Fuel Tech Inc (FTEK) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter and year end Fuel Tech Inc. earnings conference call. My name is Eric and I will be your coordinator for today. (OPERATOR INSTRUCTIONS)

I would now like to turn your presentation over to your host for today's call, Miss Tracy Krumme, Vice-President Investor Relations. Please proceed.

Thank you, Eric. Good morning, everyone and welcome to Fuel Tech's fourth quarter and year end conference call. By now all of you should have received a copy of today's release. If you have not, please call our office at 203-425-9830 and we will be happy to send you one. Joining me on the call this morning is John Norris, President and Chief Executive Officer and Vincent Arnone, Chief Financial Officer.

As a reminder, the matters discussed in this conference call except for historical information are forward-looking statement 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 are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call and as reminder, this conference call is being broadcast over the internet and can be accessed at our website www.ftek.com. With that said, I would now like to turn the call over to John Norris. John, please go ahead.

Thanks, Tracy. Good morning, everyone. We appreciate all of you joining us on this call. We were very pleased to report an outstanding. record breaking quarter and full year for Fuel Tech. For the quarter our revenues were $32.6 million, up 80% from the fourth quarter of '06. Net income for the quarter was a record $5.2 million, or $0.21 a share an increase of 260% from $1.5 million or $0.06 a share last year. For the full year 2007 our revenue was a record $80.3 million up from $75.1 million last year. Our pre-tax income for the year was a record $12.4 million, up from last year's $11.8 million. After tax income for the year was $7.2 million or $0.29 a share, up slightly from $6.8 million or $0.28 a share in '06. Both revenue and net income were above our guidance for the year.

Our CFO, Vincent Arnone, will discuss our financial results in much greater detail in a few minutes, including the discussion of the impacts of various tax and other charges such as 1.3-R stock compensation expenses. Vince will also cover our balance sheet in detail. But it remains exceptionally strong with very little debt and with cash, cash equivalents and short-term investments of $32.4 million which is roughly the same as last year despite having bought a new building for $6 million for our new corporate headquarters. Our business model continues to generate growth in revenue, profit and cash, and we expect that to accelerate in the future.

Now I would like to tell you about the company business behind these financial numbers. As most of you know, Fuel Tech is a fully integrated company that uses a suite of technologies to provide boiler optimization and efficiency improvements, and air pollution reduction and control solutions to utility and industrial customers worldwide. For reporting purposes, we broadly grouped these technologies into two product lines. Our speciality chemical business we call Fuel Chem and our air pollution control or APC capital projects product line. Again, this year we have both product lines generating growth and revenues, despite contract delays in the first half of the year for APC. and implementation delays for Fuel Chem. Our APC business sector saw record high revenues, of $47.8 million for the year, up 3% from $46.5 million in 2006. Gross margins for the year were 46%, up from 43% in 2006. Reflecting a bit less mix of turnkey work, but generally in line with our expectations for this business sector going forward.

This business sector started the year with a low backlog of $12 million and new contracts were very slow in coming for the first eight months of the year. The last four months were incredible. As we finished the year with $60 million in bookings an all-time record and up 40% over our prior record year in 2005. Our end of year backlog of $28 million equals our all-time record for the company. For our APC technologies our NOxOUT-SNCR or Selective Non-Catalytic Reduction sales have continued to be our main stay. But this has been a breakout year for our newer NOxout ultra technology. In 2006, if you remember, we talked about how we would be emphasizing ultra and cascade technologies as we go forward. And it paid off with five new ultra-system contracts in 2007. In fact, the first contracts we signed in 2007 were for ultra systems at two plants in China.

Our ultra system provides a safe supply of ammonia for use with selective catalytic reductions or SCRs for maximum NOx removal. Not only were these the first ultra sales for us in China but they utilized a new patented oil fire design which we never deployed before. When the system started up in the fourth quarter they exceeded our performance expectations and guarantees. and our Chinese clients were very pleased. You probably saw our announcement this morning about some more ultra wins in China. Domestic APC bookings were $50 million for 2007. Almost double our prior all-time record domestic bookings. Sales included NOxOUT- SNCR, NOxOUT- SNCR with rich reagent injection or RRI. Ultra and one NOxOUT-SNCR which was especially designed to be a Cascade system follow on at the customer's request. The prospects for our APC business sector in the United States have never been more robust. With the cleaner interstate rule and cleaner visibility rule expanding NOx reduction mandates throughout the nation to thousands of combustion units that were not impacted by the earlier NOx (inaudible) call.

In China there is a growing concern in the government over air quality and regulations are being formulated to reduce air pollution, especially NOx and SOx. Not just for the Olympics. Our first SNCR systems sold in China back in 2005, and which were labeled as national demonstration programs by the Chinese government, started up in 2007 and significantly exceeded our guaranteed level of NOx reduction resulting in very pleased customers. We believe this market could be significantly larger than the total U.S. market for us. Growing steadily for the next couple of years with more significant growth in the next decade.

Our fuel chem product line finished the year with a record high revenues of $32.5 million, up 14% over 2006. During the year, we added 13 new customer units which is 63% more than the eight we added in 2006. However, revenue growth did not match the growth in new customer units because of client imposed delays in getting our systems up and running. The impact of these delays startup is also seen in our margin for this sector which was 49% in 2007. Down from 58% in 2006. We incurred the cost associated with the new units such as modeling the boiler in many cases and purchasing and shipping equipment and personnel costs, but did not get substantial revenues in the year for the majority of the new units. We are pleased to note that all of these new units are now operational and should contribute nicely to 2008 results. Of the 13 new units added in 2007, ten of those were coal units. Two were-- are biomass units in Italy which burn olive pits and wood, and one is municipal solid waste unit. While our fuel chem program is highly effective on a wide variety of combustion fuels, in general, coal units generate for us the highest revenue. So, those are particularly important to our business results. In this regard, we were especially pleased to have announced four new fuel chem applications and demonstrations so far this year including a large coal unit in India and another large coal unit in China.

The China win was done with our 50/50 teammate [Atoshu]. These are our first fuel chem customers in these two major markets. The system should be operational in the second and third quarters respectively. The Chinese situation with the record breaking cold in China has forced a delay until June for that outage where our system will be installed. So we anticipate additional demo units in both markets this year, hopefully in the first half of this year. In 2007, there was a lot of misinformation in the market about the effectiveness and especially the cost effectiveness of our fuel chem programs. Two major actions by our clients did much to set the record straight. First was in Mexico where our program had replaced a competitor's system which was ineffective in solving the SO3 plume issue or slag at the three oil fired units at Punta Prieta on the Baja. Working with our teammate, Double B Holdings, we not only solved the problem but in recognition of our outstanding results we were presented the highest award possible for technical innovation by the state utility, CFE down in Mexico, and it was presented personally by the President of Mexico.

In the U.S., one of our largest fuel chem customers, Santee Cooper, presented the results of a detailed 18 month assessment of the effectiveness of our program on their large coal units at Cross Station. In addition to solving their SO3 problem and dramatically reducing the total toxic pollutants emitted by the plant, our program was documented as having a greater than four to one annual return on investment. This report by such a highly regarded plant operator is consistent with what we have been saying regarding fuel chem and is generating lots of interest among potential electric utility customers. I would like to turn the call over to our Chief Financial Officer, Vincent Arnone, to further discuss the details of our financial results. Vince?

Thank you, John, and good morning, everyone. As John mentioned, net sales for the fourth quarter were $32.6 million, up from $18.1 million in 2006. While net sales for the full year were $80.3 million, up from $75.1 million in 2006. This result exceeded our guidance target of 76 to $79 million. Net income for the quarter totaled $5.2 million, or $0.21 per diluted share compared with $1.5 million or $0.06 per diluted share in 2006. Net income for the full year was $7.2 million, or $0.29 per diluted share compared with $6.8 million, or $0.28 per diluted share in 2006. This result also exceeded our guidance target which was 25 to $0.28 per diluted share. The 2007 results for revenue, operating income, and pre-tax income represent record results for Fuel Tech.

The fourth quarter and full year results included $1.1 million and $4.8 million in stock base compensation expense versus $.5 million and $1.8 million for the comparable period of 2006. 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 was 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 was $0.08 per diluted share. The fourth quarter and full year results include $4.1 million in $5.2 million in income tax expense.

As Fuel Tech utilized all of its remaining domestic net operating loss carry forwards in 2007, $1.8 million of the $5.2 million in income tax expense represents cash tax expense. We believe that it's important to scrutinize our fourth quarter operating results as they are indicative of the financial strength that we have been expecting from our business model. On revenues of $32.6 million, we generated operating income of $8.9 million which represents a 27% operating margin percentage. At this operating margin percentage level, cash flow generation is extraordinary. Our corporate goal has been to achieve a consistent operating margin percentage of 20% or greater and we need to grow our revenue base expediently to ensure that we can repeat the fourth quarter performance on a quarter by quarter basis in the near future.

Revenues for the NOx reduction technology segment were $24.6 million and $9.7 million for the fourth quarters of 2007 and 2006. Full year revenues for this segment or $47.8 million compared with $46.5 million in 2006. As John noted previously, Fuel Tech announced new contracts valued at $60 million in the year, exceeding the previous annual record by almost 40%. $50 million of these orders came in the second half of the year and were the basis for the record second half, fourth quarter, and full year results.

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 and the Clean Air Visibility Rule which take effect in 2009 and 2013 respectively. Literally thousands of utility and industrial boilers will be impacted by these regulations and Fuel Tech technologies will enable utility and industrial boiler orders to retain compliance. Our backlog is approximately $28 million at the end of the year, equalling a record level for Fuel Tech and, as John noted, this compares favorably to $12 million at the end of 2006 and this $28 million level provides us with a strong start to 2008.

Revenues for the fuel treatment chemical technology segment were $8 million for the quarter versus $8.3 million in 2006. For the full year revenues were $32.5 million, up from $28.7 million in 2006. Which is a 14% increase. This increase reflects continued market acceptance of Fuel Tech's patented target 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 did not reflect the impact of all ten coal fired units that Fuel Tech added to its customer base in 2007, as only two of the units contributed on a substantive level during the year.

The outlook for the Fuel Tech fuel chem product line continues to be favorable both domestically and abroad. The addition of ten new coal fired units to the customer base in the U.S. in 2007 was a record for the company and we are encouraged by the increased rate of penetration in this market. Internationally with the announcement of our first demonstrations in India and China which are scheduled for startup in the second and third quarters of 2008 respectively, we were pleased to be given the opportunity to showcase the benefits of our technology to these very large developmenting markets. On a global basis, the increased focus on the reduction of greenhouse gases and on the needs to meet growing electrical demand, bodes well for incremental growth in the future. These factors combined with the increased long term utilization of coal as the world's primary fuel source for power generation leads us to have high expectation for the fuel chem program which offers numerous operational, financial and environmental benefits to owners of combustion units around the world.

The gross margin percentages for 2007 and 2006 were 47% and 49% respectively. The gross margin percentage for the NOx reduction business increased to 46% from 43% in 2006 due to the mix of project business. For the fuel stream chemical business the gross margin decreased to 49% from 58% in 2006. As John noted, the decrease is due to startup costs related to the incremental ten coal fired units that were added during the year. However, without the realization of related revenues, as only two of the units contributed to significant revenues during the year. SG&A expenses for the fourth quarters of 2007 and 2006 were $6.8 million and $6.3 million. While these expenses for the full year were $25 million and $23.9 million. The $1.1 million increase for the year was due to the recording of $4.8 million in stock compensation expense, versus $1.8 million in the prior year as noted previously. When excluding the impact of stock compensation expense, the remaining favorable variance in SG&A expenses of. $2.1million is due predominantly to a reduction in revenue related expenses as Fuel Tech align the focus of all employees under a common incentive plan in 2007. R&D expenses are at the same level on both 2007 and 2006. Fuel Tech continues in its pursuit of commercial applications for its technologies outside of its traditional markets and in the development in acquisition of new technologies that could represent incremental market opportunities. The increase in interest income in 2007 versus '06 is driven by higher average cash and short-term investment balances versus those experienced in the prior year. And as noted previously net income for the fourth quarter and 12 months ended December 31, '07 reflects $4.1 million and $5.2 million in income tax expense.

Our balance sheet remains strong. At December 31, 2007, Fuel Tech had cash and cash equivalents and short-term investments of $32.5 million and working capital of $45.1 million versus $32.4 million and $38.7 million at the end of 2006. Operating activities provided $4.1 million of cash during the year, which was driven by solid operating results. Investing activities used cash of $3.7 million during the year. As the decrease in short-term investments provided cash of $6 million, while offsetting this amount was $9.7 million in capital expenditures required to support and enhance the operations of the business. As John noted, of this amount $6 million was spent to purchase the land and building for Fuel Tech's new corporate headquarters and the remainder was principally for equipment related to the fuel treatment chemical technology segment. Fuel Tech provided $5.6 million in cash from financing activities. Stock option exercise activity generated cash in the amount of $2.4 million. Of this amount, $.9 million represented proceeds from the strike price of options exercised, while $1.5 million represented the tax benefits realized from the exercise of stock options in 2007.

In addition, fuel tech generated cash in the amount of $1.2 million resulting from the issuance of directors deferred shares of stock. Finally, basing Fuel Tech which is Fuel Tech's newly formed to wholly owned subsidiary, borrowed $2.1 million of funds to meet the short term working capital needs of this new legal entity. Fuel-Tech's market interest and sales activity continues at an unprecedented pace. The longer than expected delay and the receipts of NOx reduction orders and the timing of the startup of new fuel chem units limited our financial performance in 2007. However, we are more than pleased with the record results for the year and with the overall market dynamics for the company. Further, when combining these operating results with the addition of our wholly owned subsidiary in Beijing and with the purchase of our new corporate headquarters, we do consider 2007 as a milestone year for the company. As we look at 2008, we expect revenues to range from 88 to $93 million. The NOx reduction technology segment is expected to generate 50 to $53 million. While the fuel chem technology segment is expected to generate 38 to $40 million.

Our net income for this revenue range is expected to fall between 33 and $0.39 per diluted share. The impact of stock compensation expense under 123R on Fuel Tech's net income is expected to be $0.16 per diluted share on a full year basis. Now, with that, I would like to turn the call back to John.

Thanks, Vince. In summary, we finished 2007 with a record breaking quarter and look forward to an even better 2008. We hope and expect our 2008 guidance to be conservative. We will see how that works out. With that said, Eric, can you please open the lines for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Graham Madison with Lazar Capital Markets.] Please proceed.

Good morning, guys.

Good morning.

Just looking at the revenue outlook here for 2008 and I know you gave the breakdown between APC and fuel chem awards, would most of the APC revenue be recognized more towards the latter half of the year? Or will it be more front loaded or about even throughout the year.

I would say we are probably looking at not a little bit of a split. As you know, we have backlog of $28 million here at the end of 2007. And you were going to see a good portion of that run through this first half of the year. But then we expect to add new contract bookings, starting with the one we announced this morning in China, and we expect to add significantly to that as well as we go throughout the year. Right now we would say more of a split.

Okay, great. And then just looking at the margins in the Fuel-Tech segment. They were down a bit and I know that related to startup costs there. Is that a rate we should look at going forward? Or revert more to a historical average.

It's going to be in the 50s. Probably low to mid-50s on an ongoing basis. There is nothing fundamental about that. We track margins looking at existing customers. But once we get a contract, we assign and start depreciation the cost of that equipment right away, whether or not it started moving chemicals. You get the charges but without the offsetting revenues.

Right. That's more of a lumpiness on a quarterly basis.

And hopefully a lumpiness that we don't see extended delays like that in the future.

Great. I will jump back in queue. Thank you very much.

Your next question comes from the line with [Rich Bufaloski] of Sidoti and Company. Please proceed.

Thanks a lot. Good morning.

Good morning, Rich.

The flip side of the first question, the margin of the APC, is it the nature of the work or the volume that you squeezed through the quarter that resulted in that big 51%.

The nature of the work.

The nature of the work. When we get -- when we talk about mix of work, we get better margins when it's just our technology that's out there. When a client-- and we will do it for them, when a client asks us to do the installation, then we will hire a local construction guy to do it, that the client likes. And we're only get 10% for overseeing that as a project manager. All of those revenues come in and you get our normal mix and then you get overlaid on that at 10% margin on those revenues and that's what drives down the margin. You are looking at a more typical margin for a more typical mix in what we did in this year.

A lower to mid-40s is what we expect on a continuing basis for APC. It's a purely a mix issue, Rich.

The mix of the work you booked in the fourth quarter and then the awards you announced today, they're more of a historical range where you have some of that contractor pass through cost?

I'm sorry --

== ie, the bid margin on the new work are more like 43% than 51%?

Usually not going to be 51, but in that 45 give or take percent is probably what you are going to expect out of the APC side of the house.

Okay. And then reverting back to fuel chem, did you recognize a benefit from the volume break in the chemical supply?

Oh, we definitely did.

And then I understand the year-over-year and the delays and the costs you had, but looking at it quarter over quarter you had virtually the same revenue in December and is September and the margin came down a good bit. What as the difference there?

Just what we said. Look, the fuel chem revenues give or take a couple hundred thousand, that's in the noise to be honest. A plant burns, gets a load of worse coal they crank it up, they get a load of better coal, they crank it down in the injection rate a little bit. It varies all the time. You had all the outages in the fall where people were installing the rest of the new equipment. We didn't expect-- to be honest at all, we thought our fuel chem revenues were going to be roughly flat from the third quarter and they were roughly flat from the third quarter. They were really in line with what we were expecting. We were with the units before the new ones we were running at a roughly $8 million a quarter rate give or take a couple hundred thousand for the last three quarters of the year.

With the new units I would expect the 2009 rate to jump up a bit. The first quarter might not be as high as the rest of them because two of the big ones didn't get on until like February 1 of this year and running. But I would expect something a bit higher, nine to ten and maybe a little more as it goes -- as we see the full run rate on all of those.

Rich, as we went from the third quarter to fourth quarter and we actually-- we geared up for some of those additional new unit startups as well. So, that's the primary reason for the down tick and gross margin as you look quarter to quarter on fuel chem.

Okay. And then lastly, if you take out the stock comp from both periods as you noted in the release, yesterday dollars were down about $2 million, are you going to see a period of catch-up now that business appears pass the lull you saw in early '07?

No. We are -- this is the business-- actually the beauty of the business model and we think we showed that in the fourth quarter where our -- with the existing staff without adding significantly, we were able to crank up the work we did to do 50% -- 60% more work and then recognize revenues that we have ever done in our history, our best ever quarter was like 20. So we've got a lot of flexibility in our ability of our team to deliver we're going to control -- you don't have to add a lot of new accountants for a few more contracts. And Vince's bonus is not that big. (laughter)

Thank you very much.

Thanks.

Your next question comes from the line of Michael [Carvoy] with Signal Hill. Please proceed.

Good morning, ladies and gentlemen. John and Vince.

Good morning, Michael.

Good morning, Michael.

Congratulations on putting up the very strong numbers here for the fourth quarter. I have some questions regarding the outlook, though. You've talked about tremendous order activity and momentum in the business. And you talked also about new market opportunities. Do you see the company deriving greater growth here in the '08 and '09 periods in the international market and see the U.S. markets being somewhat slow and stagnant or do you see good growth here in the U.S.

I think you're going to see great growth here in the U.S. One of the things that's going to impact, and is impacting the U.S. market is the cancellations or delays-- significant delays by groups litigating over new coal units, Michael. And with that, existing coal units are as valuable as gold. Utilities that were planning on shutting down 2 and 300-megawatt units as they were going to replace them with more efficient 1000-megawatt units, are now looking to find ways to keep those things running for the foreseeable future and that means putting on environmental controls. It also is a great sweet spot for our fuel chem.

On the APC side, a number of folks are going to have to put NOx controls on where they were planning on phasing them out. That's good for us in places like China. There is a huge recognition by the government that they've got to do something and they are starting to do something, as evidenced by this most recent win that really didn't have anything to do with the Olympics. These systems are all going to get installed after the Olympics are over for these ultras going forward. The Chinese are very serious about cleaning up.

I think we have never seen this level of business opportunity for us. And I'm real pleased about our pushing for the new technologies, the Ultra and the Cascade. Last year, 2007, and it's going to follow into this year which was the year of the Ultra. I think you are going to see Cascades take off. I hope that's true. And Cascade orders are going to be significantly larger on a per order basis than any of our other technologies.

Let me follow up on that, John, if I may. Do you have any idea on the number of plans that a year or two ago people were think being moth balling that are more likely to stay in operation at this point? Then on the Cascade front, we are approaching a major catalyst refresh cycle right now in the market. I'm wondering if that is going to drive or potentially delay Cascade adoption rates?

I don't think -- I don't think it will delay. What's going to drive the Cascade adoption rate is the cost of steel and labor to build these SCRs. They are going through the roof. Our approach is- uses very minimal amount of new steel in the the ductwork and construction labor. It's not so much the cost of the catalyst is that driving that. And with us you get real solid performance with very modest amounts of catalyst. I think that's really starting to catch hold in both here and in China especially. We are real encouraged by the discussions we were having with the clients on potential Cascade applications here in the U.S.

Should we contemplate any sort of -- fender-based financing or financing schemes that would need to be put in place?

No. these aren't that expensive. In the U.S. you can -- our Cascade goes from 30 to $70 a kilowatt. Most utilities have that in their capital budget. They won't be out there doing a special raise for any of that. The Chinese systems are even cheaper.

By the way, there was an article in this month -- just came out, just got it yesterday. Electric Light and Power which is Edison Electric Institute's industry magazine. It said 2007 the year of uncertainty and the whole article talks about the delays in capital spending and the conclusion was that they really need to spend more money on air pollution control equipment and on any energy efficiency measures in power generation. That was a neat quote for thinking about us.

And just last question for you. It sounds like the strategy you are taking with dealing with expectations is to set a benchmark that you are highly confident that you can achieve and then as incremental wins are made, you believe you will be able to raise numbers. I am reading your press release correctly?

I think you know me too well. If we have anything to do about it, we are all done explaining away shortcomings.

Sounds terrific. Thanks.

Your next question comes from the line of [John Quealy with Canaccord Adams]. Please proceed.

Good morning, folks. Nice quarter.

Good morning, John.

Let me dive into the last question a little bit more. So if we were looking at this guidance, top and bottom if we would, 88 and 93 on the top and you gave us the split. If you are entering the year and call it 28 million of APC, 38 to 40 on fuel chem, that is almost 70 million of visibility on-- call it 90. In the past couple years you have done -- call it north of 40 million bookings in APC. I realize you are being conservative and you want to hit expectations and beat them. But, can you dig into it a little bit more in terms of potential pipeline? That seems almost too conservative, John, if you get my point.

There is-- and--- many of you and us have had this same discussion. about you're damned if you do and damned if you don't on the guidance issue. With the fuel chems, if you look at the additions we added according to how strong the first quarter is, and I don't know that yet, but you can say a large part of that, we have already, and we hope, as with our announcement today, I noticed -- I hope you saw that announcement today including -- including four mapping and modeling projects for large potential fuel chem coal customers, and that's usually the first step to contracts. But, as we saw last year, signing the contracts is one thing, getting them online in time to generate significant revenues for the year is another. And I want to see us execute and be able to get in there quickly before I raise that on the fuel chem side.

On the APC side we are starting the year a lot better than we were last year. By far and away. Not only in the announced contracts which with 28 plus we've got six plus more today to 34, but we need to win some more. And as we win them, at the first half when we do our first half earnings, we will take a long-- a strong look and see what we were doing.

Our guidance is not our business plan. Our guidance is conservative to our business plan and expectations. But I would like to see us-- I'd like to see us put a few more of these wins in our belt. A number of which we do have visibility on. The one we announced today we basically had since November. And just couldn't get the final paperwork done. And so sometimes they take longer than you expect even when there is no conscious delays by anybody out there. We just-- we are -- we do not want to be a company that overpromises and under-delivers.

Okay. That's helpful. And then just on a roll forward, if you will, on the fuel chem units. I know on your website at the end of February, you have an updated fuel chem detail like you started last quarter. And it looks like you've got 37 coal burning units. What is that number today installed?

We have 37 in the total coal units. That would be correct.

That's correct.

And that includes the catch-up from last year, is that right?

We were trying to keep this thing, John, completely up to date. When we make an announcement, we updated that very day and we look at them on an ongoing basis to make sure that if somebody has shut us off and they aren't going to run for six months, 'cause they have new coal, then we will go under kind of a formal little committee evaluation that says keep it on, take it off. This chart is really for you guys. It's for investors and analysts to give you better visibility into our-- into what we've got running and to our operation. We keep this chart -- that chart that's on the website will be accurate, realtime.

And until we say otherwise going forth into the future and to John's point we put out a press release on fuel chem customer demonstration. This thing will be updated the same day.

Gotcha. Okay. Final two questions. One on the operating expenses. Doing the math and assuming similar gross margins, where are you going to spend or overspend if anything in operating expenses this year? Is it new R&D platforms? John, you had looked at mercury and before. Why is Op Ex going to trend up and what are you looking at there?

I think generally speaking on an upward trend, I think, where we could overspend could be in international markets. Opening up Beijing Fuel Tech in 2007 i obviously costs some additional operating expenses to do that. We will see what develops in India. with the success of our demonstration there. We may find ourselves setting up a legal entity structure there as well. That is something we haven't decided yet as of today. That could be real for us. There is an area whereby we could expect to see some additional operating expenses.

We added 40 individuals to our employment base in 2007. The great majority of them actually rolled through cost of sales, but there were some folks that were added for purely administrative reasons just to help the company gear up and adjust to our growth pattern. In 2008, obviously we're going to staff up again. But, the impact in SG&A should not be what I would call material. John, anything now --

I think that's right. We are working hard to come up -- we were not going to be a one or two or three trick pony on technologies. And I think you will see 2008 may be a breakout year for us with new technologies and with expanding our capabilities. At least my expectation that that is going to be true. We are working on a lot of stuff that is real close to fruition. So we're trying to stay ahead, not only do we want to win and compete with what we have on the plate now, but we want to have a bigger plate.

And my last question for Vince. Vince, generally speaking you've got a one to one ratio on net income conversion into cash flow this year. It was .5. I know you spent money on a new building, but as we look into '08, are we still looking to keep roughly the cash flow to net income ratio about one to one?

You know, probably a little bit less than that than in '08. We do have to actually build out the inside of our new building. So we will have what I call a one time impact related just to finishing our new corporate headquarters in '08. With the exception of that, that conversion should be one to one at least.

And a note about the new buildings so folks don't think we're -- we did-- for those of you visited, we are busting at the seams and we're hot bunkin' with some of the cubes around here. We have completely used up our office space locally. We did an evaluation of lease versus buy. In fact, we had in the final competition about six places to lease and only the one buy option and we had large group of the employee goes around evaluate each one and we looked at the cost. It is-- in today's market, it is radically cheaper to go the route we did on buying versus leasing. It was almost two to one kind of thing in cost. And we were going to have a facility that should serve us for many years in the future. Right on I-88 at the Winfield exit. It's a great place. Something we can be proud of, but also, it will make us a lot more efficient because we won't be scattering our stuff all over in warehouses.

Great. Thanks, guys.

Thanks, John.

Your next question comes from the line of [Mark Tobin with Roth Capital Partners]. Please proceed.

Good morning.

Good morning, Mark.

Quick question. A lot of mine have already been asked, but one. Vince, the accounts receivable was up quite a bit sequentially. Can you comment on that?

Certainly. That is purely the result of all of the year end work that we did relative to all of the additional project bookings and the third and fourth quarters of the year. Okay? As we recognize revenue, we actually-- obviously at that point in time we actually increase our receivable balance. It's an unbilled receivable for percentage of completion until we issue the invoice. The driver there is purely the operating business activity in the third and fourth quarters of the year. And I would expect that to notch down a little bit in the first quarter of the year.

Okay. Then on the outlook, looking ahead to beyond '08 into '09, John, if you could outline the catalyst that could reaccelerate growth. Again, as several people have mentioned, the '08 guidance implies a fair deceleration. Just give us an idea what catalyst are there that will drive accelerated growth in the long-term.

Well, it's a deceleration from expectations. It's an acceleration from our '06 to '07 results. We are -- we don't mean to imply a deceleration in our guidance. And we will see how the end of year comes out. Everything -- the stars are all aligning for this to be an awesome period of growth. Not just in '08 but '09 and 2010. If we play our cards right in China, that is an incredible market for us. And it's hard to over sell that to be honest with you. And we have to make sure that we don't stumble in our process.

And Linda Lynn is winging her way back to China as we were having this phone call. We have high expectations for this company to get -- to be a high growth company. High growth rate. And very profitable company. And I think you are starting to see -- one of the things that Vince mentioned that I really want to highlight in that context this is operating margin. We had talked in the past about we hoped to get to 20% when we get to triple digits in our business plan which would imply something like a 25 million or greater -- I don't know if it will take that or greater. We never been to that level of performance on a quarterly basis. When we hit it, our operating results were quite spectacular. We have think this company can beat what people are estimating out there. And that's what we aim to do.

Okay, thank you. That was helpful. That's all have I.

Thanks.

Your next question comes from the line of [Jeff Osborn with Thomas Wiesel Partners]. Please proceed.

Hi, Jeff? Jeff? Don't think he's there, Eric.

His line is open. Jeff?

I'm not hearing anything. Let's go back and pick up Jeff in a little bit, Eric.

Go ahead.

Jeff, your line is open now.

Yeah, Vince. John, you hear me?

Yes, we can.

Excellent. I appreciate. Congratulation on the strong quarter and not sure what the confusion there was. John, I was wondering if you can rank order the potential sources of upside in 2008 that you're expecting, not in the guidance, but just where you're the most optimistic. is it domestic, is it India, China, Mexico and if you can just clarify whether it's APC or fuel chem.

It's actually both. On the fuel chem side we are getting a lot of interest in China and India on efficiency gains. If you read -- if you keep track of the coal market, China is in their coldest winter in recorded history. They are -- they are running all of their power plants. The delay in the outage is due to their trying to keep people from freezing right now. A lot of their plants are district heating plants, too. And the use of coal is up dramatically and China had stopped exports. So they are looking at: can we get more megawatts per ton of coal? And that's where our fuel chem really helps. And they want to clean up the air which is where our APC helps. Those stars are all seeming to align.

The Mexican -- the Indian market is also very active. And again I would be disappointed if we don't have more orders in both of those markets in the not so distant future. Mexico is looming as a major growth area for us. And the interest down there is quite high and again I expect to see something sooner than later for additions there on much bigger units. The foreign markets are really good. Europe, I don't see the explosive growth there. We will get some odds and ends up there. We will let our Italian office run our Indian operations. Those are great folks there and we are trying to again use our folks most efficiently. In the U.S., the market is really outstanding.

I think there is never been as green a feeling throughout the country as people wanting to clean up air and water. And utilities are no longer looking so much to buy credits to do that, but are trying to make sure that they don't have to buy so many, because they want them to be cleaner for all kinds of the right kind of reasons. On the efficiency side that Santee Cooper paper which has just been out a few weeks now, is generating incredible interest among utilities as they look at this and in fact one utility exec told us recently, he said, Now let me get this straight. I can put a fuel chem on and I can save enough money to pay for my NOx editions on the capital side and get all of this stuff done and be more efficient and cleaner and not spend any money? Net-net, and we said, yes. That's what that means. And that's actually quite intriguing to a utility exec.

Excellent. I appreciate the detailed response. I just have two more questions. Can you talk about the--- clearly there is optimism on the international side and you have the [Atoche] relationship. Can you talk about what the kind of the rhythm of the numbers are in terms of the expenses that you have associated with an international build out and in particular with Atoche only being able to recognize half the revenue? Should we think about the margin profile of Chinese customers being lower than your traditional American customers?

While the revenue overall is going to be -- and profit going to be split 50/50 there, I don't know what the margins on our revenues are going to be completely yet. We're going to see that a lot of the deployment there -- we have a business plan obviously, but the--- the-- right now I would say we don't see lot of difference between the U.S. and China today for us. But we will see what the future holds. What we need to do, Jeff, is to get one or two of these up and running and get them under our belt and we can talk more intelligently. How much is it really going to cost to ship this stuff? We have prices and for the chemicals over here. What's it going to cost us to buy in there? We have two or three prices on local mag supply. What's our technicians really going to cost us by going forward? How much training and all of that. We were just now implementing that. We have a plan. We think we know what those costs are and they look real attractive to us and the margins look real good. But before I can speak more definitively, I would like to get one or two in each market under my belt.

Yeah, that's good. And the Atoche relationship I believe that's up for renewal this year?

it's one of those things-- that it was a one year exclusive in June it comes up for -- it could be renewed or we move to a joint venture company. That was the initial plan as we give it one year to see how we like each other. And to see if it's meeting both of our expectations and then if it is, we go forward potentially with a joint venture company. We will have to make that final determination, but I think it's safe to say that both parties are very pleased with the relationship at this point.

So there wouldn't be any volatility around revenue recognition, around that June negotiation either --

Everything is in place that needs to be in place. The real big expense, Vince said, was establishing our Beijing Fuel-Tech environmental company office and they are in a great place and we have an incredible staff. I'm amazed that Linda was able to recruit who we recruited.

Excellent. And last question I had that's for Vince, what should we think in terms of tax rate for '08 and '09 and on the Cap Ex side?

I use 38% as an overall effective tax rate for both years. Okay? And Cap Ex, again, independent of what I would call the special one-time corporate headquarters purchase requirement, independent of that, as you know, our primary cap spending requirement comes from our fuel chem equipment. So, as that business further penetrates here in this country and in China and India, that is how our Cap Ex is going to ramp up. Again, it's not -- I would call material Cap Ex overall. But, an increase from what we experienced here in 2007 which was around $3 million we spent on fuel chem related equipment in 2007. I mean, any increase in that in '08 and in the future, that just means that we're going to be generating obviously annualized revenues at a $1 million per year rate per unit. So what we look forward to that capital spending any day.

The '07 had front end loaded in terms of the Cap Ex on those fuel chem customers that actually have inflow through revenue. You could argue fuel chem revenue would actually grow a little bit faster and you wouldn't have the Cap Ex associated with that? Is that fair? You already spent that money in depreciating it as you said before?

Absolutely true from that perspective. My point is related to incremental Cap Ex related to new fuel chem units.

Gotcha. Thanks a lot.

Thanks.

Your next question comes from the line of [Carter Schoop with Deutsche Banc]. Please proceed.

Good morning. Can you guys hear me okay?

We can. No problem.

The first question is on fuel chem. It sounds like in the first quarter maybe it will be relatively flat sequentially and then pick up to 9 to $10 million range. First off is that correct?

Well, may or may not be flat. We don't know yet. It wouldn't be the full operating flow rate that I would expect in the second and third and fourth quarters.

And exactly how much short of that we won't know for a little while.

And just to clarify, the pickup to 9 to $10 million, that's going to be as a result of the contracts you have already won?

Those are for as a result of 2007 and wouldn't include anything we've announced in '08. I will be honest with you, we are not counting -- you have to (inaudible) -- and everything in our business plan. We really don't have much for the India, China units in there. And we announced two oil units that were already up and running and those were a few hundred thousand on a year basis. So, the baked in impact is from the ones we won in '07 and we need to win some more here in '08.

Great. That's helpful. In regards to fuel chem, there is a way you can quantify the number of plants that have maybe been offline for more than two or three months? It sounds like you guys take them off the sheet after they have been offline for six months. Are there a handful of different plants that have been off for two or three months?

Jeff, the -- i mean Carter, I'm sorry. Carter, we don't give out -- that's getting way down into the weeds for that sort of stuff. We were trying to help give macro visibility versus micro. Power plants, when they take an outage, sometimes it will be a six week outage to do a turbine. That's just a standard outage. Obviously we aren't injecting when they're doing that. They may have other issues that they deal with at times they want us to crank up higher. We don't try to tell everybody, okay, we are cranking higher than normal on five units and lower than normal on three others over here. That's way down in the details and we really -- I think we are being -- I hope we were being open enough to be useful to you all. I can't get down into that level.

Okay. I understand. It's pretty far into the details. Given the sequential declines the past two quarters in a row, I thought it might be helpful to get more understanding on the drivers there.

Carter, let me -- as you look at fuel chem, 100,000 more, 100,000 less or 200 or 300,000 that's kind of in the noise for usage. One way or the other. Gas unit comes on or a coal oil unit comes on for peak in a period and goes off that might have an extra 50,000 here or something there. What you are really looking is for movement in the millions.

Okay.

On a quarterly basis.

Can you give us an update on the lobbying efforts associated with giving fuel chem recognized as a fuel adjusted cost with several different PUCs and what type of upside potential that would provide if successful.

Carter, yes. That's actually something we are working hard on. But not at the state level. We will -- we do work at the state level, but the interest really is on working with the House and Senate so that in any new energy legislation package we get them to put a mandate in there that (inaudible) allow for energy efficiency measures like injections to be included in the (inaudible) fuel adjustment costs. Actually, right now I think in both of those bills that are -- we have successfully got that language in those proposed bills. Whether an energy bill passes in '08 we will see. But if it passes and if that language stays in there, that's a home run. That means no more do plants have to worry about this being an O&M cost increase.

It's now a fuel cost pass through and they would be no reason on the budgetary side which is the primary drawback for implementation at most utilities. We were working that hard. Vince Albanese, our Sr.Vice President, Investor Relations, and he has been meeting with not just -- Republicans and Democrats on both sides of the House and we're getting a very positive reception. And that reduces not only efficiency-- efficiency-- if I could change a unit's efficiency by 2%, 1%, it's double that in the CO2 reduction. 1% change in efficiency means 2% reduction in CO2. With our cost it's free. Why wouldn't you do that if that's something you are worried about?

Yeah, it seems that it makes a lot of sense. Do you have an idea how many different customers you have talked to that have been hung up on the fuel adjusted cost clause and how many customers are waiting in the wings for this type of legislation to be passed?

They aren't necessarily waiting in the wings because utilities know about politics. But, I would say 90% of the customers we talked to, this is an issue.

Okay. And final question, can you give us an update on the overall competitive environment both on the fuel chem and APC side?

There is much said about the competitive alternatives on the fuel chem side. And I hope that the facts are showing out that was all way overblown and there is not serious competition on that side. Competition really is around getting it for us utilities being able to justify in the O&M costs or the cost side when the benefits often go to the fuel buyer and the power marketer. That's the biggest issue. That's where the, quote, competition will come to in their own internal financials. This is not us being beat head to head by someone else.

On the APC side there is competition. There are a few others out there. And now Mobile tech just came in. Although, I don't think their rotating old fire air system is remotely as good in the domestic market as our system. And there are a couple of others. -- ACP is one that we meet in the market a good bit. And we work hard to win what we win. They all good competitors on the APC side. We see those a lot more prominent.

Great. Best of luck in '08.

Thank you, Carter

Your next question comes from the line of [Dan Menace with Avondale Partners]. Please proceeds if good morning, everybody.

Good morning, Dan.

Couple follow-up questions. First on the APC side. You noted in last year's "K" you thought about 300 domestic units would be impacted by care. I was wondering as we look to care implementation at the beginning of '09, where are we in terms of compliance. Obviously, you've gotten your share of orders in the fourth quarter and we've seen a lot of scrubber announcements two years ago now. How many people are still working through their compliance plans? How much is open business at this point?

Dan, that number was based on some assumptions that proved to be grossly over conservative on our part and as far as low numbers, the new 10K is being filed today. is it Vince?

Yes, it is.

And you are going to see new numbers. And they are substantially higher. I think we are showing -- I'm trying to read what we had said in here. In either case, you are talking about thousands of new units as we look at the applicability for care. We had 1300 electric generating units. Not counting the industrials alone on care that we believe are customer units. The market potential -- and then you look at the cleaner visibility rule and that goes into the many thousands. Now with the spread of our technology sweep, we really -- if you are doing anything with NOx, then we've got something to talk to you about. If you want to put on an SCR, our ultra technology has now taken off.

I think we were the industry standard and we have gotten all kinds of ways -- we were just looking at units, for example, if you were going to put an SCR, we call that list and say, okay, which units will put an SCR in and have gas supply nearby. Our ultras were gas fired and that would be a customer. Now we've got ultras that are oil fired, gas fired, fired by air, hot air. So -- and electric. So, there's really no unit out there if they are doing something about NOx that we don't have a technology applicable for and we were expanding those. So that market is opened up a lot for us in the past year.

Just so I understand, the 300 was really coal fired units when you talk over 1000 you talking more about industrial and non-coal fired.

No, actually, Dan, the 300 was a subset of coal fired units.

Right, that's what I meant.

It wasn't all the coal units.

Right.

The 1300 includes coal, but has other oil -- other fuels in it, too. You burn combusting anything, you are generating NOx, whether it's gas, oil or whatever. And we've got these new-- for some of the ones that we would have never have included before with very small university and industrial gas-fired boilers, for example. We now have a brand-new design that we call mini ultras that are just awesome for that market and again that's stuff we didn't have a year ago.

Okay. And then briefly on the ultra product. Certainly I understand the hazardous nature of ammonia especially by the heavily populated areas. But, isn't there also a cost increase there? Given the lower ammonia quantity in urea and returning it back and isn't there a cost disadvantage to actually using urea?

There is a--- when we-- when I was looking at this at AEP and I remember we did a detailed analysis of all of that, the capital cost for anti-disamonia, which is just the pure ammonia is very high. You have to have these tanks and you have to have a-- all sorts of safety equipment around them. But the shipment cost is the cheapest. The next in line on cost was a system like an ultra. Then the most costly was to do a water ammonia blend-- hydrated ammonia. And you can get that down to like a 19% ammonia and 81% water.

But that gives you five times the shipping cost. With the new rules coming out of Homeland Security on transportation of those -- even of those kind of tankers for both acquiesce and anhydrous ammonia, the shipping costs are going up dramatically because trains will have to be routed around like a Chicago. That's very costly for a train have to segregate so it doesn't go into the yard in those big cities. I think the cost is going to come out that we will be cheaper all the way around. Especially with our new heating techniques, Dan, with not just gas but even hot air.

And then lastly on fuel chem. Just focusing a little more on Q4 and I know obviously there's some noise quarter to quarter, but again year-over-year you had two more coal fired units than last year on plus some portion of whatever you brought online in the fourth quarter. And revenues were down year-over-year. Some of this outage related that seems to happen every quarter. But, are you seeing any difference in sort of flow rates on a consistent or trend basis? Is there-- whether due to coal switching or anything else or efficiency in the amount you inject-- is there any shift we should be looking at in terms of chemical demand?

Yes, Dan. Year-over-year we are up. It was just the quarter over quarter. It was minor variances in operations. Year-over-year we are up 14%. And we only had two new units in there. So year-over-year we were up and you saw the results in there. But not quarter over quarter. You will see the full results of these -- of all these new units running in '08.

So, you're saying there's is no real fundamental change in usage per unit even with coal switching or other efficiencies.

On an individual unit, Dan, there are always be-- somebody brings in some really slaggy coal, our usage goes up. Somebody brings in coal that is not nearly so slaggy, the usage on that unit-- while they might still be using us, they might cut back on the flow rate because they just don't need it. And we are working on that. We're actually working on an automatic control using infrared cameras and in a really neat way that will -- you go on automatic and it will actually watch for slag in the increase or decrease. So we are looking to fine tune those kind of flows. It's not that there is just one number right there that a unit once you turn it on is just set. They vary all over the place all the time on every unit. And those kind of operational variances is what I was talking about earlier. You can't down into the weeds and worry about if it's 100,000 up or 200,000 down. What you looking for is the overall trend and you will see the overall trend move up to that 9 to $10 million a quarter range and as we win more we will get more.

Alright. Thank you.

Okey-doke, man.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up question from the Michael Carvoy-- with Signal Hill. Please proceed.

John, I like to follow on this last question here on fuel chem feed rate. We've talked in the past before about mag ox being a way to also help mitigate sulfur emissions which should be relevant in China as it is here in the U.S. Are you not seeing any real increase in the feed rates here in the U.S.?

Oh, yeah, on some units, Michael. We look at gross averages on stuff and as we said in the past on a big unit it's according to the application. You might get a unit that is 3 million a year per unit on some applications according to how we were doing that. And we are working with utilities to find the sweet spot for that utility. We will vary it up and down to take a look at where you get maximum return on investment. It might be a higher dose rate.

You might be that if somebody is dosing that at 1 million that they get a two to one pay back and they dose at 2 million and they get a six to one pay back. It literally is that kind of a difference. So we actually do work with utilities to -- and that's where if you have a fuel cost pass through, this becomes a no-brainer. It's a little more difficult to work with a plant manager and say, hey, look, I think if you just tweaked it up a little bit you will get twice the return that you are already getting. And that's where Santee -- we worked with Santee Cooper on just that issue. And did a wide variety of rates with those guys and they found their sweet spot and they paid back very, very handsomely for them.

Great. Thank you.

Does that help?

Yes, it does.

Thanks, Michael. Eric, any more?

Yes, sir. Your next question comes from the line of [Michael Morner with Goldman Sachs]. Please proceed.

Good morning, everyone.

Good morning, Michael.

It's a marathon call so I'll just ask one question. Most of mine have been answered. Can you just give us some idea of how you think about protecting your IP as you venture into places like China?

Absolutely. Michael that's a great question. You know, we signed our Chinese fuel chem -- end of January, February, we had hoped to have that under contract well before Christmas. The whole issue over the last two months was over our license agreement. The Chinese -- we -- the modeling stays here in Batavia.

So, when the Chinese plant managers fly over here to view their model. But we also-- once you shown where the ideal locations are, similar sized boilers might have somewhat similar locations. It was extraordinarily important to us that there be a rock-solid license agreement with unlimited liability if they disclose those port locations to anyone else. That was a hard concept for the Chinese plant manager to accept. But they did. And with adjudication, not there in the mainland.

We are taking our best effort to protect that information we do it in our contracts. We do it in the way we approach our customers and how we were doing our projects. One of the reasons-- good help is Atoche-- they are a very large corporation. And people pay attention at times to larger corporations. More attention sometimes than they'll pay to a smaller one, which we are. I think we knew we won that thing for awhile. But we were not going to go forward until we had the IP issue in absolute solid terms. And that's true here in the U.S. It's true in India, for the same reason and Mexico and China or wherever else we go..

Great. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Currently we have no more questions in queue at this time.

Thank you very much, everyone. Thanks for listening in on the call. We plan to make 2008 a better year and we have to get to work and make that happen. Thank you so much for your interest in the company. Goodbye.

Thank you for your participation if today's conference. This concludes our presentation. You may now disconnect. Have a good day.