Fuel Tech Inc (FTEK) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2007 Fuel Tech, Inc. earnings conference call. My name is Katina and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Katina and good morning everyone. Welcome to Fuel Tech's third quarter conference call. By now all of you should have received a copy of today's release. If you have not, please call our office at 203-425 9830 and we'll be happy to send you one. Joining me on the call this morning is John Norris, President and Chief Executive Officer, and Vince Arnone, Chief Financial Officer.

As a reminder, the matters discussed in this conference call except for historical information are forward looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward looking statements. The factors that could cause results to differ materially are included in our filings with the SEC.

The information contained in this call is accurate only as of the date discussed and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed on this call and as a reminder, this call is being broadcast over the Internet and can be accessed at our web site, 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 third quarter include $15.2 million in revenue, down from $20.2 million in the third quarter of '06. Net income for the quarter was $0.9 million, down from $2.1 million in the same quarter last year. For the nine months of 2007, our revenues were $47.7 million, down from $57.1 million last year. Net income for the nine months of this year was $2 million, down from $5.4 million last year.

Our results so far this year are below our expectations, but are the result of timing for both of our business segments rather than a fundamental shift in the market or any of our products and services. As we look at the details of the results by business segment, we find our capital projects or Air Pollution Control segment had revenues of $6.9 million in the third quarter versus $11.2 million last year.

Revenues for the first nine months of this segment were $23.1 million versus $36.7 million last year. The decline is due to delays in new contract signings this year and a winding down of two large China projects which contributed heavily to last year's results. As we look at these specific items, I think it is instructive to look at our announced Air Pollution Control segment new contracts over the past few years.

During the first half of 2005, we announced $18.4 million in new awards. In the first half of 2006, that number was $16.7 million. This year the amount was $10.9 million, down substantially from the prior two years. In the third quarter of 2005, we had a record high announcement of $13.7 million, while in 2006 we had $5.5 million. The third quarter of this year blew away all prior records with $24.7 million in new awards. In fact, with the $7.2 million announcement in October of this year and with the $8.4 million announced last week, our year to date total is $51.2 million, which far exceeds all prior full year totals in our company history.

We may have started slow, but we're on a record setting pace and additional awards are expected before the end of the year. However, while the third quarter announcements were record setting, they occurred late in the quarter. $21 million of the $24.7 million announced were too late in the quarter to have really any significant impact on our quarterly revenues or profits. These new awards will have a significant impact on our fourth quarter results and all the recognized contracted revenues should contribute to an outstanding backlog of work for 2008.

As we look at some of the details for our Air Pollution Control segment, beyond just the revenue dollar totals, it is gratifying to note that of our 2007 announcements our traditional NOxOUT SNCR technology continues to enjoy widespread market acceptance with $32.9 million in new work year to date. While our newer ULTRA technology, which provides safe ammonia supply for SCR's has enjoyed $18.3 million in new awards, including two awards in China, one in Europe and two awards in United States. This is really significant since it signifies growing domestic and international market acceptance of this technology for units of all sizes new and old.

With the recent very successful start up of our newest ULTRA system in China, and the very favorable public announcements of that start up within China, the interest by potential clients in this technology is incredibly high in China. We hope to be able to translate that interest into successful contract awards.

Finally, our newest Air Pollution Control technology, NOxOUT SNCR CASCADE is generating a great deal of client interest in domestic and international markets as evidenced by the award last Friday for the SNCR's in this first purchase order are designed to upgrade to a CASCADE system at the utilities options in the future. We fully expect to see this sort of interest manifest its contracts in the not too distant future in that technology.

Looking specifically at International APC markets, China remains the market with the largest unserved NOx control needs in the world and our new Beijing Fuel Tech office has hit the ground running to help address those needs with Fuel Tech technologies. We have an unprecedented number of proposals and clients in China and expect a number of those to manifest themselves as contracts in the not too distant future. But China is not the only international market for our NOx control technologies. One other area which holds near term promise is the Eastern European countries, which must reduce their NOx emissions as a requirement for membership in the European Union. Our office in Milan is vigorously pursuing leads in this area as evidenced again by the award announced last Friday in Romania.

For our FUEL CHEM business segment, our revenues for the third quarter this year were $8.4 million, down 7% from last year's all time record quarter of $9 million. And for the first nine months, revenues of this year were $24.6 million, up 21% from last year's revenue of $20.3 million. While the year to date numbers are up substantially from last year, they are well short of our expectations. This is especially true since our growth in contracted FUEL CHEM customer units has been outstanding this year with 11 new announcements, nine of which were coal fired. We only announced four all of last year.

With all these new contracts under contract -- all these new units under contract, one would have expected to see a dramatic increase in revenues. Unfortunately, due to circumstances beyond our control, only two of the new units were even installed and pumping chemicals going into the third quarter and with various utility operational issues, our third quarter revenues were basically flat from the second quarter. The slight tick down from 2006 with roughly the same number of major units running appears to be due to lower electric demand this year versus last.

Contrary to all the media hype about global warming, 2007 is actually not hotter than 2006. Year to date through midsummer numbers from the Energy Information Administration saw electricity demand and generation down about 4% from 2006. The New York Independent System Operator notes that peak electricity demand this summer was 1800 megawatts less than in 2006 and at the six hottest days this summer were actually close to normal high temperatures for those dates.

Our feed rates are based on coal use which is based on unit loads. So, if the units are not running as hard, then our feed rate is not as high. These sort of fluctuations as well as periodic unit outages will always be a factor in specific quarterly revenue fluctuations, especially while we're a small company or have small number of FUEL CHEM customers. The real driver for increasing revenues is to increase the install base. The good news is that the rest of our new customer units are being installed now. How much they'll contribute to revenues in the fourth quarter of this year is uncertain, but they should provide an excellent new baseline for 2008.

Speaking of install base, we posted on our website today a breakdown of our current contracted and installed or being installed units. We hope you'll find this information of interest and useful. Looking at the chart, and I hope you have that in front of you, you'll see that we've broken our customer units down by size and by fuel type. For the size breakdown, we're defining a large customer unit as one 500 megawatts or larger, medium size units 100 megawatts or larger up to 500 megawatts, and small units are those less than 100 megawatts.

We have further broken down our customers by two major fuel categories; coal and non-coal fuels with similar needs. The latter category would include biomass, municipal solid waste, petroleum coke, black liquor, wood, tires, olive pits, and heavy oils with slag in S03 issues similar to coal. For the U.S. market only, we've also provided a breakdown of what we believe to be the potential addressable market. As you can see there are about 266 large coal electric units in the U.S. and 14 of those are our current customers. There are about 544 medium size coal units and 10 of those are our customers. Finally, there are 698 small coal units and eight of those are our customers. To complete the coal units, there are two medium size units in Europe. Total coal customer units are 34.

For units using non-coal fuels, we estimate that there are 20 large units in the United States and seven are our customers. There are 58 medium size units and 7 are our customers and there are 590 small units and eight are our customers.

Internationally, we have one medium size unit with is fuel type and 31 smaller units. The last group includes the three small -- as an example, three small 30 megawatt units in Mexico where we've had such a dramatic impact on the visible SO3 plume as well as the two small olive pit burning units in Italy. Our worldwide total number of FUEL CHEM customer units is 88.

As you can imagine with a high price of oil, some of the oil fired units are only used as peaking units so our revenue from these is spotty and periodic. We have not undertaken an effort to define the international FUEL CHEM market potential, but we believe it to be enormous. Our total FUEL CHEM customer base is a good bit larger than we had previously discussed with you. The difference is in the small international units burning non-coal fuels, especially oil. We'd not talked about much those because the annual revenue stream from a given unit in this category is small. But there have been some misinformation out in the market that our FUEL CHEM programs are not effective on very small units. Nothing could be further from the truth and it's time to set the record straight.

In China, our partnership initiative with (inaudible) is making significant process toward landing our first FUEL CHEM contract there. We still hope to be able to announce that success this year, but contracts can take longer than you sometimes expect as we've demonstrated this year to reach final agreement. That is especially true for the first customer contract in China. But there is a very large amount of interest in our FUEL CHEM technology among major Chinese utilities and we believe we will ultimately have great success there.

We also continue to pursue FUEL CHEM prospects in other international markets, especially Mexico and India. Our recent successful project in Mexico has kindled much interest in other facilities in that country. We hope to translate that interest into new awards in the near future.

Now, our Chief Financial Officer Vince Arnone will go over the financials in detail with you next including our outlook for the end of year results and I won't steal all his thunder. However, I will note that even though our year to date revenues are down $9.4 million from last year primarily due to contract delays and delayed startups of our FUEL CHEM customers, we are anticipating a record breaking year. So the fourth quarter is expected to be outstanding and the company appears poised for excellent growth in 2008. Now I'll turn the call over to Vince.

Thank you, John, and good morning everyone. As John mentioned, net sales for the third quarter were $15.2 million, down from $20.2 million in the prior year, while net sales for the nine months were $47.7 million, down from $57.1 million in the prior year. Net income for the quarter totaled $0.9 million or $0.04 per diluted share compared with $2.1 million or $0.08 per diluted share in the prior year. Net income for the nine months was $2 million or $0.08 per diluted share, compared with $5.4 million or $0.22 per diluted share in the prior year.

The third quarter and nine month results included $1 million and $3.7 million in stock based compensation expense versus $0.3 million and $1.4 million for the comparable periods of the prior year. 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 stock.

On a full year basis, the year on year after tax impact of the additional expense is $0.06 per diluted share. Additionally, in the third quarter and first nine months reflects $0.6 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 $6.9 million and $11.2 million for the quarters ended September 30th, 2007 and 2006. Nine month revenues for this segment were $23.1 million compared with $36.7 million in the prior year. Revenues are down from the prior year due to timing on the receipt of new NOx production orders domestically and due to the winding down of two NOx reduction projects in the People's Republic of China. Although revenues are down, this segment is positioned well to capitalize on the next phase of increasingly stringent U.S. air quality standards.

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.

As John noted, we have had contract announcements of $51 million year to date, $40 million of which has been announced since July 1st. Our backlog is approximately $28 million at the end of the third quarter, which equals a record level for fuel Tech and $15.6 million in contract value was announced subsequent to the end of the quarter.

Revenues for the fuel treatment chemicals segment were $8.4 million for the quarter versus $9 million in the prior year. For nine months, revenues are $24.6 million, up from $20.3 million in the prior year which is a 21% increase. The increase reflects the continued market acceptance of Fuel Tech's patented Targeted in Furnace Injection technology, particularly on coal fired units which represent the largest market opportunity for the technology, both domestically and abroad.

The year on year growth of 21% did not reflect the impact of all nine coal fired units that Fuel Tech has added to its customer base thus far in 2007, as only two of those units contributed on a substantive level in the first nine months of the year with the remainder scheduled for startup at varying times during the fourth quarter.

The outlook for the FUEL CHEM product line continues to be favorable both domestically and internationally. With the addition of nine new coal fired units to its customer base thus far in 2007, we are encouraged by the increase in rate of penetration of the domestic market. Internationally, we continue to monitor the expedient progress of the exclusive teaming arrangement with [Attochu], which has as its sole focus the penetration of the Chinese market for FUEL CHEM. We believe that this agreement will accelerate penetration of the Chinese marketplace by at least five years.

On a global basis, the increased focus on the reduction of greenhouse gases and on the need to meet growing electrical demand bode well for incremental growth in the future. These facts combined with the increased long term utilization of coal as the world's primary fuel source for power generation leads us to continue 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 nine months ended September 30, '07 and '06 was 45% and 49% respectively. The gross margin percentage for the NOx reduction business decreased to 41% from 44% in the prior year due to the mix of project business. For the fuel treatment chemical business, the gross margin decreased to 50% from 57% in the prior year. The decrease is due to startup costs related to the incremental units noted above; however, without the realization of related revenues, as only two units contributed revenues during the first nine months of the year.

SG&A expenses for the quarter ended September 30, '07 and '06 were $5.7 million and $6.1 million respectively, while these expenses for the nine months were $18.1 million and $17.6 million. The $0.5 million increase for the nine months was due to the recording of $3.7 million in stock compensation expense versus $1.4 million in the prior year as I have mentioned previously. And when you exclude the impact of the stock compensation expense, the remaining favorable variance in SG&A of $1.8 million is due predominantly to timing on revenue related expenses.

R&D expenses for the nine months ended September 30, '07 and '06 were $1.7 million and $1.5 million respectively. Fuel Tech continues in its pursuit of commercial applications for its technologies outside of its traditional markets and in the development and acquisition of new technologies that could represent incremental market opportunities.

The increase in interest income in the first nine months of '07 versus the prior year is driven by higher average cash and short term investment balances versus those experienced in the prior year. As previously noted, net income for the third quarter in nine months ended September 30th reflects $0.6 million and $1.1 million in income tax expense, virtually all of which is non cash.

Our balance sheet remains strong based on the leverage of Fuel Tech's business model. At September 30, '07, Fuel Tech had cash and cash equivalents and short term investments of $33.5 million and working capital of $45.2 million versus $32.4 and $38.7 million at the end of 2006. Operating activities used $1.1 million of cash during the first nine months of 2007, primarily due to the change in working capital from year end.

Investing activities generated cash of $5.4 million during the first nine months as the decrease in short term investments provided cash of $8 million. This amount was then offset by $2.6 million in capital expenditures required to support and enhance the operations of the business principally for equipment related to the fuel treatment chemical technology segment. Fuel Tech generated $4.8 million in cash from financing activities. Stock option exercised activity generated cash in the amount of $2.3 million. Of this amount, $0.9 million represents proceeds from the strike prize of options exercised, while $1.4 million represents the tax benefits realized from the exercise of stock options in the first nine months of '07.

In addition, Fuel Tech generated cash in the amount of $1.1 million resulting from the issuance of Director's deferred shares of stock. And lastly, Beijing Fuel Tech, our newly formed wholly owned subsidiary borrowed $1.3 million in funds to meet short term working capital needs for this new legal entity.

Fuel Tech's market interest and sales activity continues in an unprecedented pace. The longer than expected delay in the receipt of NOx reduction orders and the timing and startup of new FUEL CHEM units has delayed our short term revenue recognition; however, we do not see this as indicative of any fundamental change in business outlook.

We have adjusted our revenue guidance for 2007 to $76 million to $79 million. The NOx reduction technology segment is expected to generate $44 million to $46 million in revenue while the FUEL CHEM technology segment is expected to generate $32 million to $33 million in revenue. Our net income for this revenue range is expected to fall between $0.25 and $0.28 per diluted share. The impact of stock compensation expense on Fuel Tech's net income is expected be $0.12 per diluted share on a full year basis.

With that, I'd like to turn the call back to John.

Thanks, Vince. In summary, delays in signing contracts in our Air Pollution Control business segment and delays in startup are the majority of our new FUEL CHEM customer units have caused our revenues and profits to be below our expectations year to date through the third quarter. We now expect a record fourth quarter and to enter 2008 with an extremely strong backlog and a record base for FUEL CHEM. Katina, let's open the lines up for questions.

Thank you. (Operator instructions). Your first question will come from the line of John Quealy representing Canaccord Adams. Please proceed.

Hi. Good morning. First question on the FUEL CHEM business, if we can talk about the Q3 year on year decrease in revs. So, you talked about plant outages, operating issues and electrical demand. John, I think you covered electrical demand pretty well. Can we talk about the two other issues here? The outages and the operating issues. What exactly was going on in terms of the 7% decrease. Which contributed the most?

Well, since the units -- you can't define them as to which contributed the most. They all were contributing factors. Outages, there were a couple of units that took outages earlier than we had expected. They took them in September, so that brought them down a bit earlier. They didn't --last year was hotter and they didn't bring them down as early because the load demand was pretty high last year.

There was, I think, one or two units that were trying some different coals and were looking right before they went into an outage and they tweaked down our volume a good bit on our injections to see what would happen with those and we worked with them on all of those. The electrical load wasn't as heavy, so they didn't - they could afford to trim the unit back some. It was a number of those kinds of issues, John, across the whole spectrum with our units, so it was a pretty flat - down a little bit from last year, but certainly doesn't reflect the 11 new units that we've signed up by any stretch.

As a follow up to that, for the units that are getting installed, I guess the nine coal fired units I'll focus on. Two things, generally speaking how much of the two units on line contribute in the Q3 period and as a follow up to that in terms of the longer process to install these, this seems like it's a longer process, but is it tracking with your expectations?

I'll answer the latter one and let Vince answer the first one. The process for us, we can have them up and running starting from scratch in a model in six weeks or less. So it really isn't anything with us. This had to do with a number of those clients. In fact, the majority of those clients for reasons on their side of the fence did not get the systems. They wouldn't let us put the injection ports in before the summer heavy generating season and they won't take an outage for that sort of stuff during the summer season.

And so, once we didn't make it by June, the next opportunity is going to be in September to put those things in as they're coming down for outages now, we're putting them in now. On one of them, the client was waiting on a tank and hopefully that will be coming in soon. They wanted a permanent tank even for the trial. They expect it to be a success. We try to have -- now we're going to have a tank in a warehouse. We didn't expect a plastic tank to hold us up on something like that. So there were a number of those kinds of issues. They really didn't have anything to do with us, but there was a client dictated and all of those are resolved now and are being installed now and should start up. I think all of them will be running, certainly, by the first of the year.

I'm sorry, how much of those two give or take --?

Vince will --.

John, regarding the two units. On a year to date basis those couple of units generated just about $1.5 million on a full year basis for the nine months. The third quarter specifically, you're talking approximately $500,000 to 600,000 there. They unfortunately were offset by couple of bid units that had come down or throttled back.

Okay. My final two, I guess, here. APC, so $40 million of new orders since August or July, I guess. Can you talk about the gross margin expectations for those? It looks like gross margins, at least in APC, hung in there this quarter. Can you talk about --?

I think you'll see those come back up. We're still expecting the low to mid 40s; 43%, 44% overall ongoing even with - we're getting a number of installs with some of the new orders, but we still expect that low 40 range. And on FUEL CHEMs, we still expect a low 50 range going forward with those.

And in terms of forecasting, John, you tweaked out guidance for the second time this year. You talked about a lot of external and internal factors that led to that. As you gave us Q4 guidance and as we can look ahead to '08, what's changed in your approach or your methodology based on all the external circumstances you folks deal with with a very conservative utility base? How has your forecasting change?

That's a good question, John. When we made our adjustment at the end of the second quarter, we had taken what we thought were dates that we would have. All of these orders we've been negotiating with or know we've had for quite some time, the vast majority of them, and we took a look at when we thought we were going to get them and then took a little bit of conservation with that, added a few weeks delay and as we said, we came up with our estimate and then gave a band on either side of that.

The trouble was the actual contracts came in about six weeks later than we were expecting in almost all of those cases. They're coming in too late for us to get too much equipment ordered in some of those cases. Now, what's changed? Well, now we're basing the fourth quarter estimate, end of year estimate on contracts we now already have in hand. We're actually not counting on much new work for making our fourth quarter numbers. We try to provide as much detail and as specific a guidance. We try not to sandbag too much and again we had thought about the last time maybe we should have. Live and learn. That tweaked lower. Had one of those contracts, the larger one of the ones we signed there at the end of the third quarter, had that come in three or four weeks earlier, we would not be tweaking down guidance right now.

Okay. Thanks.

Your next question will come from the line of Michael Carboy representing Signal Hill. Please proceed.

Good morning, ladies and gentleman. I guess congratulations on a good careful balance sheet management on the quarter. A couple of questions for you, John. First off, we were bedeviled earlier this year with some unexpected shutdown plans very early in the year. Now it sounds like we're having some in the tail end of the year. Are you seeing any shift in the way utilities are planning their outage profile for next year because that will obviously affect the rate at which installations can be made?

Not yet. The fall outages people were able to enter a little bit earlier because the weather just wasn't as hot this year as last year and the projections this year are for a very cold winter, much colder than normal. Utilities look at those sorts of things right now and they are pushing outages a little bit earlier to get ready. I noticed, I think in Michigan, they're expecting 10 inches of snow today. Utilities look at weather patterns across the U.S. and really try to adjust those outages as best they can in the spring and fall. So you're seeing some of those early ones now, which again, on a quarter versus last year quarter causes a little downtick on the FUEL CHEM side.

On the APC, they're installing the equipment that they are ordering now in the spring of next year and in the fall of next year. So, some of our announcements on some of those orders will all be done by the end of next year. In most of those announcements, some of the SNCR's are going in the first part of the year in those spring outages and some are going in the fall outages to get ready for '09. Utilities will be buying equipment for years with regard to that care, just like they're still installing equipment to meet commitments under the SIP Call. That will be pushed a little bit closer in time toward us because the care rules are for annual operation of the NOx control equipment and those seasonal credits won't transfer one for one to be annual credits. Does that help? I was trying to answer. I hope I answered what you were trying to get to.

The smart spread on the coal units is still (inaudible) natural gas units. These things are going to be in sort of a must-run condition, won't they? Doesn't that suggest that APC install may be broader than people may believe?

I think existing units are going to be almost like gold to existing customers. It's hard to get new ones built and the price of natural gas, for those of you that have been following that, that's up at $8 and climbing. As people switch from coal to gas, that's going to drive the price of natural gas up considerably and that smart spread is going to get even wider; $25 versus $80 today, coal verses gas. That's a hell of a spread.

Okay. Can I get you to elaborate a little bit on the natural gas opportunity - the opportunity to install a NOx control on natural gas installations. There are a whole lot of gas fired boilers, not gas turbans, but gas fired boilers that are out there in both industrial land, domestic and U.S. I'm wondering what you think the opportunity there might be.

Well, it's really good, Michael. Don't exclude the gas turbines. Some of the newer gas turbines don't need our retrofit technology, but even on some of those where they are putting SCR's, even small ones. We have actually tweaked our ULTRA design to have small package gas turbine ULTRA units. We only make a few hundred thousand dollars on those, but we're trying to address that whole market on the APC side.

If you're burning natural gas, you're creating NOx and you've got to bring it down, too. You've look at the numbers, I know. There's thousands of units out there burning natural gas and thousands burning oil in addition to the coal unit. All of those are going to have to eventually do something about NOx. There's various ways and our technology won't be for all of them, but that addressable market is enormous.

Okay. And then two last nuts and bolts questions. Vince, given the way -- usually in Q4 you get a margin bump as you achieve some volume purchase points in [MagOx] acquisition. Do you still expect to reach those margin break points this fourth quarter?

Yes, we do. We realized a little bit of benefit in Q3 and we'll continue to realize another small benefit in Q4 as well.

Okay. You had mentioned that there was about a $1.6 million or $1.8 million positive variance in SG&A that just occurred because of the way costs rolled out as part of project timing. You're not suggesting that we're going to see SG&A continue at these very attractive albeit low and attractive rates. They're probably going to pick up a little bit.

I would expect them to pick up a little bit. Exactly right.

All right. Thanks folks.

Thank you.

Your next question will come from the line of David Edwards representing Morgan Stanley. Please proceed.

Hi, there. Thanks for the question. Just two things. One, on the FUEL CHEM side, I guess I'm hearing that clearly you had a smaller number of units come in during the quarter than you were expecting; the ASP was a little bit lighter. Are there any of the units that you had under contract that were just not operating during the quarter? Can you help us understand out of the 34, how many were actually operating and were they operating at all and do you expect them to come back up next quarter?

There are all kinds of operating issues. The ones that are on this list are customers that are using us. They may come down at any given point in time for various reasons. And we work with them to actually help them. We want them to use the minimum amount of our material to get maximum benefit. So we are always tweaking. Sometimes they'll try -- they'll install new equipment, Dave that they'll want to check out and they'll shut us off for a weak or two. Those things happen all the time, but of these 34 coal units, they were all running at some point in time, but a number of them came down for various reasons or throttled us back for various reasons.

In one case, a unit throttled us back because of water temperature. The drought lowered the temperature in the river and they have thermal limits on that river on how much -- that's actually pretty common in the U.S. to have those kinds of thermal limits and they're just not allowed to generate and push those thermal limits. They'll throttle way back to do that sort of stuff. But these are all - we reviewed the list. I, by the way, misquoted from the chart. I think I said there were 544 medium potentials; there's 545 and 701. The chart that's on the website and that Tracy may have sent around has the right numbers.

Where you really see the ones that weren't running are oil units. These things were built when oil was $30 a barrel and now its $90 a barrel. Even though they may have other contracts that allow them to run some now, they get problematic for some of the oil units to run except during the very high peak periods when prices go over $100 a megawatt.

Okay. Great. And one other question. Just looking out a little bit longer term, can you help characterize sort of the opportunity either in terms of number of units or the ASPs of your products per unit when you look at the NOx rule in '09 and then the Mercury and SOx rules coming in the beginning of 2010.

Well, we've tried and we were in the process of trying to do something like we've done for FUEL CHEM for the NOx side. I know a number of you - I saw one from Michael Carboy that was extensively researched on potential market size of units that might have to deploy in SNCR or in SCR. We're in all of those. If it's SCR, then it's a candidate for our ULTRAs. And there's thousands, I think there's something like 30,000 units in the United States that are eventually going to have to - of all fuel types, that are eventually going to have to do something about NOx. I think something like 350 have done something so far. It's not a lot. We are not going to sell to all of that, but that's a multibillion dollar market and it will evolve and come out over the next 10 to 13 years to about now in 2020. We expect to get our fair share of that.

Okay. Great. Thanks a lot.

Your next question comes from the line of Sanjay Shrestha representing Lazard Capital Markets. Please proceed.

Hey, guys. This is actually Graham Mattison. How are you?

Hi, Graham. How are you?

Good. Just a quick question. You said delving into the push out of order a little bit more, what exactly is pushing them back? Is it just in terms of timing or the company is looking at other products or is it just delays in meeting regulatory approvals? I know there's no one thing, but can you just give a little more color in terms of what's causing some of the delays on the contract signings.

It really is uncertainty on the regulatory front the utilities see out there with all this talk in Congress about this rule or that rule, especially with CO2. The NOx rules under CARE and with the Clean Air Visibility Rule and the Clean Air Mercury Rule will all drive some sort of NOx control plus scrubbers and SCR scrubber combo to address Mercury. They're looking at those. They know them. They're written. They're at least coming out at them. The thing that's really driving them is what if Congress goes wacky and introduces something that makes coal just completely untenable as an energy source for the United States. Do they want a sunk investment in cleanups that then they can't recoup.

On the good side, our technologies tend to be low capital costs. So, actually, the market uncertainty tends to favor us strongly for folks looking at our technology, especially CASCADE. On the other side, though, they're going to wait until the last minute to make capital additions to any plant in any way. That will be true across the board. I saw the same thing when I was running ADT's fleet and we waited way past the last minute to get started on our SCR's after we lost a court case in the spring of 2000.

This is typical utility behavior. We actually thought, though, that they would sign -- to be honest, it was delayed by about four to six weeks, but I think you're seeing right now a very steady order stream of being announced. They know that it's crunch time now.

Great. And following up on the CASCADE. The recent order you said is being designed that it could eventually have a CASCADE. When do you think that might happen if that company were to go ahead with that? Three or five years?

Oh, no, it will probably be under that period of time. In this way, they can probably spread out their capital costs. Again, such a project put in the SCRs now and hopefully we'll see that - I can't speak for that particular company, but I would hope that by the end of next year or not later than the year after, we would be getting that upgrade should they decide to move forward. The beauty of that particular system is that they can do just what we're talking about. They can invest some money now and then if they see they need more, if we've designed it right, we can go back in and put in the catalyst portion of that and that would be a much larger dollar volume, by the way, making that CASCADE modification at that point.

Got it. And just one other quick follow up. For the smaller FUEL CHEM units that you guys mentioned in the list there, what's a good revenue run rate? Would those be about $1 million a year or would they be a little bit less than that?

Graham, you ask a good question and I noted in my script. I came into Vince and I said, "You know, we didn't really talk about estimated run rates." I'll give you what we think is our best estimate on all of these now in this new category grouping. We would probably estimate from a large customer about $1.5 million a year on average; from a medium coal unit about $1 million; and from a smaller coal unit about $0.5 million a year. By the way, if you run those numbers against that addressable market of 1512, you run up to something like $1.3 billion a year potential market if you were to get all those. Obviously, you won't get all of those, but on the international coal, about the same; about $1 million a year.

For the non-coal burning units, you probably ought to - for the large and mediums probably use about half of the revenue projection vis-a-vie a coal unit. For the smaller, especially the international, those 1300 small ones; some of those are tiny, like 1 megawatt and a lot of them are oil. Actually, a number of them in the Caribbean on some of those islands out there we have a number of that as customers. I'm personally looking forward to a trip to see all those. But those are $50,000 a year kind of revenue sources from some of those. So, that whole group down there would make maybe $1 million or $2 million a year kind of revenue number. Does that help?

Very much so. Great. I'll jump back in the queue. Thank you very much.

Your next question comes from the line of Jonathan Hoopes representing ThinkEquity. Please proceed.

Yes, thank you. I was wondering if there's a change in how you're working through your backlog; specifically, is the installation project effort getting off to a slower start? And also on the backlog, how do you feel about your ability to hit your percent completion milestones to work down your backlog and realize revenues? What I'm trying to do here is determine if there's any change in revenue pace once a contract is signed or if this is more about signing contracts later in the quarter as you mentioned.

Well, for the revenue recognition, we entered the third quarter with $9 million in backlog, which is not a hell of a lot to be spread over the next two quarters basically with some of those China projects especially. So, the revenue recognition to date is more of a contract delay. Now, fourth quarter and going forward, we've actually known that we were going to win a number of these for quite some time and we have begun and have been at engineering work associated with them for a number of weeks. We won't order equipment without a signed contract. So, some of them that we've announced recently were actually the lot further down the path than one might see and which gave us - it was a lot of work because we went to make this earnings estimate, we went contract by contrast, delivery date by delivery date. The team that worked on that spent about a week of 12, 14 hours a day so that we could give you guys our very best estimate of end of year results.

We're confident and who knows what the future holds for any of us, but you can push some of that stuff, as Vince has talked in the past about, a trimester kind of approach, if it's six months or nine months, either two, two, two, and three, three, three and the first trimester there is one of the lower ones maybe 15% of revenue dollars. We can actually, if we get to work early on the engineering and we can get some equipment ordered and get it delivered, we can actually move some of that revenue a little bit further forward and we're doing some of that.

I will tell you that one of the things that we got caught in with all of these late contracts is Christmas. Our suppliers are going to have to get most of that stuff done before they enter Christmas break. We're not going to pay overtime for all of that. So, we've got a lot of suppliers that are working their buns off right now in will between now and Christmas to get those deliveries in so we can meet the revenue and profit projections that we've just given you.

So, if I'm to understand your comment correctly then, you're saying there is not a general change in the pace of project completion once the contracts are signed?

That's correct, Jonathan. At any given point time, how we work through backlog is going to be a function of a customer's requirements, relative to that project base, if you will. And then also a function of what is the workload that we have overall as a company to work through? So, any given point in time there are going to be some project mix factors that are involved, but with the late ordering activity that we've had here in this past couple of months and given the fact that we have some very short time schedules to work with on a few of these projects, we're going to have to go ahead and work through those projects very rapidly. So, at any given point time that could move around a little bit, but generally speaking there is no change in how we're working through projects at all.

Okay. Thank you.

You're welcome.

Your next question will come from the line of Mark Tobin representing Roth Capital Partners. Please proceed.

Good morning.

Hey, Mark.

Quick question. Your guidance implies quite a ramp in Q4 and I'm just curious if you can provide some color on your ability to scale, both from an infrastructure and staffing standpoint?

Staffing is not a problem. Infrastructure is not really a problem, except for as mentioned, the capacity of our suppliers. The other item that you run into, there's a certain amount of engineering, I said you can do a certain amount of engineering work up front, but there comes a point that you need a signed contract so you can go in, especially on APC work where its hard dollar. We can go in; we know exactly what it is we can measure clearances and we can put the final touches on the final design before we can order some of the final major equipment.

Once you get that signed contract, then you can go great guns. We are really not - our limitation right now is not the staff. I would say our limitation, literally, is time and us getting on the site, getting the final designs in to our subcontractors and them being able to turn it around with their labor before the end of the year. We are expecting to achieve what we've given you as guidance. If you run those numbers and you consider that we think we're going to sign a few more contracts this year, we're going to enter next year with one really nice backlog.

And I guess looking forward to 2008 with that backlog, at what point do you have to invest in new buildings, new equipment? Do you hit a roadblock at some point?

We're not the manufacturer. We don't do manufacturing and we've looked at adding other suppliers to our supplier base, which would be our response to that if they couldn't build or couldn't expand for ourselves. For those of you who visit us, we're here in this warehouse and we're kind of busting at the seams. We'll be getting new digs here early next year, hopefully. Our issue really isn't a limitation on executing at all with the staff we have or what we're going to add. We're continually adding folks, but we're not adding some big wave that's going to hit our cost before the revenues hit our bottom line.

Okay. That's what I was getting at. Thank you.

Your next question will come from the line of Chip Cruice representing Greenville Capital. Please proceed.

Good morning. Thank you for taking my question. Two questions. First one is, can you give us an idea of the seven FUEL CHEM customers that you have on board, but have not started up? A little bit of idea of the rollout and a little bit of an idea of the size of them; the small, medium and large?

That's a good question. I don't have that specifically. I know a couple of them are large that I can think of right off the top. Vince is over here scrambling to take a look at the customer list specifically on those. They're all being installed now and should be up. There is one unit that's a large customer that it's a brand new unit and they've been in some discussions with the original equipment supplier for the boiler itself. There's been some equipment that didn't operate as planned. Those modifications are being made right now. Our stuff is installed and ready to go, but we can't start injecting until the manufacturer of the boiler actually passes muster with that particular utility. Otherwise, we don't want to get blamed for any faulty thing that they have.

It's going to be a mix.

It's think it's a mix of -- the most recent one we signed was a small unit as we described, the [Sugar Beet] one and then I know we have several large ones in the pot, too, of those.

The second question and last question is can you give us a sense of the value of the dollar value of the APC business that you bid on that you haven't heard one way or the other?

I can't, but I will if you're looking at the domestic - I have a list of those. Domestically, it's according to when they decide, but certainly it could be a lot more than what we've announced so far in the fourth quarter remaining that we might get in the fourth quarter, but on China how many of those materialize in this year or next year. I think Linda shared with me that our number of leads was in triple digits there for numbers of projects and that we had active bids on about half that number in now. So, it could be enormous. We'll have to see what we win and how we win it. That's all talk until you actually bring them across the line, Chip.

Right, I understand. I just wanted to get a sense of demand that you all are seeing in terms of what you're bidding on. That's helpful.

It's quite unprecedented in our company's history.

Thank you.

You're welcome.

Your next question will come from the line of Rich Wesolowski representing Sidoti and Company. Please proceed.

Thanks a lot. Good morning.

Rich, can I -- we finally got -- Chip, I hope you're still on the line. It's Vince. I think it's three large, three mediums and one small on that seven.

Now Rich, go ahead.

Okay. I'd like to clarify a prior point visited on the call. The new guidance for the APC implies about $17 million or so of revenue recognized from the orders that were booked since the last time or the last call. It seems like a high number considering that you do a lot of engineering which doesn't generate a lot of revenue. Is the acceleration there an owner driven thing or is it company driven?

It's both. The orders are coming in very late and for those spring outages we got to get that stuff in quickly to make those spring outages. The fall outages we have a good bit more time, but spring outages, that's got to come right now. And on the flip side, our team is - I will tell you we had an employee meeting last night and the whole team is fed up with coming in on these earnings calls and being below our expectations. We're planning on turning that around in the fourth quarter.

Okay. As a rough guide, how many of your SNCR orders and inquiries involve designs that allow for a CASCADE installation at a later date?

Well, any of them probably could, but if you know you're going to do a CASCADE and you really want to position them so you can get ammonia slip, it matters where you my position some of the injectors. If it's not specifically that way, we can go in later and move some of the injectors to be a little bit better to cause intentional ammonia slip with part of that. So, any of it could. This particular client wants us to specifically design those so that they're CASCADE ready.

That answers the question. Thank you. You mentioned also last call that there was one FUEL CHEM unit that was disconnected due to some testing of alternative boiler modifications. Any news on the results there and whether that represents a general risk to the product?

We took that unit off the list and we are going to now keep this list up to date, so you're going to see any changes to that and we'll explain any changes to that list. We're really trying to be open here. There's always risk in operational issues as people change coals or they make some extensive boiler modifications. As they go into NOx compliance, you know the first things you do on NOx with any boiler is to go in and put in low NOx burners and over fire air. Invariably, if you're going to do that and you have supplemental injection systems for any reason like a FUEL CHEM, you're going to turn that off for a while because you want to see how your boiler is operating with that new equipment and then you'll turn it back on. If we see some sort of - if we see somebody who's decided I don't need it, then they'll come off the list. We'll be up front with that.

Okay. Finally, just Vince, if you X out the stock based comp, the S&A was down quite a bit. I know there was a question earlier, but how much of that was due to lower incentive accruals versus personnel or other factors?

It's predominantly related to a set of accruals and to sales commission expenses. If you recall, as we came in here into 2007, we made a change in our incentive plan, in our corporate incentive plan. John instituted an incentive plan that includes all of our employees, including our sales team, so we made a change from a sales commission based approach. So the favorable variance is really do to reduction in incentive accrual and sales commission.

That's not the way we want to save money, I might note. We are not pleased about that.

So sales were up the way that many of us expect them to in 2008 and beyond, you should go back towards at least a mid-single digit dollar increase in the SG&A?

Yes, absolutely.

Okay. Thanks a lot.

Thank you.

Your next question will come from the line of Dan Mannes representing Avondale Partners. Please proceed.

Good morning, guys.

Good morning.

A couple follow up questions on the FUEL CHEM segment. I guess the first thing I want to touch on is you had noted for a variety of reasons any of the existing installations could go on and off, but only one of them so far you've sort of taken off the list. Are they're any others that you currently have that maybe have been off for more than a couple months due to margin and maybe there's some uncertainty as to whether they come back on?

The ones that we have on the list, Dan, now and we scrubbed through this list and went down that list. The ones we have on there we believe are current customers that intend to use us going forward and the variations will be on those typical kind of operational variations. There's no guarantee on any of that, but in publishing this list we went through customer by customer to make sure that we weren't going to be - it does you no good. This doesn't do us any good because we know these numbers. We're trying to do this for you investors and analysts so you can model us better. It doesn't do you any good in that regard for us to have something on the list that's bogus.

Okay. I guess the follow on there is I assume this list also includes people who signed up for demos, whether it's become a commercial order or not. I know historically you said you have pretty much 100% hit rate on demos to commercial orders. Is that still true, number one? And number two, are using seeing longer demo times or a longer time frame between a demo and a commercial order for any of these customers?

No to the latter. No change in that. Like I say, in one case there was a new client it's -- the contract is a demo and we're ready to go. We can bring in a portable tank and they said, "No, no, no. We want a permanent tank in there. We think you're going to succeed." We haven't seen any change in that sort of stuff. The only ones that would be of any question are the ones that haven't yet started up and they're the new contracts. The rest of them are part of ongoing contracts. Does that answer--?

I think I understand. So, of the ones that are currently running, even the ones that are demos, you still anticipate those to turn into commercial contracts or are they already?

Yes or yes. Our newest unit that I was talking about earlier was delayed because they're trying to work out the difficulties with the original equipment supplier. That's one that's a new order and it's not a demo. It's just going commercial.

Okay and then the last question. You noted your investage to the customers; you will change around feed rates, et cetera to maximize performance. Given that and given obviously the constant tinkering these guys are doing on the plants to optimizer performance, do you expect that over time that your feed rates per unit will go down or is that something that you expect the current $1.5 million for the large, $1 million for the medium. Do you think that will stay constant?

Dan, that's a really good question. Our goal and it sounds perverse, all right. Our goal is to provide maximum benefit to our client. That's what we think is the right long term goal not to maximize revenues per client. So we're going to be working with clients across the board to try to tweak those rates. Now, the numbers we gave you on an ongoing kind of basis there is our best estimate on a slightly conservative side of where we think that's going to be.

If in the future we find that that changes in any way, the whole purpose of doing this is so you can model us better. That's what we want. It serves us ill completely if you guys are thinking we're getting one kind of revenue stream and we're actually getting another kind. That's only going to lead to disappointment.

Okay. Great. Thank you very much.

Your next question will come from the line Levon Von Redden representing Hocky Capital. Please proceed.

Good morning. It's Levon Von Redden with Hocky Capital.

Hi, Levon Von Redden:

How are you? A quick question. Obviously as these 2009/2010 regs come closer not everyone is going to be able to make it into the door before, I guess, that time frame hits. What are some of the alternatives that are open for folks that are basically going to miss this regulatory deadline or is it just a function of them paying certain fees or penalties because they are not complying with regulations or are there alternative things they can do?

Levon, a good question. The way these things work is a unit that's now coming into a regulatory period is going to get - and by the way, all of the units that were in the SIP Call are now in the CARE under an annual NOx reduction of that same level, but that will drive other controls that come into play. But going back to a new guy that's in there, you're going to get credits based on .15 pounds per (inaudible) BTU and that's -- the government kind of says you're assigned that level of credit. Now if you come in under that, you can bank those credits and use them later or you can sell them to somebody who doesn't come in under.

Now if people over comply and there are fewer people out buying credits, then the credit prices are going to come way down. If they are under compliance and people are going to have to buy credits, then prices will go through the roof. I would note the last time I looked and it was a couple of days ago, so there may be newer numbers, but I think the '08 SIP Call kind of credit for the seasonal NOx was running somewhere around $900. It jumped up a little bit to $900 a ton. I think the '09 annual credit the last time I looked was around $7,000 a ton. So, clearly the market and there's going to be a lot of people under complying and scrambling to get credits to fill their needs.

That's what we would see. There's no way that there's enough labor or steel out there to put al these NOx controls on all the many units that are going to have to comply. They'll pay the -- they'll buy the credits from those that do have those credits available and people who may even be generating credits will be looking at putting on extra controls and if their capital budget allows so they can go out and sell those credits. It's a whole market based approach.

Is there something competitively that you're seeing out there that ultimately people are also looking at potentially?

The choices on NOx are around using the catalyst in SCR or not. The catalysts are very, very expensive on an SCR, but you're seeing a number of folks going that route and marrying those up with scrubbers. That will take out Sox 2 and that's a big deal for the Clean Air Visibility Rule. One of our pushes for this CASCADE is that, hey, we oxidized Mercury, too, with our CASCADE. So you can put a CASCADE in front of some sort of a scrubber and also get that Mercury. So, there's a lot of things facing utilities and industrials and university boilers over the next few years and they're going to be asking a lot of questions. And there's a lot of interest and requests for proposals out there right now.

And, I guess final question is in terms of lead times for you, obviously, as you pointed out you're not really a manufacturer. What kind of lead times do you need to give to your suppliers to be able to kind of order stuff at a reasonable amount of time to make sure that you can fulfill some of the future demand that you think you're going to see?

We've said all along that six to nine months for a standard SNCR we could get those. A CASCADE is probably going to take a longer lead time with a different set of suppliers that we would work with for the catalyst and for the steel to go around in the duct to install that catalyst. So that might be a bit longer and that really is what's driving people to have the contract now for the fall of next year. The steel market is pretty tight and the labor market is pretty tight for skilled workers. Those are probably the two biggest drivers as opposed to manufacturing capability machine shops. There's actually an excess capacity of machine shops. You just don't have the skilled workers nor the available steel to do it. We watch that with the clients and every one of them is unique, Levon.

Just following on that, if I think about that and the timeframe in which you needed for this fall rotation shouldn't you start to see your backlog really jump now or next quarter?

Well, I think yes and I think you're seeing that. We've signed, as we said, and it's most all been in the second half. We're now at a record level of contract signings far exceeding any prior full year.

Levon, since love July 1st we've signed $40 million in contract business. That is by far the largest rate of signings that we've ever had in this company's history. And as John mentioned previously, we expect more of that to be coming here in the near future.

Perfect. Thanks guys.

(Operator instructions ). Your next question will come as a follow up from the line of John Quealy representing Canaccord Adams. Please proceed.

Hi. If we can go back to the FUEL CHEM breakout sheet. Since we're asking so many questions here on this, did you break out John, or I may have missed it, the [Tuminis] versus sub-bit and regulated versus unregulated units?

No, we did not. We looked at it and we just decided to lump them large, medium and small and we're using coal units -- these are coal units that have some sort of electric generation associated with them. There's actually a large number of industrial coal units that are purely processed steam that are potential clients. We did not try to break those out and that database is not as well documented. We're researching that because that will expand the potential customer base some, but all units on this are, internationally and domestic, are based on units that have some sort of electric generation associated with them.

And let me see if I can get at it this way. For SO3 would that be like 10% or 15% of the current installed or contracted base?

There has been 230 SCR's out there so far on coal units and another 120 or 110 SNCR's, a majority of which are ours. Any of those would be S03 candidates for sure, the SCRs, plus there's a number of units out there that have SO3 issues that don't have an SCR associated with them. They've got opacity problems and you'll see local groups coming at those specific units. And again, any of those oil units, SO3 is a big deal if you've got heavy sulphur and high (inaudible) which is a combo you typically find in the heavy oils. That was the problem with the Mexican unit.

All right. Let me move on to my last two. In terms of China, you mentioned that there's several order opportunities floating around and I thought we were looking for China more like 2010-ish. Is that the timeframe you're talking about or you're pulling some stuff up ahead of that next economic cycle out of China?

Good question, John. The retrofit - China has about 4,000 electric power units coal fired today. They're going to shut down about 1,000 of those small one. Of the 3000 current units, China plans on a major addressing of those in NOx compliance starting January 1st of 2011. Between now and then, though, China is on a tear to try to clean up its image worldwide and for the Olympics and they are really pushing for new NOx controls across the board. And when I say China itself, you also have that same phenomena going on in Taiwan and to a different degree in Korea.

There really is - the plan that they were on was this next five year plan starting in 2011 and they're still on that, but they have accelerated NOx compliance in a really big way and we are seeing potential interest popping up literally all over the country, but especially around the major cities with regard to the Olympics. Those are going to be crash programs to get them done quick if those awards come in.

My last question on the non-coal burning units for FUEL CHEM as well as, I guess, for APC. We're seeing some tightening of regulations for some non traditional fuels like tire burners and these guys get much tighter in the states. Can you comment either about your R&D order focus on going after some of these boutique fuels with the FUEL CHEM or APC product line?

Oh, absolutely. We are on a large spectrum of that kind of stuff. You know that we announced early this year, I guess, the patented technology for municipal solid waste units and that was really - we can address their slag. They had a corrosion problem and we came up with a patented chemical concoction mix with our FUEL CHEM to address the issues around municipal solid waste. Some of those you see in tires. Tires on the good side is largely rubber. If you can chop them up and fuel treads kind of get in a way of some of that and that causes its own special flag issues in a tire burner, but yes, your point is, I think, that there's a whole bunch of these other non traditional fuels that are now coming under environmental scrutiny and that's right on target and a lot of those kinds of units, you can't build new ones because of environmental concerns would block you. So they're trying to clean up their act both on the NOx side and on the FUEL CHEM side. We can actually do a lot for those.

Thanks.

This concludes our question and answer session. I would now like to turn the call back to Mr. John Norris for closing remarks.

Thank you very much, Katina, and thank you all for listening in. I look forward to be able to address you at the next quarter's conference call, with hopefully with some really good results that we're expecting for end of year. Thank you very much and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a good day.