends on the scope of work that we actually sign on with for the end customer. If it's just a Fuel Tech scope of work -- and we've discussed this a little bit previously -- if it's only Fuel Tech's scope of work and we're really just selling them our process technology, we are going to expect upper 40s or around 50% on our scope of work.

If we are selling the customer a turnkey solution in which they tell Fuel Tech that hey, Fuel Tech, we want you to be responsible for the full installation scope of the work. We're going to have some diluted margins. Okay? So a lot of those factors relative to the orders that we're going to be receiving have not necessarily been fine-tuned yet. So that is going to be a little bit of a variable relative to the overall gross margin scenario for the full year.

But from your point that you just made, absolutely our sales force is it is what it is and we have approximately 15 salespeople and we use outside manufacturing representatives. Incremental sales for us have a nice leveraging impact on the Company as a whole.

And final two questions. Going to the FUEL CHEM side, six or seven new coal-fired boilers that is a rate much higher than it was last year. Can you comment on the pace of new wins in the back half of the year especially domestically? And I have a follow-up.

Got it. Our seven new -- if you're keeping track of those numbers, 30 is our total. We added seven new coal units this year plus those two [Olive Pit] plants in Italy; the total number does reflect one down from if you added those up, we had a client that did some expensive boiler modifications and has disconnected our equipment now while he sees whether those -- how those boiler modifications are going to work. We are not counting that client right now because of that. So that is the adjustment in the number.

Our new client expectations are real high right now for the remainder of the year. Whether the second half of the year we sign as many as we have in the first half, I don't know. But our expectations are that we're going to have at least several if not more than that of new FUEL CHEM coal unit customers this year which would be pretty dramatic increase over the pace that we've seen that deployed in the past.

One of the things that has really help us, John, has been that now two of our customers have agreed to allow other utilities come visit their plants and speak to them regarding the results that we've achieved year-to-date, to date with those guys. And those visits have been extraordinarily favorable. Our sales force and the negotiating teams are hard at work. They are never a done deal until you get a done deal. But we have high expectations for the second half.

My last question, last year '06 net income to cash flow conversion rate was greater than one. It sounds like you are spending a little bit on R&D as well as some SG&A to ramp up business up for these big NOx orders. What should we look for for cash flow events in terms of vis-a-vis net income conversion this year?

Well, I think we're going to see definitely an uptick in cash flow here in the second half of the year. I mean so much is going to depend on as we mentioned a couple of times now just the timing of receipts of orders, the timing of the achievement of milestones on those contracts which are triggers for invoicing and payments. So just as a general statement, just because of the results that we expect for the second half of the year, I'm anticipating a nice uptick in cash flow.

But that also is going to have a little bit of timing impact, John, that I just can't foresee and can't predict right now. So much depends on the timing of receipt of the orders and then how we progress through those orders for the second half of this year. Just in general as we generate additional top-line revenue from both business segments, we are going to generate more cash.

Great. Thanks, folks.

Sanjay Shrestha, Lazard Capital Markets.

Great, thank you. Good morning, guys. A couple of quick follow-up here. First on the APC segment of your business, your backlog at the end of the quarter was $9 million. Where would that number be right now?

Unfortunately, we just give that number at the end of each quarter because that is when we actually calculate how much we bring through the profit and loss statement. Now we haven't even actually gone ahead and finalized our July results as of this point in time. So I couldn't tell you how much of that backlog we worked through.

All I can say is that to that $9 million, we just recently added $3.7 million last week so that bumps it up to approximately $13 million and then we would have to back off how much revenue would have run through the profit and loss statement through the month of August. But we typically don't go ahead and provide that level of detail during the middle of a quarter. So we only give that hard backlog number at the end of each quarter.

That's fine.

You know, Sanjay, the new signings on the APC side has been pretty anemic to date from my perspective, at least. But we really, we've never seen this level of market interest negotiations advanced discussions with clients in our corporate history. So the proof is in the pudding if we can bring that step across the finish line. We had hoped to have more of it by now. But over the next four to six weeks we have high expectations in that timeframe.

Got it. So now in this new guidance here for the APC portion of your business, right, you are talking about if some of these things does hit let's say by the middle of August and you've got potentially a month and a half of revenue to be recognized even in Q3 and clearly the Q4 is looking like it's going to be clearly a pretty big quarter year-over-year. Now when you provided this new guidance, in your new expectation here, are you expecting the majority of this order to really hit at best the end of Q3 or maybe even in Q4?

And so that if some of these things, let's say a large project in an accelerated schedule given the lumpiness in the utility end up materializing in Q3, the numbers are clearly not at the high-end of the range but even slightly higher than that?

That is absolutely one scenario. Just a couple of caveats on that though. Even on our FUEL CHEM side is what they will contribute and how much, we have laid out in our plans when we think certain of our units will start up if they are a little bit earlier, it will make a difference, if they are a little bit later, it makes a difference. Earlier is obviously good. And if we can get an alignment of our FUEL CHEM and APC then it could be much better.

We did not gauge on the upper end of all of that. We're trying to be responsible in that guidance that some may come a little earlier, some may come a little bit later. But earlier means more revenues this year. On the FUEL CHEM side that means more revenues overall because every -- you can't really make that stuff up. On the APC side you'll eventually get all those revenues; it will just mean more of it will be in '08.

Got it, got it. Now one more question on the APC side then I have a quick follow-up on FUEL CHEM. On the APC side in the anticipated new bookings here, right, can you give us a sense of how is that split between the domestic opportunity as well as the international opportunity?

Actually all of the ones we're -- well almost all -- we have some revenue expectations from some new international work this year. But the vast, vast majority is domestically and significant international sales will be gravy.

Got it. So then the international opportunity for you guys really is more about if anything if it comes a backlog build, it is really more of a big opportunity in the second half of '08 to early '09 but whatever we're talking about here let's say for another 12 months is really sort of dictated by the domestic as well as the FUEL CHEM business?

Absolutely true.

Correct. Okay, great. One last question. On the FUEL CHEM side, you talked about how seven new additions, total of 30 million a powerplant is still a good number to use for that, right?

Once they are running we're running a little higher than that on our -- and hopefully at the end of the year, we're going to give you a little better but it is still running on our units that are in operation it's running a little bit higher than that. We need to get a few more of these units up there to have a little bit broader customer base to give you -- start giving definitive answers. But we are still going to try in our new announcements to talk about whether it is a big unit, a large unit, a medium-size unit or a small unit to give you a feel. Usually our small coal units will generate one million a year and our medium and larger units will generate more than that. And SO3 mitigation is typically on the higher end -- there is typically a (multiple speakers).

Got it, so then just as a follow-up on that, guys, and I'll hop back in the queue. So we have 30 new clients, if you would, right, 30 locations, let's say so give or take about one million a year. How should we think about the revenue opportunities of FUEL CHEM between Q3 and Q4? Is it going to be evenly split that now two out of the seven is working and maybe all seven starts to hit in Q3 or all seven really would be more of a Q4 phenomena?

And under the second thing is even if you guys don't sign anybody, then FUEL CHEM side of the business is looking up a year-over-year even though there is not incremental signing taking into consideration that call it $1 million to $1.5 million all materializing as revenue in 2008?

Sanjay, the utilities take outages in the spring, more of them in the spring. They do take outages in the fall too. So how many of our utilities customers take outages this fall and some of them will because the one that I gave you the example of is going to take an outage so we can get our equipment installed and running on it. Q4 will be much stronger than Q3 in our FUEL CHEMs. And exactly how strong will depend on when the revenues -- when the units get running. And hopefully we will have all of these seven.

We've not seen at all a quarter or a year with all of our revenue base to date. And I would tell you that might expectation for 30 coal units on a full-year basis is my -- I think would be more in the 45 range versus the 30 range.

Got it. Got it.

We've just not seen that because we haven't gotten them all up and running yet.

If you just annualized the second quarter FUEL CHEM number, you get just under 35 million. That is not even having what I would call our base 24 units that we had at the end of last year. It's not even having all those running at full bore during that second quarter of the year. So to John's point, if we had all 30 running full out simultaneously. you're recurring annualized revenue is definitely higher than what we are showing on a profit and loss statement today.

Got it. That is exactly what I was trying to get al. Thanks a lot, guys.

Michael Carboy, Signal Hill.

Good morning, ladies and gentlemen. Can you hear me?

Absolutely. Michael. How are you doing?

Terrific, John and Vince. Thank you. I trust you are as well. Couple of questions for you. First off, let's go back to margin on the APC side of the business and talk a little bit about the timing issues. John, you related the utilities are sort of in dilly-dally mode here. When is a fish or cut bait time for the utilities? When do you have to give them a drop dead date? And at that point, what sort of margin impact are you likely to see given short order time that you'll have for raw materials, steel, labor and so on?

I think we're going to be okay on the equipment side for steel. It's a good question. If our projects were of a larger nature and we didn't already have prices from our suppliers who are just waiting for as to say go, for them to go, then there would be more risk at that. But I think we are fine on the margins from a material or labor side of the equation on execution. We do have time issues for constraints on some of these client projects. The clients know that they are running up on a clock for deadlines that if they want it by such and such a date, they are going to have to sign soon.

We just haven't -- we don't BS clients so we haven't reached that date for a number of the clients and they know that and that is why the delay in the signings. But I think the margins are going to be fine, Michael, once we get rolling on this. In fact when you get all hands working on projects, your nonbillable hours go down and your billable hours go way up and that helps all the way around.

It sounds like from that, then you are not expecting any CASCADEs, even though you've commented that you thought ABC orders would be sort of in the $5 million to $10 million territory in terms of project size?

$5 million to $20 million on the size. I would not rule out that but the -- there's a lot of people who are looking for the SNCR Rich Reagent injection solution first. Even if they have contingency plans for putting that CASCADE on later they want to get the SNCR part of that done up front. And when you add numbers of those units, if a client gives you an order for multiple units all at once, that is where you get the larger dollar volumes. I think there is a lot of interest coming in the market on the ULTRAs and bigger ULTRAs as they come in as evidenced by this last $3.7 million order from the city of Springfield. And those were for modest sized units.

Right, and sort of on that topic of staging things, we've seen a lot of -- as capacity markets have tightened in the utilities sector, we've seen a lot of units that were slated for mothball or decommissioning being brought back online. Can you give us an idea of how many of those units you think are actually coal units that are being brought back on as baseload facilities? And what incentives would a utility have in terms of pulling a unit out of mothball or out of decommission schedule to spend the money on installing either APC or FUEL CHEM?

First, most of them are not in mothball. They were just plans where if you build this new unit then I will retire these other two. They are still operational but they were in their long-range plans not to make a lot more capital investments.

If you can't build a new plant then an existing one becomes crucial and you want to keep it going as long as you can while utilities are looking through what does the future hold? If you go with all gas, two years ago we saw $15 a million BTU gas. We're at half that now. But it wouldn't take but a few push toward gas and you are right back in that range.

One of the neat things about our NOx control technology, and I will address that first, is that it is relatively low capital cost. They don't have to put a big capital item that they've made a commitment and now if they shut the unit down 10 years from now, they have eaten a lot. Our units tend to be more of the low capital, a little bit higher O&M cost which is just perfect for what you want for a medium to smaller sized unit. The ULTRAs of course are typically what you are going to see for the newer units where they are going and with the big SCRs. And I think we are seeing a big uptick in that SNCR which reagent because of that issue where folks are now saying, whoa, there is no way I can count on having a new unit to replace it and there is no way I can count on alternative fuels today. So I need to clean it up without spending a lot of capital, and by a lot, I mean $100 a kilowatt or more.

That -- we've had tremendous interest by folks who've just been sitting on the sidelines in the past that have now come out and said, hey please come talk to us quick and we want an urgent discussion on how we can deploy this technology.

Okay. Shifting gears to FUEL CHEM for a minute. Usually in Q4 you guys have gotten to sort of a volume purchase break point on the Mag-Ox. I'm curious as to whether you believe you will get to those breakpoints in this fourth quarter given the unexpected delays we've seen in FUEL CHEM uptake this quarter?

Oh absolutely. In fact our year-on-year revenue growth is 43%. I actually -- we think we dipped into a first-tier of volume discount already but not to a material aspect. We will realize some volume discounts on our supply of mag hydroxide here in the second half of the year, there is no question.

Our revenues were below our expectations but way above last year and last year we went into the volume discount. So we are going to get into that a whole lot earlier this year.

Okay and jus the last question for you both. With regard to new business, could you segment it please into new business from existing customers versus new business from new investor-owned utilities that you have not done business with in any capacity?

Well, we've had very recently in the last month, Michael, a number of clients with whom we've tried to have -- we've been trying to sell for a long time, years, on FUEL CHEM. Suddenly call up and these are brand-new customers for whom we do not now have any existing FUEL CHEM work. Have requested how quickly could we do a model, how quickly could we get it installed kinds of discussions. So these are on new customers who haven't done a significant amount of work with us in the past.

In terms of the business leads that are out there you can't segment it into 70-30 or 60-40 or 50-50?

Hold on a second, let me do a mental -- APC, Vince, was saying by the way, these new additions are all new customers who haven't done business with as much in the past either. But the FUEL CHEM, I would say a majority of what we are expecting the new stuff is going to be with people we haven't done work in the past.

Okay, so the majority of new stuff in FUEL CHEM will be new names?

Yes.

Okay, great. Thank you.

Rich Wesolowski, Sidoti & Company.

Good morning. On the less call you guys had the expectation winning substantial number of new APC awards and I imagine a bunch of those were for the ULTRA product going into China. Can you review how many awards you expected whether they were delayed, whether they went to a competitor, alternative technology, etc.?

For China the new ULTRAs hadn't really changed. I mean we are still expecting them -- we weren't counting on them for a large amount of revenue this year. We still believe that at least by all indications from clients -- again it's not a done deal over there at all until they are signed. But all indications at this point are that we are the chosen technology for a number of those bids, and we've got a lot of them out there. So we have high expectations for signing some significant revenues, most of which will be in backlog numbers with equipment deliveries next summer before the Olympics. So we are still counting on China.

Okay. Secondly, you mentioned the new APC margins were up and I was a little confused by the conversation. Is that more because you are the only bidder and the pricing is going to be pretty good on this work or because there is less low mark-up revenue in the mix?

It is the latter, the latter comment. And again, some of those details are still to be worked out with customers before we actually finalize these orders. But if indeed these new orders are predominately Fuel Tech only scope, we're going to see a nice uptick in gross margins here in the second half of the year for APC.

Would you imagine if these customers turn into repeat customers and even long time customers with lots of orders in the next two years, that that revenue progression will eventually turn more into the low mark-up subcontractor type stuff?

I don't know where that is going to go. The way these discussions typically go with utilities is especially with folks -- and again many of these are folks who we haven't done projects before in the past. They will be looking at our technology and then later in the discussion they will turn and say, hey, instead of us doing all this stuff, would you guys just turnkey it? And of course our answer on those is going to be yes, we will be happy to do it.

So it is usually later in the discussions where that turn comes. We get more revenue and we get more profit. It's just that the overall margin of that project goes down. So I can't tell you how that is going to come out on some of these that we are not quite as far along on in the final definitive statement as we are with some of the others.

Okay and finally the revenue break out on the APC backlog as of June 30, just taking out the $3.5 million or $4 million in awards you announced the other day said to be completed next year. When does that $9 million run out? Is it mostly in the third, half way between the third and fourth?

I can't say it's going to be on a pro rata basis, Rich. What I can say is just about all of it is going to be in the second half of the year. Even off the top of my head I really couldn't give you what I would call a specific breakdown quarter to quarter on that. I think the best assumption would be to look at a third and fourth quarter split for modeling purposes.

Great, thanks a lot.

Michael Molnar, Goldman Sachs.

How are you? Just want to make sure I have my numbers right. You had 30 coal-fired boilers for FUEL CHEM at the end of the quarter. Does that mean -- that implies that there is no new contracts for the quarter, is that right?

I thought we ended up with -- we had one in the quarter -- Vince is chasing down --

You had one and then one fell out, is that it?

One fell out really at the first of the year when they were doing their mods this spring. And we took it off the list. We still have hopes of getting back in there and starting up. But I think I don't think it is right to count it if it's not installed and running there.

I just want to make sure. Last quarter we -- and I know it is lumpy and I fully respect that. Last quarter we had six which was a big end number. And I had -- I just want to make sure my numbers are right, we had about 30 units under contract. Now we have 30 so this quarter we essentially had --?

I think we announced the one -- and we had a formal review on all that stuff and I took that other one off. Relations are still great with that client and that client still has us on another unit there with them so at a different station. But they are looking at how these new modifications they did a full extensive series of modifications at the plant. And until they sort that out, I'm not going to have them in the number.

Okay. And the other contracts -- I know there's like -- there's oiler, boilers, etc. Can you just run through -- it doesn't have to be exact, but just as an order of magnitude, what the other boilers you have under contract?

I think it is 30, Michael. I think it is 30 all total and I'm looking down here the oil unit I think -- this is within one or two. I think about thirteen out of that 30 are oil and then the rest -- some of those there is three -- six, seven -- seven units that are coal. They are not utility coal boilers. They are coal industrial units. And then the rest of them burn like municipal waste and that sort of stuff.

Got you. Okay and I know we're running long on the call but just one last question. In China, there's obviously a lot of potential there and you are getting involved. How do you see the competition there? Who do you compete with or who will you compete with as you enter China?

For China on the APC side, on the APC side there is two levels. First the decision are they going to use ammonia in an SCR? The units right now that are putting stuff on are putting SCRs on them although we do have some discussions in China on some cascades. But the vast majority of the bids and discussions are around whether they are going to switch to a urea rebased system. There is a decision to go to a urea based system versus ammonia. There are competitors to our way of heating the urea and driving off the ammonia.

On technical analysis that we have come to to date, we had been winning because we can use any kind of urea where as our competitors really need to use a formaldehyde free formula that costs about 30% more. So we have a price advantage once the decision has been made to go to a urea based system. And we typically win those when they get there.

The way these awards come in China is -- and the way you bid them, or we bid them at least -- is they go out for an award to a major architect engineering firm to do typically a scrubber and an SCR on a unit. And then we will be bidding to the various major Chinese AE firms for our ULTRA and at the same time keeping the client informed.

Once we know that our teammate has won, they will negotiate their contract first with the client and then turn and negotiate with us even though we are a designated teammate that is the way you do with subs. So when we say we have high expectations, many of those cases, it is because we know that our prime that we bid into has already won the contract and is in negotiations with the utility. So we expect those negotiations to turn to us shortly.

That is the process that you typically go in there and there are competitors. There is nothing out there that people don't try to compete especially in China. But right now we think we that has been proven at least in discussions with client that we hold the technical advantage there.

Okay, great. Thank you.

Dan Mannes, Avondale Partners.

Good morning, everybody. A couple quick follow-up questions. The first on the order you guys just received I think with the city of Springfield.

Yes.

It looked like it was scheduled actually to come in next year Q2, Q3, so I guess the follow-up question to that would be with the January '09 deadline for compliance of care, what is the likelihood that while you may get a large backlog or you may be able to find a lot of deals, most of it will be back end loaded for next year and that could also be a risk for meeting this year's numbers?

Dan, it is a concern but for domestic orders, you have to do --up front you have to do the engineering. And then you have to get the equipment ordered. And then how far you go through that manufacturing process is really where you can recognize those revenues on a percentage of completion. If we sign something this year, we will get through that engineering real quick and be placing equipment orders. It just depends on if it is a late September signing, well there's just so much you can get done. If it is a late August signing, then you can get actually a lot more than 30 days would just indicate if you follow my meaning.

The revenue recognition kind of ramps up and it is not linear, it's more exponential. So how much we get done this year will depend where in the third quarter some of these things actually get signed. There is a time period when we have to get the stuff done and delivered to the site and then there is -- there will be some time period while the site is waiting for a month on their outage and then they are into their outage and then the stuff gets installed, so you kind of have a lag right in there where you are in start up before you can acknowledge the rest of those revenues.

So, there is a small buildup right at first in engineering. It ramps up a lot during equipment ordering and manufacturing and then you have some at the end during the startup and testing.

I guess if we want to start from the utility perspective and you sort of want to back it up and they want it up and running by the beginning of '09 and considering their needs to be an outage I guess for a final hookup which probably would be in the fall -- what is the latest they could potentially -- and I know this is a real broad question and there are a whole lot of different utilities with different needs -- but what is the latest they could sign on for you guys to still be able to supply for them to be able to meet that deadline?

What they will likely do, Dan, they won't put all of that stuff into a fall -- they won't wait for fall on all that stuff. They will do it in the spring and the fall. It's just depending on their outage schedule. They'll have them in one place or the other. They won't have them during the middle of the summer nor during the middle of the winter. So it depends. They know we can get the stuff still in time for a spring outage. So a lot of this stuff is spring outage stuff and fall.

Hopefully with some of these new orders we're going to see where they are going to have -- some of these units are going to be installed in spring, some of them going to be installed in the fall and we'll just have to see what their outage plans are when they come to us.

We think that the work we believe needs to be done this year would give us the revenues to meet the guidance we've got versus our earlier guidance. So we've taken that into account when we've given this 80 to 85 guidance as best we can today.

No, understood. And realistically, clearly this is a timing issue and I mean the final deadline to meet the regs isn't changing so it's just a question of when this gets realized. So that totally make sense.

And some of these guys, to be honest with you, that are coming forward now need the stuff for the -- they are actually in SIPCALL areas. They just weren't planning on driving these units quite as hard as now they are going to have to drive them next year and into the future. So they needed in place for them May 1 ozone seasons of '08.

Is any of this offset by maybe people who have larger units and are able to actually run SCR's full-year instead of just during ozone season? Does that kind of offset some of the needs especially on the larger fleets?

No, actually for the coal units are so deeply in the money that if it's a coal plant, coal is going to get dispatched way ahead of natural gas or oil with today's kind of prices. So even the smaller coal units, the difference between a $20 or $21 fuel and O&M cost versus a $25 fuel and O&M cost for a smaller unit is quite frankly in the noise when the market is $65 to $100 per megawatt hour.

I guess I was looking at it a little differently. I guess in terms of compliance as we get to an annual season in '09 rather than just a partial, is there the opportunity for guys who are already running their large and small coal units to comply more by running their SCR's for longer periods of time especially with bigger fleets, are they able to sort of manage the cost on the smaller plants just by running the SCR's on the larger plants even more aggressively?

Dan, that is actually a very good question, sir. You have done your homework. One datapoint for you there, the year-round doesn't kick in in '09. They have to go -- the new -- well it does kick in in '09 -- the lower numbers don't kick in '09. They go from 0.15 -- the year-round kicks in in '09. They will deploy and use those SCRs more but in the off quarters, in the spring and in the fall, for example, you will find those SCR units are having to cycle a lot more. They have to come way down at night because the minimum load goes way down when the milder weather. And they are having to run uncontrolled which is just -- which will just kill them.

In those cases you need an SNCR on smaller units to try to knock down to make up the difference in the SCRs when they are running uncontrolled. Brand new units can work around that with something called an economizer bypass. But you really can't do that very well on a retrofit. We have seen as we've been talking to utilities in their NOx planning and I know when I was doing those NOx plannings fort AEP, that night uncontrolled operation is real pronounced in the spring and fall. They may not even get up to full load during the day. They may -- 1300 megawatt unit might stop at 1000 megawatts and you have to have a number of the smaller units on for voltage support in some of the areas so you really can't do that run the few units max out and get maximum NOx reduction and make up for those smaller one.

Got you, thanks for that color. Last question just on China. And just a bit of a clarification. You guys are using what I would sort of term two different channels for a sale of products. You have the partnership with ITOCHU. And then separately, you are building up a sales operation for the APC side. Is there a difference in the customer or is there a reason you wanted to separate the two? Because if you're going to spend I guess -- I don't want to call it capital because I know it's not hard capital to build a sales force in China why not move more product through the same channel.

It could have. You know we were planning on going -- we were looking at both ways when we were looking at this. But there is two different business models for those business segments. The APC, we're working hard with the regulators to make sure the regulations are good for China but that we're also in a favorable position there. And then working with the major architect engineering firms and the utilities looking at what we can do. Now so there is that sales force, those relationships out there.

The FUEL CHEM remember is one where we want to have people on-site at the powerplant, We want to own the equipment or at least have some way of controlling what goes through that equipment so there is a whole different way you operate and logistical base you have to have where you have to have people on these sites all around the country. You have to be ordering chemical every week or every other day and having it delivered and shipped in.

It is that infrastructure -- we could have done it but it would've taken us years to flesh out that infrastructure as we won clients. The beauty with ITOCHU and they are a great company -- the more you get to know them the more you like them. They have that already in place. So that infrastructure just has to be just brought to bear for customers.

We think we can as opposed to having one customer and then maybe two next year and then maybe another one or two the year after that as we grow out, we think this thing can expand radically very quickly and that was the reason for forming this initiative with them that is separate and apart from our office there.

And Mr. Mannes, for any additional questions, please requeue. Jesse Herrick, Merriman.

How is it going, guys?

Hey, Jesse.

Just want to dig in a little bit on your contract cycle time on the Air Pollution Control side of the business. I know that we've previously said six to nine months and just looking at where bookings have been and where I guess what you've been recognizing so far, just wondering if that is starting to compress somewhat?

Absolutely it will compress right now. While typically it is six to nine months, you are still going to have and you have to look over an average because if we sign a contract in China that still might be a year kind of situation or Nine Or ten months, whereas a number of these might be 4.5 to 5 months here. The domestics are going to be more compressed right now with the delays and we're just going to -- we're out to make sure we can execute those.

Our guidance earlier was more of a not this is what we can do but rather this is what we have experienced.

Okay, so 4 to 5 months, is that just because you are rushing to get them done or is it because you guys are starting to I guess getting more used to executing on the same systems so it just becomes a quicker execution that way?

Well, it is a little bit of both. It's a lot because the clients are saying you've got to get it done as opposed to working 40 hours a week five days a week, those hours are going to get extended around here. It really is client dictated. We would rather not -- you'd rather not have to rush and work Saturdays and nights to get it done but if that's what the clients demands, that is what you have to do in a clients service arrangement.

Not is that going to hurt the margins in that side of the business for that to take place?

Actually it shouldn't hurt them at all, the margins actually probably will go up a little bit with that.

Okay. So domestically we're looking at 4.5 to 5 months. Then on the international side, where do you see that going? Do you see that still sort of the 9 to 12 months or are you going to compress those as well?

Right now the clients haven't pushed that as hard for that. So I don't see that compressing right now, Jesse, to be honest with you. I'd like to see a few more orders here. The ones that we signed in the first part of the year, those were for fast-paced projects. Those are all going to be done in six months, hell, we're starting up on those ULTRAs here right now. So we have over the next month, we will be starting up I think all those ULTRAs that we signed earlier or near about those. And at the same time we're starting up those SNCRs that we signed up in '05, too. So a lot of startup going on in China. So we can do it if the client needs us to do it. They've just been giving us a bit more time as we would hope they would.

Okay. Now my understanding is that when you typically announce a contract, I've been using that more or less at the beginning of the contract cycle. But obviously the $3.7 million contract that you guys announced I believe that was delivery second and third quarters of 2008" So that is -- and I believe that is domestic. So that would obviously not be in that 4.5 to 5 months cycle. Should I be --?

Well that is in the -- what the six months. Here we are -- well, yes, probably in more like the six or seven months. They have just given us a little bit -- they've given us about the right amount of time that we would hope for to drive it out into that six to nine month sort of seven months. When I was talking about those more compressed ones, I was really looking at somebody that signs up first of September and wants a March 1 delivery date.

Okay. Then if we looked at a typical contract and just sort of the breakdown in revenue recognition over that I know you touched on this briefly earlier. How long does that engineering -- the engineering work take at the very beginning of that?

It depends on how complex it is. In all cases our modeling will take two or three weeks according how complex that is. And that is a few hundred thousand dollars there according to how complex that is. And then the engineering on -- if it looks more like a standard stuff then you just have to tweak those designs a bit for the injectors and where they are going to go and how many of them and exactly what locations and then you place equipment orders. Those get more standard so the total engineering dollars are in the hundreds of thousands of dollars range. And then you go to the equipment where a large majority of the work is and the revenues are.

There are some projects that are more complex where we might not have exactly designed something like that need before, we would design stuff similar and we know how to do it. We just hadn't done it. In that case, the overall engineering might get up to $500,000 or something like that. And then you are into the equipment ordering phase. And if it is a little bit longer, it's a newer stuff its going to be a month later before you are going to be able to order that equipment.

Okay. All right, that works.

Jesse, one additional thing to add-on to that. Typically speaking you will go anywhere from say six weeks to three months during an engineering period and right after that you will go into your heavy -- heavier equipment purchasing routine starting to incur the additional cost. So when you hit say 5 months into a project, 5 or 6 months into a project you've recognized the majority of the revenue on a project. To John's point, if the engineering is not complex and you can get that done in a month and half, you are into your equipment procurement phase and within a month or 2 months after that or 2.5 months after that, you've recognized a significant amount of revenue on that type of project.

So it does vary between projects. But once you get into your equipment procurement phase, that is when you start to recognize the majority of your revenues and then it will taper down then during the last months of a project as it will go back into an engineering mode whereby we are involved with startup activities at that customer site.

So it has a little bit of a curve to it whereby you are starting off at a slower pace from a cost incurrence perspective. It will ramp up significantly once you start procurement of equipment and it will ramp down again toward that latter third of that project timeframe horizon. It's the complexity of the job that will determine how quickly we get into that procurement phase. And on occasion we actually will authorize the engineering group to do advanced engineering prior to getting that order in hand because if we have a level of confidence that the order is going to be granted to us within a near-term perspective and we know we're going to have a tight deadline with the customer, we will start that engineering work early in anticipation of that and we've done that at least three customer accounts already.

Okay. So would you characterize it them as sort of middleweighted or back-end weighted?

They are all middleweighted. They will always be middleweighted once we get into that procurement phase.

Okay. All right. Now, you talked earlier about 5 to $20 million range on potential orders coming on this side of the business. I guess that would potentially indicate that there could be some CASCADE somewhere in there.

I wouldn't make that assumption.

That 5 to $20 million could be for multiple units, whether it is ULTRA technology or SNCR technology.

I think the largest contract we've ever signed in our history was, what, 9.5 to date?

Yes, that was one of the China orders.

Yes. I think if we are right, we are going to bust through that pretty good on some of these.

Okay. And multiple unit orders rather than a one-off like a CASCADE, most likely?

Yes. We're a one-off as in somebody gives us one SNCR, which I think John Quealy was asking about earlier. These are going to be the $2 million per order kind of order. And the discussions we're in with most of these clients are for substantially more work than that.

Okay. When we do eventually get to the CASCADE stage, are those contracts -- do you foresee those being similar cycle times as the SNCRs or the ULTRAs?

Well, they might be a little longer because of the ductwork you have to put in there, and that is where the price gets high. You have to put the one or maybe two layer of catalysts in there in the ductwork and expand the ductwork a little bit. It's a lot cheaper than an SCR, but there is still a good bit of work.

The first thing a customer needs to do if they're doing a CASCADE is to do the SNCR work. And if the customer is asking us that they have a potential for doing a CASCADE, then we will tweak that design slightly so that we are ready to overfeed those injectors if we need to when they move forward. And we won't be able to announce to anybody, because the customer's plans on whether they are thinking about it or not thinking about it for a particular unit are very confidential within their realm with us.

We may know what they are thinking, but we couldn't say anything about that. But that is what you would see. You would see SNCR or maybe SNCR Rich Reagent injection, which is the second thing they would do after boiler [mines]. And then their plans later could be expanding quickly into a CASCADE.

Mr. Herrick, for any additional questions, please do requeue. Mark Tobin with Roth Capital Partners.

Good morning. A quick couple of bookkeeping questions. On the tax rate, is it still safe to assume a 38% rate going forward?

I would do that. We have a little bit of a tax benefit anomaly that we are experiencing in the first half of the year, and that is why it is down to that around 34-ish% rate. I would use 38% for the remainder of the year.

And your guidance is based on that assumption?

Yes.

I'm trying to look at SG&A. Obviously a large portion of that this quarter was stock-based comp. Is that driven by the stock price during the quarter? In other words should we see that come down by -- back to the $6 million range in the back half?

I wish.

No. The reason for the uptick in stock comp expense in Q2 is the fact that we had an award of options to our directors. And this particular stock award actually vests immediately so with the immediate vesting you recognize all of that expense immediately. Now, the equivalent, that was approximately $900,000 in terms of impact on the SG&A line in Q2. So that will not the recurring in Q3 and Q4. You will see a stock comp number in Q3 and Q4 that will be similar in nature to what we put out there for Q1. So just by design, you are going to see a base reduction in SG&A in Q3 and Q4 relative to Q2. Does that make sense?

That makes sense.

Just generically, our stock comp expense is going up and generically it's going up because the value of our options that we are granting have gone up significantly. And that is driven by essentially by the price of the stock outstanding.

At the time you sign it. So if a stock price comes down it doesn't really hit you, you don't get the to recalibrate that like Shoals (inaudible).

Okay, that makes sense. And then one follow-up and maybe a different way to ask this on the Air Pollution Control side. Obviously you have a lot of proposals that are out there. When you look at your guidance, what type of win rate percentage are you estimating or assuming when you come up with that guidance?

Well, the guidance is assuming on the APC side stuff that we've been told we won. On the FUEL CHEM side again, it is assuming stuff that we have a high confidence that we are going to get the contracts executed and win and start it up this year. Anything can happen but we didn't -- when we selected that we didn't actually use much of anything that we weren't real certain of. In many of those cases, certainly in one particular one for a major client we got an e-mail that says you've won the contract and expect the PO date on this date. Well, there is nothing we can do about an announcement with regard to that but it is events that we've already started some engineering work associated with that.

Okay, so these are orders that have been evaluated by your customers and decisions that have essentially been made, it's just a matter of making them official?

That is the phase we believe all of these in that we used this guidance. Again, the real issue for us on how we look at our -- this $80 million to $85 million revenue range is okay, is that client -- if they're going to order it August 23, that is one thing, if they delay until September 10, or September the 15, that is a month loss in revenue. How much can we actually get done at that point for the rest of the year.

Okay. And on the APC, what is the level of customer concentration on the orders of the proposals that you have out there?

There isn't -- it's a number -- it is a number of customers. It's not just one or two.

Okay.

If one or two -- obviously if you lose anything or if you get delays on any of them that is less but it's not like we're sitting around waiting on one client and if they shift the whole stack of cards tumbles.

Okay, that is helpful. Thank you, guys.

(OPERATOR INSTRUCTIONS) [Zande Batu], Thomas Weisel Partners.

Quick question on 2008. Where do you see the growth coming from? Is it going to be primarily domestic or is it going to be international?

Well, two items here. Domestically for the APC sales, I would be shocked and amazed, but of course I've been shocked and amazed before, but I would be shocked and amazed if we don't end this year with a substantial backlog going into next year for APC domestically. And a pretty substantial backlog for some international work too. I think our FUEL CHEMs -- you know I expect to see us have that start up in China soon on a FUEL CHEM client and how far and how fast we go next year is yet to be seen on FUEL CHEMs internationally.

We expect to see a pickup in some of the European orders on the APC side of the equation especially from the Eastern -- Eastern Europe as they join the EU part of their requirement in coming into the EU is to reduce NOx. And the levels to which they need to reduce NOx are right in the sweet spot for some of our technologies. And I think you will see some awards coming from that Eastern block area. former Eastern block area soon and next year. So I think you are going to see it across the board domestically, FUEL CHEM hopefully is we're going to keep that thing cranking up with some more wins domestically here.

Right so just to touch upon the NOx segment as such. The SIPCALL is obviously winding down and we've seen a shift to [CAIR]. Somewhere in your presentation you had mentioned that in fact from CAIR was kind of limited in the number of boilers than SIP so I'm just trying to understand why do you think the business would be better than what it was during SIP orders or there something I am missing here?

The business is better than what?

Than you know, what it was during the SIP regulation? (inaudible)

First, a number of the clients that we are in discussions with today, for SNCRs are all in SIPCALL states. The SIPCALL deployments are still going on those -- they're going to be impacted by year round NOx requirements and cycling units as we talked about earlier with a caller. So there are still a lot of units that haven't done anything, they were looking at the potential for new units coming on that would mean that they weren't going to do anything. Now that those new units are not coming on even in those SIPCALL areas, they are now looking at needing to deploy NOx reduction technologies.

For the new states and for the further restrictions on CAIR on year-round operation, that especially on the industrial side we haven't yet seen the surge that we expect there. They are still working with the Feds on some of the specifics for some of those industries.

I think the next decade is going to be one where across the nation there's going to be significant work that needs to be done to clean up industrials and powerplants and university boilers. We've got some work that we're doing now on ULTRA systems out for the University of California for gas-fired units out there. Remember NOx is something that you have to control. It's not a coal issue. It's anytime you are burning anything and using air your going to generate NOx.

So if it is in ethanol plant and you've got for your distillery as part of the ethanol plant you've got a NOx issue. So I think we're going to see at least a decade of some serious work far beyond what we have seen to date in the United States on NOx control.

That was very helpful. About China, the FUEL CHEM segment has it made any developments with ITOCHU as such? Any timelines that you can offer on that?

Well the only timeline has been that I hope and expect to have a FUEL CHEM order this quarter with ITOCHU. And let's get that running. That's ITOCHU's expectations too, we've narrowed that down to a handful of client targets from a long list that we want to go after it immediately. Now whether we can get that done will depend to a certain degree on how quick we can negotiate a deal with the Chinese utilities. We are in some pretty advance discussions with some of those and we have hopes that we can get it done this quarter, if not for certain this half to get one going.

And then part of that deal, if you remember, was to do one real quick to see how if there's anything logistically and relationship-wise that surprises us and then to work on a joint venture that we could move forward with quickly. And we have a part of one of our action plans with the team is working on that joint venture right now on the framework for that. So there is a lot going on in ITOCHU. It's a very high-energy, very fast action relationship right now. Amazingly so.

We just completed a very extensive week long training session of the ITOCHU sales team. They had representatives from each of there four regional areas in China. To John's point, the pace that we're moving relative to try to penetrate the marketplace is truly extraordinary. And we're expecting to reap benefits as quickly as we can.

In fact the team we had a train the trainer kind of session for the senior team here in the United States over two weeks. That was done several weeks ago including a pretty extensive visit with one major client that they came away very impressed with that process and learned a whole lot. And now they've gone back and just recently completed all the training for their much larger sales force as Vince was saying throughout China. So that actually is moving along at an incredible pace.

Sure. Just a quick housekeeping question. Do you anticipate any higher (inaudible) expenses from that new China office that you set up and could you give some color on that?

We are going to have expenses from the China office. It actually officially started up in the month of July and we actually now have 11 employees on staff for the China office. Now, yes, there are going to be some operating expenses relative to that office. But the majority of the employees that we have similar to here in the U.S. are engineers. So as soon as those engineers are deployed on project work, they no longer become SG&A expenses, they become cost of sales.

So what is going to happen is is the fact that when we win project work there, the actual impact of their SG&A cost is really going to be limited in nature. Now another point I will note is that we have incurred some expenses, not insignificant in terms of getting that office up and running here in the first half of this year, legal fees to the tune of $250,000 to $300,000 and getting that office up and running. But that fell through in the first half of the year and that is in our numbers already. As we go forth into the future I don't expect a huge incremental SG&A hit from China as of this point in time.

And a large part of their engineering costs, we have already been bearing for a while with some of the work that they -- some of the projects that -- we just hired all the key folks just came on very recently just as Vince said right at startup.

In the NOx segment, which would be the product that you finding the most demand for in China? Is it the ULTRA, is it the CASCADE or is it the standard [SNCR] product as such?

In China right now it is ULTRAs because the large majority of their environmental controls are SCRs and scrubbers. They are putting a lot scrubbers into try to slow down their acid rain growth and clean up the air around the big cities they are putting SCRs on most of their units especially all these new units. So it is ULTRAs right now. The retrofit market for SNCRs and CASCADEs predominately will occur in the next decade when the twelfth five-year plan kicks in in January of 2011.

Thank you.

John Quealy, Canaccord Adams.

Sorry to do this. Real quickly on M&A, are those efforts sort of on ice for a while until we get APC order visibility back or are you still looking at M&A?

Actually it is on a faster pace than it ever has been.

In terms of areas, John, we talked about Mercury in the past. Any other areas that you are looking at?

Yes, the areas that are important are Mercury, SO2 and CO2. And we are looking to try to find innovative solutions to all three.

Thanks, John.

Jesse Herrick, Merriman.

I will be quick as well. Just wanted to see if you could outline the incremental drivers following the phase in of the Clean Air Interstate Rule and January 1 2009. Where are the incremental drivers to get people to continue to adopt the technology?

First there is a whole bunch of new states along the Mississippi that are now needing to deploy NOx controls that didn't have NOx control regulations outside of new source review at least on a national level heretofore. The other is the shift moving from seasonal ozone to year around ozone. And you know, there is a whole series of regulations that you can go to the EPA site and look at all of those on how they can convert credits from seasonal credits to annual credits and it's not directly one-to-one at all. So utilities, they are having to learn a lot of stuff out there.

There will be more serious -- more stringent requirements under CAIR that kick into 2014 or 2015, I have to look, to be honest, Jesse, going from .15 to .125 for all in the U.S. So you get all of those new clients and then the Clean Air Visibility Rule as it comes into play is going to require -- it requires SOX NOx and particulates. Those will be the three things that will be contributing to regional haze or clean air visibility and that is nationwide. So over the next decade, there is going to be a huge surge in NOx cleanup across the nation and -- it's not just coal units. It is anybody who is burning anything.

Okay. And then last question, just if you could -- is there sort of a set date when these orders on the APC side of the business would have to come through the door for you guys to actually hit or miss date?

No, there isn't a set date because they are all across the thing. But I would tell you, Jesse, that if -- the earlier in August we can sign some of these the better it will be for Q3 revenues and for annual. As long as they are in place in September, the fourth quarter will get what we can there. We've tried to use our best estimate on when clients are going to sign and almost all of the ones that we know about -- correct me if I'm wrong -- but there all going to be -- we expect them all by about mid-September.

End of September at the latest.

Yes. So to the extent we can get some of these in here in August instead of the first of September, if we could get it to mid-August that helps for the third quarter kind of numbers. Fourth quarter and backlog I'm not actually -- I've never been more encouraged ever about where we're going to end up and going into '08. The real issue here is how much can we recognize of that in '07 to make our '07 numbers?

All right. Well I'll let you go. You poor guys have been talking for about two hours now.

Thanks.

Have a good one.

I'd like to turn it back Mr. Norris for closing remarks.

Thank you very much for the interest in our Company. We wish we had orders earlier. We work real hard to try to do that and we wish our FUEL CHEMs more of them had started up earlier especially our new accounts. But wishes don't make it happen. We believe that we're going to have a heck of a fourth quarter and the third quarter is in question. We believe our guidance is accurate with 80 to 85 and $0.30 to $0.35 a share earnings. And with that, thank you very much and you all have a good day.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very much. Have a great day.