Fuel Tech Inc (FTEK) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2008 Fuel Tech earnings conference call. My name is [Lamanuel] and I'll be your operator 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 call over to Mrs. Tracy Krumme, Vice President of Investor Relations for Fuel Tech. Please proceed, ma'am.

Thank you very much. Good morning, everyone and welcome to Fuel Tech's third quarter 2008 conference call. Joining me on the call this morning is John Norris, President and Chief Executive Officer, John Graham, Senior Vice President and Chief Financial Officer and Ellen Albrecht, Vice President, Controller. As a reminder, the matters discussed in this conference call, except for historical information, are forward looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward-looking statements. The factors that could cause results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call, and as a reminder, this 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, and good morning, everyone. We appreciate all of you joining us on this call. Our results for the third quarter include $23.7 million in revenue, up 55% from $15.2 million in the third quarter of 2007. Net income for the quarter was $2.1 million or $0.09 per diluted share, up 125% from $930,000 or $0.04 per diluted share in the same quarter last year. For the first nine months of 2008, our revenues were $62.9 million, up 32% from the $47.7 million last year. Net income for the first nine months of this year was $4.2 million or $0.17 per diluted share, more than double the $2 million or $0.08 per diluted share last year. Our CFO, John Graham, will discuss our financial results in greater detail in a few minutes. John will also cover our balance sheet in detail, but it remains exceptionally strong with very little debt and with cash and cash equivalents of $32.8 million as of the end of the third quarter. Our business model continues to generate growth in revenue, profit and cash flows and we expect that to accelerate into 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 group these technologies into two product lines, a specialty chemical business we call FUEL CHEM and our Air Pollution Control or APC Capital Projects product line. For the third quarter and the first nine months of this year, we have both product lines generating growth in revenue and profits. Our APC business sector saw third quarter revenues this year of $13.6 million up 98% from $6.9 million last year. For the first nine months of 2008, revenues were $35.7 million, up 54% from the $23.1 million generated in '07. Year to date, APC gross margins were 45.3%, up from 40.8% in 2007, reflecting less mix of turnkey work.

This business sector started the year with a strong back log of $28 million. During the first half of the year, we signed $16.3 million in new contracts, including $11 million in China for an ultra-system in southeastern China and two selective non-catalytic reduction or SNCR systems in inner Mongolia and we ended the second quarter with $27 million in back log. In the third quarter, we announced $2.6 million in new APC projects and we finished the quarter with a back log of $15 million.

We had anticipated that we would see a much larger number of contracts signed for us in the third quarter, especially from US and China. But the global financial crisis caused a number of projects to be delayed and especially US projects. With some of those projects now expected to be signed later this year and more signed in 2009. Some of the US APC projects we had anticipated signing late this year might be delayed up to a year. In the wake of the current financial crisis, we see almost all utilities, US utilities, rethinking and relooking at their spending, especially their capital budgets. I think we will see new, large capital projects being reexamined to see if there are not lower cost options. Discretionary projects will be curtailed significantly, but most environmental control projects are not discretionary.

A positive note regarding all of this for Fuel Tech is that we have the lowest cost environmental control technologies in the world, especially for NOx control. Our Cascade technology, for example, offers very high NOx control rates at a fraction of the cost of high-capital cost projects like selective catalytic reduction or SCR projects. Still, in times of uncertainty, US utilities especially will wait until the last possible minute to sign any new contract and we are seeing that right now. Now, we do not anticipate losing much of the work we expected, but we do expect to see delays in many of the projects that have not yet been contracted.

In September, we announced and in October we closed on the acquisition of Tackticks and FlowTack which greatly expands our NOx catalyst expertise and our physical modeling capabilities. We are already seeing very positive feedback from clients and potential clients regarding these additions and we expect this to yield new business opportunities for us in the not too distant future. Already we have been able to develop a whole new product line of many SCRs MINI for use in small industrial applications. This system provides excellent NOx removal in a very compact system which is about the size of your desk. There are thousands of potential clients for such a system here in the US alone.

It was the technical expertise, the Volker Rummenhohl, the former owner of Tackticks and his team combined with the Fuel Tech team which made this new system possible. In addition, we have recently expanded our offerings to include Trona injection downstream of the boiler, to provide trim control for SO2 when the client may need an extra 20% or 30% SO2 removal on their units. This is a low capital cost approach with a business model more like FUEL CHEM than our traditional APC business model.

In China, our APC business prospects remain very strong and dwarf by a large margin our business prospects anywhere else in the world, including the US. We continue to pursue a very large number of significant projects in China and the Pacific Rim and we anticipate contract awards from those bids to begin soon and to grow significantly in 2009 and beyond. In fact, the Chinese are currently indicating that they plan to continue to invest in their energy sector, including environmental controls, as a way of sustaining growth in their economy. As such, we believe that 2009 will be a very strong year for us in China.

Our quarterly FUEL CHEM product line had revenues of $10.1 million an all-time quarterly record. This was also a 21% increase over the $8.4 million in the third quarter of 2007. For the first nine months of 2008, our FUEL CHEM revenues were $27.2 million, up 10.8% over the $24.6 million in the first nine months of '07. Of special note, our revenues from coal units were up 21% or $4.1 million year to date in '08 versus '07. At the same time, our noncoal revenues in 2008 year to date were down 28% to $3.5 million versus 2007 with revenues from domestic oil-fired units down even more. But partially offset by international oil and non-oil, noncoal-fired units such as the olive pit burners in Italy. The decline in domestic oil-fired revenues this year is due to the very high price of oil keeping these units off line most of the year. Oil prices have recently come down, but the domestic wholesale power prices have also declined as is normal for this time of year, so we don't see much recovery of those units this year.

The 21% increase in coal revenues is reflective of the key market area we're focused on which is our key growth area. Our FUEL CHEM gross margins for the third quarter of 2008 were 47.6%, down from 51% in the same period last year and down considerably from our normal gross margins in this sector of about 53%. This lower gross margin in 2008 is due to the record number of FUEL CHEM demos which are in progress right now. The financial impact of the FUEL CHEM demos and the significant R&D expenditure in the FUEL CHEM technology area this year depressed after tax earnings per share by about $0.02 per diluted share in the third quarter. While depressing our earnings in the quarter, these costs are really investments in our future which should pay off handsomely as these units go commercial with our FUEL CHEM programs in the future.

Looking at our international markets for this business sector, we are pleased to have announced during the first quarter our first FUEL CHEM demonstrations on large units in India and China. The unit in China has just finished its demonstration period and the final report between us and the client and the official third party evaluator is being completed and the decision on a long-term commercial contract will be made soon. This extensive technical evaluation report has taken a huge effort to complete. Most Chinese customers are waiting to see how well we did before committing to go forward with FUEL CHEM on their units. Thus we are especially pleased that the Fuel Tech ITOCHU team has been awarded a second demo contract in China even before this report is complete and we are pursuing a number of other promising prospects.

The unit in India has recently started up on its FUEL CHEM demo and visual observations in the boiler look really good so far. We are very pleased with the record-setting pace of FUEL CHEM awards, but we have received considerable feedback in numerous meetings with analysts and investors that the large number of demonstrations has made modeling our FUEL CHEM business segment more difficult. To help our analysts and investors better model our business, we are revising our FUEL CHEM list included with our earnings release and on our website now. We have separated the units on the list to show FUEL CHEM commercial units versus those in the demo phase. We've also done a scrub of our list to remove units that are not providing revenues consistently for various reasons. A total of six coal units were removed from the commercial list. Of these, one very small domestic, industrial boiler had the system removed recently as the client did not want to continue after the trial run and in this business environment. One other small utility unit had really good results from our FUEL CHEM program, but the client is not now dispatching that unit very often and asked us to take the equipment off of that unit and move it over to a larger unit on that same site that they run much more often.

The other four programs that were removed all have our systems installed and the clients have plans to operate those systems in the future. But they have not been consistently using the systems recently for a variety of reasons, including boiler modifications they've made and changing to oils that do not slag as badly. Well, since the whole purpose of this list is to better help you model our business, we're taking them off the list for now to be appropriately conservative. As you look at the list, you will see that domestically we have 12 large coal units in commercial status with three in the demo phase. Based on our more recent experience, we would suggest a likely average revenue stream from large units in commercial status of about $1.75 million per year, that's up a bit from the prior guidance we've been giving. We have seven medium-sized coal units in commercial status with five more of that size in the demo phase. We would suggest an annual revenue stream of about $1 million per unit for those. Finally, we have seven small coal units in commercial status with one more in the demo phase. We would suggest a revenue stream of about $0.5 million per unit per year from these units.

Internationally, we have two medium-sized coal units in commercial status with two large units and two medium-sized units in the demo phase. The units in commercial status now should enjoy the same level of revenues for their size as their domestic counterparts. The two Chinese units in demo phase, one large and one medium, will see about half the normal revenue stream when they go commercial because of our deal with Itochu. On the noncoal side, we removed one unit for a program that we recently discontinued down in Venezuela due to the government's nationalization efforts there. The other 55 systems are used whenever the units run on oil or other solid or liquid fuels other than natural gas.

Current 2008 expected revenues for this group taken as a whole is about $4 million in total for the full year. Now, if you add all this up, you'll come with a run rate of about $37.5 million per year, which we think is conservative, but we think it's in the right ballpark, too. We plan to update this list quarterly in the future at the time of the earnings conference calls. Again, the purpose of this list is to help you model our business better. The actions we have taken are in response to numerous suggestions that you, our investors, and various analysts have given us and we hope these changes help.

Finally, before I turn it over to John Graham to talk about the details of our financial numbers, I'd like to address our end of year guidance. At our last earnings call for the first half of the year, I walked through our results and expectations for the full year. I noted at that point that we needed a number of APC contracts to be awarded in that sector for the third and fourth quarters and that those to be made early enough that about a third of those revenues could be recognized this year. The utility contracting delays caused by the financial crisis of the past few months will not likely allow us to be able to recognize a significant portion of contracts we win this quarter. So we are conservatively revising our end of year guidance down to reflect that situation.

We also have a record number of FUEL CHEM demonstrations under way and the ones in China and especially India have some costs which will be recognized in the fourth quarter and will not be fully recovered from the client. We believe these are very prudent investments to establish ourselves in these huge markets, but they will impact our fourth quarter results. We now expect our full year revenues to be in the $79 million to $81 million range, fully diluted earnings per share to be in the $0.15 to $0.17 per share range. These numbers reflect existing commercial FUEL CHEM programs and contracted APC work currently in our back log without considering any positive impact from new contracts which may be won later this year. Now I'll turn this over to John Graham to talk in more detail about our financial results.

Thank you, John. Good morning, everyone. As John mentioned, consolidated revenues for the third quarter were $23.7 million up from $15.2 million in the third quarter of 2007 while consolidated year to date sales were $63 million, up from $47.7 million through the first three quarters of 2007. The third quarter revenue level was the second highest in our Company's history. Now, let's talk more in depth about each of our business segments and other financial items. In the FUEL CHEM segment, third quarter revenues of $10.1 million, a record level for our Company, included $8.7 million from coal units, a 25% increase versus 3Q 2007. Quarterly revenues from noncoal-fired units of $1.4 million equaled the comparable prior year period. High crude oil prices kept many domestic oil-fired units from running in all but peak or other critical situations. For the first nine months of our year, our FUEL CHEM revenues of $27.2 million were up 11% from the amount recognized in the first nine months of 2007.

Again, this number alone must be further segmented into revenue from coal and noncoal units to further clarify the true growth of the underlying business. In the first nine months of 2007, the $24.6 million in total FUEL CHEM segment revenues, $19.7 million were from coal-fired units and $4.9 were from noncoal-fired units. In the first nine months of 2008, of the $27.2 million in FUEL CHEM revenues, $23.7 million were from coal-fired units, an increase of 21% over the comparable period in 2007 while revenues from noncoal-fired units declined 28% to $3.5 million.

The large reduction in FUEL CHEM revenues from noncoal-fired units year-over-year was also due to the high price of crude oil keeping the domestic oil-fired units from being dispatched to the extent they were in 2007. The $4 million increase in year to date 2008 FUEL CHEM revenues from coal-fired units versus 2007 comes from the addition of new incremental units signed during 2007 that were started up on a FUEL CHEM commercial program late in 2007 or during the first nine months of 2008. As you can see from the new FUEL CHEM list that John discussed, the large majority of units signed so far this year are still in their demonstration stage with many of them yet to even start injecting chemical at all. As with all of our FUEL CHEM demonstration programs, these units will generate revenues as they complete their installations, conclude their successful demonstration periods and roll into commercial account status.

Quarterly gross margins for the FUEL CHEM segment declined from 51% in the third quarter of 2007 to 48% in the current quarter reflecting an increased number of demonstration programs at customer sites. At present, FUEL CHEM has a record number of demonstration programs underway with each designed to improve the effectiveness of the TIFI application. FUEL CHEM and the customer normally share in the demonstration program's expenses and the customer typically transitioned into a commercial account status once the program's value has been demonstrated.

Segment gross margins declined slightly versus a year ago from 50% to 49% reflecting the effects of the aforementioned demonstration programs. From an operational standpoint, we continue to keep an inventory of eight FUEL CHEM systems ready to deploy in the United States with two additional units stationed in China so as to be able to install them as quickly as possible upon receipt of new orders. In the Air Pollution Control or APC segment, third quarter revenues were $13.6 million, an increase of 98% versus the $6.9 million reported in third quarter 2007. Our APC back log at the end of the quarter was $15 million. The year-over-year increase was driven by the ongoing recognition of revenue on the $50 million in APC contracts awarded in the latter months of 2007 and projects awarded in the first nine months of 2008. While our back log is below where we would like it entering the fourth quarter, as John alluded to, it is not fully representative of the significant activity ongoing behind the scenes in terms of bid submissions and RFP activity.

Year to date FUEL CHEM has announced contracts, APC contracts, with a value of almost $19 million. APC segment revenues for the first nine months of 2008 are $35.7 million or 54% higher than the comparable prior year period. For future reference, Tackticks and FlowTack, the acquisition we closed on October 2, will roll up into the Air Pollution Control segment for reporting purposes. Segment gross margins for the quarter were 43%, unchanged from a year ago, while year to date APC gross margins improved to 45% versus the 41% reported for the first nine months of 2007 due to a more favorable turnkey project mix. In other words, the make of the contracts had a lower mix of turnkey work, which is work where Fuel Tech not only provides the capital equipment for the APC contract, but also manages the installation process.

On a consolidated basis, the Company gross margin percentages for the third quarter of 2008 were 45%, a decrease from the 47% reported in the third quarter 2007. The reduction in quarterly FUEL CHEM segment gross margins due to the effects of the aforementioned demonstration programs was the driving force of this decline in consolidated quarterly gross margins. Year to date, consolidated gross margin increased from 45% to 47%. Quarterly SG&A expenses exclusive of R&D expenditures were $6.8 million or 29% of consolidated revenues. While these expenses increased $1.1 million from third quarter 2007, their percentage to total revenue decreased from 37% to 29% as we continue to leverage the fixed and semi variable cost structure of Fuel Tech in a growing environment.

On a year to date basis, SG&A expenses of $21.2 million represented 34% of consolidated revenues. This dollar amount was also up versus the prior year amount of $18.1 million, but represented a decrease as a percentage of total revenue from 38% to 34%. Of the $3 million year to date increase, $953,000 is due to stock-based compensation expense under FAS 123 R, while the remainder is due principally to employee related costs resulting from the expansion of the business both domestically and internationally. A separate table was included with the earnings release that provides pre and after-tax guidance on our expected full year FAS 123 R expense. As stated on the second quarter earnings conference call, quarterly R&D expenses returned to a more normalized level of $380,000 after the strategically important but somewhat anomalous amount reported in 2Q 2008 of $909,000.

The majority of the total year to date R&D expense was due to spending on a major initiative in the FUEL CHEM product line that should yield very positive business results for us in the near future as Fuel Tech continues its efforts in the development and analysis of new technologies that provide solutions to complex operational conditions and customer boiler units. Third quarter 2008 operating income of $3.5 million or 15% of revenues was up $2.5 million over third quarter 2007's operating income of $1 million. Year to date operating income of $6.4 million or 10% of revenues was up significantly versus the $1.9 million or 4% of revenues reported for the first nine months of 2007. From an interest income perspective, the decline in that amount versus the prior year is driven by lower short-term interest rates relative to 2007.

The third quarter and nine month results include $1.3 million and $4.2 million in income tax expense respectively, an increase over the $571,000 and $1.1 million reported in the comparable periods of 2007. These increases are solely due to the result of increase in taxable income. Due to the mix of domestic and international revenue and income levels presumed in our revised guidance, our full year income tax provision is expected to increase to approximately 40%. Net income for the quarter was $2.1 million or $0.09 per diluted share, an increase of 126% versus the $927,000 or $0.04 per diluted share reported in 3Q 2007. Net income for the nine months of 2008 was $4.2 million or $0.17 per diluted share, an increase of 109% versus the $2 million or $0.08 per diluted share reported for the first nine months of 2007.

Our balance sheet remains very strong and in great shape. As of September 30, 2008, Fuel Tech had cash on hand of almost $33 million. On October 2, we did fund the Tackticks and FlowTack acquisition from cash on hand, so this amount would have decreased accordingly in early fourth quarter. Cash collections remain strong and working capital at September 30, 2008 was $45.8 million versus $45.1 million reported at December 31, 2007. From a cash flow perspective, year to date 2008 operating activities generated $8.3 million of cash, driven by solid operating results versus net cash used in operations of $1.1 million for the first nine months of 2007.

Year to date 2008 investing activities used cash of $7.1 million as the sale of short-term investments provided cash of $2 million while offsetting this amount was $9.1 million in capital expenditures required to support and enhance the operation of the business. Of this amount, $5.2 million was spent for the development of Fuel Tech's new corporate headquarters with the remainder principally for the equipment related to the FUEL CHEM technology segment. Fuel Tech generated $1 million in cash from financing activities primarily related to the stock option exercise activity experienced. Fuel Tech's domestic and international market interest and sales activity continues at a strong pace, but as John mentioned, the global financial crisis has delayed some areas of activity and will have a dampening effect on our full year financial results. In addition we will have some one-time expenses in the fourth quarter related to our current FUEL CHEM demonstration programs in China and especially in India. Accordingly, we are revising our range of full-year revenue to be $79 million to $81 million and our full year earnings per diluted share to $0.15 to $0.17. John.

Thanks, John. And now, operator, can you open up the lines for questions?

(Operator Instructions) And our first question will come from the line of John Quealy with Canaccord Adams. Please proceed.

Hi. Good morning. First a bit of house keeping and I apologize if you said this. In terms of the detailed guidance, the $79 million to $81 million, did you break out APC versus FUEL CHEM?

No, we did not. Nope, we have not provided that level of detail, John.

John, I think you mentioned something like $37.5 million per FUEL CHEM when you were going through the reconciliation. I would assume that's a decent number to use on a run rate basis now?

Run rate right now basis, that's exactly right. Some of those, for a full year like in '08, some of those units that are in commercial status now became in commercial status during this year. So we weren't suggesting that that will be like this year's number because some of those units didn't have a full year run rate, but for those units in commercial status, that provides a base for -- for going forward and then your new units as they roll into commercial status can be added to that. We were trying to just clean up that sheet so that you guys could have a better basis for what to use as you run your models.

And with regard to the FUEL CHEM spending initiative, can you comment as much as you can, what exactly you're doing to tweak the process there or what you need in international markets to invest near term? And then, also, any quantification of that number in the next couple of quarters?

John, ask -- I lost the train of thought there for just a second as I was trying to shape my answer.

No worries.

Go at me again.

Sure. First part, what exactly are we doing, as much as you can tell us, about the FUEL CHEM initiative overseas that requires some extra expense there? And then secondly, can you quantify the related expense over the next couple of quarters?

Got you. Most of that is going to be done this quarter in the fourth quarter. It's not going to be followed on. And the nature of those one-time expenses are really -- as an example, the China project, the demo project that we've been doing up until now, the amount that the customer paid us on that one wasn't going to fully ever cover our costs on that. We knew that was always an investment and so we'll be seeing the rest of those costs come in in this fourth quarter. This effort on preparing this final report is really -- as I said, it was a huge effort. To give you a feeling, you're trying to quantify boiler efficiency gains and megawatt gains on a unit that cycles dramatically up and down throughout each day, on a unit that was hit with numerous typhoons during our demonstration program so that the coal was saturated with, at times, a foot of water a day on numerous occasions and then you had, as typhoons moved through, the discharge cooling water would heat up as the warm water coming in off the ocean would affect the condenser cooling water coming in. It was -- it is probably, for me it is a fact that it is the most difficult technical evaluation I've ever seen. You know, we'll see what the client thinks. I think the results look real darn good and -- but we've spent a heck of a lot of time and money preparing the evaluation going through daily logs and coal analysis reports. That's the kind of thing we're talking about.

On the India unit, we are not and we never planned on fully covering all of our costs. Now that that unit is in operation, you know, on a cost accounting mode, we move all of those costs to charge that project. So I don't see that going -- being the norm. Normally in the US, our demonstration programs, the client, their contribution covers our costs in there. We may not make a margin on it, but those typically cover our costs. John, in answer to your other question, John Graham has actually a breakdown of some expected FUEL CHEM and APC revenue dollars, not on the EPS side, but on the revenue side if you'd like it for our end of year. John, go ahead.

Yes, John, two comments. One from a breakout from a segment perspective of the $79 million to $81 million, we have FUEL CHEM at $36 million to $37 million full year and APC at $43 million to $44 million full year. And if I may, just one comment to follow on John, when we talk about the additional costs we've incurred overseas, because we are in the process of determining the market viability for FUEL CHEM and both look very strong for us, one of the items that we as a Company have to do is qualify a local chemical supplier. Until that occurs, and that's on the fast track for us in both countries, we have to ship the chemical over there from here to run in the FUEL CHEM demonstration programs and you can imagine the cost of the freight and the import duties and tariffs and whatnot can add cost to that. That's just one example of why, during these demonstration programs, the costs over there will run more than they will back here in the States.

Okay. Thank you. Just a last question quickly. John, thanks for that break out on the guidance. So that's assuming maybe $8 million in APC business in Q4. Is that all in the $15 million back log right now or what's going on there?

It is, John. Everything in our guidance from an APC standpoint are contracts in-house, expected to be worked off here in '08. We presumed betting on the comp for nothing in the guidance.

If you remember, that was consistent with what we talked about at the end of the second quarter where I said we had about $27 million in back log at that time and that we expected about $7 million of that to roll -- to really be work that had to be done in '09 and that's still a consistent number.

Great, thanks.

And our next question will come from the line of Michael Carboy with Signal Hill. Please proceed.

Good morning, ladies and gentlemen. Given the natural gas prices have declined roughly 30% to 40% here since the beginning of the second quarter, I'm sorry, beginning of the third quarter through the end of the third quarter and coal prices have jumped, depending on which blend of coal you're looking at from 30% to 40%, I'm hoping you'll be able to discuss the FUEL CHEM variances in the context of those fuel costs and what operational bearing that has for the utilities? I certainly understand your point about oil-peaking units not being run as much, but I think there is a lot more going on here with regard to fuel costs that are influencing unit yield levels.

Well, there are some, Michael. The coal unit costs have gone up, which actually makes our FUEL CHEM program more desirable from a utility point of view because as they look for cheaper coal and usually get cheaper coal in price because the quality is so much less. You know, it's higher sulfur, it's very high slagging, those are the reasons that coal costs are different across the nation and that really pushes units to want to use us. The prices have come down on natural gas. Natural gas, you know, follows the -- how much is stored and the delivery patterns and those are posted on the energy information agency site each week and looking at supply and demand really will dictate the natural gas prices. You're seeing prices come down as the start of the winter is mild so far and as the economy is slacking off. The -- even at today's prices, though, a natural gas fired power plant is twice as expensive to operate, even the best ones, as an average-sized coal unit in terms of electric production costs, O& M. So coal units are still very deeply in the money. The -- and they'll run where they can preferentially, but a lot of the gas units, especially gas turbines are quick starting. You see those used for the peak periods if the coal units are more sluggish in operations.

Going forward, you know, it's anybody's guess the -- of what power prices will look like. It will depend on how cold the winter is because natural gas, one of its alternate uses is obviously to heat homes directly and water heating. So -- but coal units are still, Michael, half the cost of gas units to operate.

And if you think about the -- switching gears here to the international front, you've talked about having to provide some, shall we say incentive pricing to some of the Indians and Chinese. Given that it's sometimes rather hard to raise prices in those environments, do you think that we're going to see a diminished profit margin coming from international FUEL CHEM and APC business just sort of as part of a modeling exercise?

I don't think so, Michael. What we -- when we gave them -- we give them a break on how much of the costs they have to share, they know what the ultimate program costs will be on a successful project. We're just not asking them to share a full 50% of that up front. So the folks out there, it's not a factor of we've given them a -- some price that's $10 and our real price is $40. We've showed them $40, we're just saying for this demo, you only have to cover this smaller portion of that and all of our evaluations will be taking a look at the benefits to them from efficiency improvements, the ability to burn cheaper coals, the ability to produce more megawatts on the grid. We'll be taking a look at that versus our commercial rates. So these costs that we're talking about are not setting the stage in client expectations for some cheaper prices.

A couple of quarters ago you had talked then about having already identified and qualified MAG-OX sources overseas and in particular China. It sounds like from John's comments that that is --

What we had done, John, was we had identified mag sources in there. We had had material shipped back to us and we had looked at the chemical structure on those and the physical properties under a microscope, looking at slurrying. The kinds of qualifications that are going on right now that finishes that, and if I said that earlier, then I wasn't complete, are things like how's the stability of that material in a tank when the temperature is way below zero? Does it coagulate? And we're looking at their full -- we have a Ph.D. chemist over there now, actually working with them to fully qualify and then we are in commercial discussions with those folks about what's the price going to be and negotiating those prices. So when we talk about qualifying, it's not only the technical qualification, but also working out the commercial contract details and running some more rigorous testing because we have to take a look at do you ship it as a slurry, do you try to ship it dry and then mix it on site? How long will it stay on a train as it's coming in, which tells you whether you ought to -- how you're going to ship it. So there's a lot of those kinds of questions. That actually is a major effort, but we feel very confident that we'll have sources in China that will fully qualify for what we need.

Do you expect to have those sources qualified this quarter or next quarter?

Well, we expect to have that done hopefully this quarter, especially if we go commercial on this one unit, we don't want to be shipping a whole lot of stuff over here from the US.

Okay. Excuse me, last question regarding taxes in China. I think the comment was made that the tax rate for the fourth quarter was going to pop up to 40%.

On a consolidated basis.

Can you walk us through sort of what's driving that in detail, John?

Given the performance of the international offices versus what we presumed in our combined rate of 38, in essence, we're going to generate not as much profitability over there and in some cases because of the investments made running at an operating loss and right now because we don't have the income to offset those, in effect you have to valuation allowance those offline which drives up the overall rate. The rate domestically is not moving, it's really just how the weighted average rate is playing with the revised numbers from a P&L standpoint overseas.

Okay. So you can't basically bring the foreign operating losses in to shield US-based profits?

Yes

Is that correct?

Yes.

Okay. Thank you. Thanks, John.

You're welcome.

And our next question will come from the line of Rich Wesolowski with Sidoti & Company. Please proceed.

Good morning.

Good morning, Rich.

John, are there many or any contracts, APC in China where your engineering partners have won their direct contract or whether their competitors have won their direct contract?

The -- one of the near term ones for us in -- there's a lot of contracts we're chasing in China. In most of the ones we're chasing, we're trying to position ourselves to be on all the teams bidding. We have one that we hope will be let in the not so distant future that there's five potential winners. We are the specified technology to be utilized on all five of those bids. So we try to position ourselves and market to the AE firms, to be their preferred source, for example, if they're doing an SCR, to be their source for ammonia, the ultra urea to ammonia system. And in some cases that same thing is true SNCRs, on new units or major retrofits where that's not the only thing that's being done and there's a lot of those. We market to the AE, we market to the utility and then we make sure that the governments and the government agencies know about the effectiveness of our technology. So we try to work all three levels.

Have you spoken with many of the engineering partners lately and, if so, are they saying that the contracts that they're in negotiation for are postponed or are they potentially canceled?

Neither. The Chinese are moving forward. There's no discussion that we have seen from utilities or AEs that we don't just depend on the -- I mean we stay in touch with the utility to know when they award it to any of those AE firms. And the Chinese utilities are not slowing down at all that we have seen. In fact, the government is pushing projects to go forward. Most of this work is going to be done in China. Even the stuff we supply. You know, our -- most all of that will be done by our Beijing Fuel Tech office. The Chinese are looking at trying to maintain their -- and they're projecting what, 8% to 8.5% GDP growth in 2009. They're going to do that by investing a portion of that $1.5 trillion in cash they're sitting on. And energy and environmental, we have been told, are right at the forefront of those kinds of projects. They are investing in other infrastructure kinds of projects, bridges and roads and some of their agriculture areas and some of the others, but the Chinese do not seem to be letting off of the gas pedal at all.

Finally, can you give us an update and some perspective on domestic state regulations in the APC market in the wake of Care's repeal?

Boy, you don't ask easy ones, do you? The chair and the situation in the courts, we're all following -- I guess you saw where the courts went back to the plaintiffs and said what do you really want in the way of a settlement? Do you really want Care to be vacated or do you want it to be reinstated but with a mandate to EPA to fix it and I was surprised that the plaintiffs didn't get together any more than they did. The majority still say they don't want it vacated, but not everybody agreed with that. So it's a bit more of a toss up to see whether the court, the US court will reinstate it or not. Now, we have had at least two now clients -- we had only known about one. There's a second client that has said, hey, if the state reg isn't firm right now, it's supposed to be done by next March, to the EPA under the existing Clean Air Act requirements and since Care is in limbo, we are delaying those projects until we see that they're mandated.

And every client that we have been in touch with -- and you see that in the paper. Those of you that keep industry news, I mean Duke, AEP, Ameren, there's a whole series of them that have talked about how they are deferring projects because, quite frankly, their access to cash is not good. And that's what we're hearing from a lot of clients. Now, projects that are halfway through construction or some portion of it, they're moving forward with those because it would cost a lot more to demobilize and try to remobilize. But projects that we're still ready to be let are all being delayed. Now, they know they're going to have to do them. They can't cancel them. But they will delay them until either regulations or until they have enough money to be able to do them and that's why we really took a more conservative approach and we said, hey, look, even though we expect to sign some more this year, we're not going to assume any of that for right now and try to put a floor on where our guidance is.

Thanks, John.

And our next question comes from the line of Graham Mattison with Lazard Capital Markets. Please proceed.

Hi, good morning, guys.

Good morning, Graham.

Just to clarify, looking at Care, what would a reinstatement of Care do for you in terms of your outlook?

It wouldn't change what we're doing right now on this outlook. The -- because I -- if the court ruled even this next week, utilities are going to have to then revise again their -- of course, they're revising them almost daily right now, their capital budgets and their O& M budgets and we're in touch with all of these guys and we have some meetings with them which are being rescheduled for the -- two days later because they say we're in this huge officer -- complete officer meeting scrubbing every item of our O&M and capital budgets. So right now, Graham, I don't think it would change anything for this year. I just don't think -- I think there's just too much uncertainty. And if we happen to win some and can work it off, great, we beat our guidance, but we're not going to count on it in our guidance at -- right now. We want to give you guys a guidance and explain our logic behind it and hopefully you can model us better.

And then in terms of looking out to 2009 and beyond, what's your outlook for APC awards there, particularly domestically.

Well, we don't know that yet. In fact, we're fixing to have our own officer team meeting and scrub our list of folks. We're having an advance Tuesday, Wednesday, Thursday of this week as we look at our overall business plans for 2009. What I would suspect is that a lot of industrials and small units and small -- and projects that are smaller, like SNCRs and all of those that are needed to meet various regulations that are in place and in states that are impacted by those are probably going to go forward. You may see a few of those later this year and in the first quarter of '09. In the US, there's a lot more uncertainty there. In China, we had always anticipated that of those very large number and large dollar amounts of bids we have currently in China, that the vast majority of those would probably be signed in 2009, a few of them over in 2010. So we see no abatement of the Chinese market.

The rest of the world pales in comparison. You know, we don't get a lot of business out of Europe and other countries right now. I think the amount of work that we're doing there probably remains about the same, but it's not a large driver of our finances. So China for us is the area where we believe are going to buy strong, maybe starting later this year, but certainly in '09 and then FUEL CHEMs, we're pushing hard, we're getting a lot of success and a lot of traction throughout the US and overseas and we think you'll see some more -- we anticipate, hopefully, signing some more this year.

But in terms of, you know, looking at -- I guess looking now at a Cascade, and I know in prior quarters you talked about you thought you were close to being able to get one signed up, has the outlook for Cascade changed given the economic environment, given that it's a higher ticket item or do you still feel pretty confident that you'll be able to get one or two Cascades coming soon?

The logic and the interest in Cascades has gone way up, but the near term decisions on those, we had, indeed, expected one, Graham, actually, we had expected it by now and that one has been delayed. We think by months and not a year or anything like that. But we do see a lot more interest in clients, clients that were not talking to us about that at all have now scheduled meetings very quickly and said tell us more about this Cascade process. And those people are for units that were planning on having SCRs, that hadn't already entered into contracts with SCRs and now don't have the -- can't raise the capital for that and they're looking for other ways. So our interest is way high on those, but, you know, I don't see that in the next few weeks on a domestic order.

And on the international front?

Still a lot of interest in that in China, Asia Pacific especially.

All right. Great. I'll jump back in queue. Thank you.

And our next question will come from the line of Ron Oster with Broadpoint.Am Tech. Please proceed.

Good morning. Just had a few quick questions on the FUEL CHEM business. I think you mentioned run rate $37.5 million, but did $10 million this quarter. Can you just kind of -- which would give you a run rate over $40 million range. Is there a -- anything to account for that variance or is that just --

Ron, it's seasonal. The third quarter we have July, August, September. That's the hottest months, the highest power prices, the coal units -- it's the highest loads on the system, so the coal units are all going to be running as much as they can to try to meet that load. Our use on a unit depends on how much power they're generating, right? If we are injecting at, say, one pound per ton of coal, well, if they're burning a lot more coal than those, we've got a lot more pounds because it's per ton. But if they're not generating as much, we're not used as much. So our usage and our revenue dollars from that tracks the power market.

Okay. And --

So third -- Ron, third quarters will always typically be our strongest with really fourth quarter and second quarters probably being our typical weakest.

Okay. And then looking in the 2009 with the additional detail you provided for the units, of those in demonstration, can you kind of ballpark when you might expect those, to the demo period expires and when we might be able to expect them to shift over to a commercial status? I think there's nine domestic, four international, what -- in the next six months, how many of those might transfer over to the commercial status?

Well, one of the things that we've found, Ron, and why we've switched to this is that we used to say, well, demo starts six weeks later and count on three months for the demo and we found utilities, and they're in that same mode now, are less predictable these days. Some of the utilities, as an example, on some of their -- and I think at least one of the demos, it's probably going to be more like about six -- we thought it was going to be six weeks to get that sucker installed. It's going to be more like six months. They canceled their outage that they were planning in January for cash flow reasons because outages cost money and they're just going to run the unit. Now, we'll be ready if they have an opportunity outage, but it's that sort of reason why what we're going to do now, Ron, is that at every conference call, every earnings call, we are going to revise this list and we'll show you then what you should count on for the next quarter. And I can't really handicap those. It's typically what I just said. It typically is about a six week to get it installed and then the demo lasts for about 90 days when we're splitting the costs, before it goes commercial. So we had said as soon as we announced one, probably count on two quarters passing, you know, to get it installed and then the demo to run out and then in the third quarter after our announcement, to -- that it goes commercial.

Okay.

You all were having -- we had a lot of folks, okay, when did you announce this one, when can I add this one in and so we -- that's still probably very good, but we'll tell you now. Every earnings call we'll revise that list.

Great. That's helpful. And then you mentioned the -- a pretty extensive evaluation report in China that could be a catalyst for additional orders. What's the timing of when that's going to be released and is that something that will be publicly available to other potential customers?

That is a -- the timing is that we're having the meetings with the clients this week and may have another one next week on all of that. So it's imminent. The -- what the client will allow us and what they want to do with that report, we'll see. Okay. We had confidentiality agreements executed by all three parties, us, the client and the third party, which is a national lab over there, evaluator. And we'll see how we can best use that going forward. So that's a yet to be determined item.

Okay. And then lastly, I think last conference call you mentioned over $100 million of bidding activity in China. Is there any similar type of update you can provide us with, you know, with recent bidding activity over the last month or so or --

The number is up in total bid dollar volume and projects we're pursuing from that, but, now we -- the number is large enough, Ron, the real issue is let's start bringing them in the boat, let's start landing these rascals and the number is quite substantial, far beyond any other business prospects we've got. Now, the issue for us, you know, whether it's $100 or $160 million, the issue is, okay, how many of that are you going to actually win and that's what we need to be bringing in the boat now, starting the wins.

Okay. Then one modeling question on SG&A. 29% of revenues, is that a sustainable level or do you expect that percentage of revenues to continue to decline into 2009 as you grow the top line?

I think we've got a very tough comp when you look at fourth quarter '07 because we had our largest quarter ever back in the fourth quarter of last year. So when you take a look at SG&A expenses, what I would expect you would see going into '09 is a flat to slightly up increase on an absolute dollar basis, but continually to be leveraged as a percentage of revenues. I think we can run this business as we get to 100 million and above year in, year out, with an operating income, well north of 20%, which is primarily going to come from reduced SG&A expenses as a percentage of revenue mainly because, Ron, we're running right now, for the most part, our FUEL CHEM in the low 50s and our APCs in the mid-40s. We're at the gross margins that we expect to be, you know, a worst case for us. So our operating income leverage going forward is really going to come out of our SG&A line. So I wouldn't look at any one quarter in particular and say that's a run rate because our income -- I'm sorry, our revenue levels can oscillate quarter to quarter because of the seasonality of our business and the timing of the APC orders and the revenue recognition associated with them, but going into '09 and even prospectively, I think it's safe to say that you will see absolute dollar increases as we invest in the growth of the business, especially internationally, but as a percentage of revenues, that number should continue to drop dramatically.

Okay. Thank you.

And our next question will come from the line of Ted Kundtz with Needham and Company.

Hey, guys.

Howdy.

Basically one question for you since most have been asked. In China you were talking about doing a project with the smaller coal-fired boilers, you know, this is 10-K per system projects and there's certainly a lot of those boilers over there. Any update on that effort?

They're still going through to pick the exact site. We got the project with a region and they were going to pick a site. We have been working on the design of the system and the Chinese had changed sites on us. This whole first effort was anticipated it would take up to a year to get the system installed and fully demonstrate it. They're looking at a couple of other different sites within that same region and we'll pick one here very shortly. There wasn't any sense of urgency -- I mean we have got a great sense of urgency. That's not critical path for us right now as to which site because we had to get the system design finalized and then get it constructed and then have it delivered to the site. So the first parts of that, design and construction, are kind of underway because we want to make these modulars so we can just tie in with temporary connections to run the demo and we'd like to make the system modular so that we can go to all of these sites with truck mounted system that can do its thing and then if they ever want to shut down that unit, we just back up another truck to that trailer and take it somewhere else.

Okay. This is more of a 2010 revenue opportunity, you think?

Yes. Exactly right. It will be a installed and demo complete in '09.

Okay.

And then it will -- hopefully the business prospects for us will be material in 2010.

Okay. Just one more question, then. Just on this evaluation report you're having done in China, is this for a particular province or particular utility over there that you're doing this for and what does this effect? How much of the business could this possibly effect assuming this is a positive report?

Well, it was -- the Chinese had seen the report from Santee Cooper in January and they really liked that kind of very technical approach, so it's not a -- as that commercial on TV says these day, it's not a she said, she said kind of thing and they really wanted the hard core technical data and that was fine, but it's for the unit -- for the utility for that unit and then -- but the Chinese the effectiveness will be widely known. Now, whether we're able to release that unit like Santee did in their report, we don't know just yet. I hope we will be able to because a tremendous amount of work -- it's probably the most complex set of circumstances I've ever seen, but we had situations at the plant where as we were operating the worker looks -- the plant manager looks in and says, wow, that looks very clean. We're saying, oh, that looks good. He says, but we will look at the data.

Okay.

So they really wanted to see that hard kind of data, not just rely on visual observations or --

So it's not really clear if this will be applicable to a lot of the other proposals that you have over there.

No, no, no, I think it will be applicable.

You'll be able to use it.

It will certainly be known, the effectiveness. It's already -- while we're able to sign this other unit is that they had already heard positive stuff from the -- just generalities from the plant socks they were encouraged by that which is why we got our second one. It will be very applicable, just how much of the report we're going to be able to release is the question.

Okay. Great. Thank you.

And our next question will come from the line of Jonathan Hoopes with ThinkEquity. Please proceed.

Hi. Actually, it's Jonathan Hoopes and actually it's (inaudible) on behalf of Jonathan Hoopes. Thanks for taking my question. In the past you had pointed to high oil prices as one reason for low FUEL CHEM consumption. Now that oil price is back to about $60 per barrel range, shouldn't we expect more oil-fired boiler consumption of FUEL CHEM or is oil still too high for utility companies to fire up their oil.

If you look at the utility prices in the market, this is -- our prices track the usage, a supply demand kind of thing, so you have the highest power prices of the year in the summer where you get up to way north of $100, sometimes north of several hundred dollars per megawatt hour. In the fall, prices will fall back to about $40 or $50 a megawatt hour and then in the winter typically you get up to $75, $80 an hour. So summer is the highest, winter will be the second highest season, but not as high and then spring and fall will be very light. Oil prices at $65 or $60, in that range, that's -- if you work the math out, it is coincident that most of the oil-fired units heat rate around 10,000 and the barrel of oil content works out to be that that's about the fuel cost to generate with oil. So today an oil-fired unit would be break even on their cost of fuel at about $60 to $65 per megawatt hour when a market is paying $45 to $50. So they're still outside the money right now, but a lot closer and they will run sometimes even if they're not -- utilities will dispatch them a little bit more now for voltage support around some major cities, but still the -- now, if the prices hold throughout the winter, when the price -- power price moves up to $75, $80, if the price of oil holds, then you'll see those units come on a lot stronger. We just don't think that will happen in the fourth quarter. Does that help?

Yes, it does. Thank you. Also, I have another question, we were wondering why Fuel Tech low capital intensive solutions wouldn't be able to -- wouldn't be even more enticing to utilities in a CapEx constrained environment as is our understanding that much of the installation work is done leveraging the Fuel Tech balance sheet. And also shouldn't we expect that in a period of low economic growth utilities wouldn't be able to find more down time, that utilities are able to find more down time, wouldn't it help Fuel Tech to complete more installations and give them a chance to see the benefits of the product line?

Yes. The -- let me answer both. The first item, absolutely because we are a much lower capital cost solution, we are seeing a lot more interest from very big utilities just in the last few weeks they've called us and said come back in to tell us more about what you're offering and we're especially interested in the Cascade. And those -- that logic and why they're saying that is exactly what you were talking about in your first point, they really are looking at lower capital costs -- they can't borrow enough money right now and utilities typically -- typically utilities use debt and equity to fund major capital additions. They like to keep their dividends up. They're really cut off from a lot of capital access right now. So that they're trying to restrict cash flows.

That leads into the second item. While you would say, okay, it is -- they don't need as much generation right now, but they don't want to go into outages. Outages cost millions of dollars for all the workers that have to come in to do everything that they need to do. So you've got a lot of units running along at partial load right now that utilities are looking at actually deferring outages. And not incurring the several millions of dollars in cash flow that an outage would cost. And they're taking a risk, you know, that the -- because the unit's going to degrade in material condition if they skip an outage, but right now a lot of utilities are in the survival mode. I've been there, been part of that kind of a situation as I was decades at Duke as an executive and at AEP and they're husbanding their cash right now every way they possibly can in the US.

Okay. Thank you.

And our next question will come from the line of Carter Shoop with Deutsche Bank. Please proceed.

Good morning on the APC side, can you comment on what the back log was as of the end of the third quarter and then also comment on what percentage of that back log do you expect to be realized in 2009?

Yes. It's $15 million, Carter, and we'll probably recognize about $8 of that in this quarter, carry about $7. That can move by $1 million one way or the other, but it's in that range going into the first quarter of next year.

And then, can you comment about the pipeline for APC deals and how much it could be realized in 2009? It seems like we could potentially see a down year in 2009 on the APC side.

Well, I don't think so because of China, Carter. I think we -- our expectations are for a really strong year in China and we also expect to see some good portion of wins probably in the first quarter, but maybe a few even late this year on the American side. We had expected a very strong close of the year as we saw a lot of the same signs that we saw last year. Obviously, the financial crisis changed that completely. But for 2009, we haven't developed a guidance and everything, but right now, our business indications are that this is going to be our coming out party on the Chinese side. We'll see if that actually materializes.

Okay. Shifting over to the FUEL CHEM side. When do you expect your Chinese FUEL CHEM demonstration customer to make a decision on a long-term contract? It sounds like it could be any day now, but what's kind of the other side of that guidance range? Could it take another two or three quarters for them to actually sign a contract?

Oh, I don't think so. I think your -- the former is right. I think the technical evaluation meetings are going to go right into commercial contract meetings and, you know, we already set the stage for that. We didn't just sign, you know, it was in -- our original contract had an anticipation of a commercial contract to evolve if everything came out okay, so I would expect that you would see by the first quarter that that thing would be in commercial operation if the client decides as we expect them to decide.

And then lastly, the commentary on oil prices and the impact to FUEL CHEM is helpful. I was hoping maybe you could quantify what that potential impact could be in '09 if oil and natural gas prices stay at current levels.

Well, I don't -- it looks like if oil prices stay at current levels, then I think we may see a recovery from some of our oil units because next summer, if it were to stay there, those units would be pushed back into service because they could make a lot of money producing at $65 when the price is at $130 a megawatt hour. So --

Like $1 million or $2 million, is that kind of a reasonable way to think about it?

That's exactly the kind of range you're talking about.

Okay. Great. Thanks a lot, guys.

And our next question will come from the line of Jeremy Sussman with Natixis, please proceed.

Hey, good morning.

Hey, Jeremy.

Thanks for all the colors so far. I was going to ask about kind of signs -- see if you were seeing some signs on APC pickup and I guess maybe you answered the question, but let me know if I'm thinking about this correctly. You know, clearly you talked about fourth quarter being a bit slow, but if some of the larger utilities are now starting to come for you for Cascade or what have you, is that sort of potential that we could see in 2009, I guess?

What's going on -- it's a good question, actually, Jeremy. The utilities by this time of the year would have already done their capital budgets and be presenting them to their Boards of Directors by the first week or so in December for approval for next year's budget run. What they are all doing right now is preparing to rerun all of those capital budgets with a mandate to reduce capital and operations and maintenance costs wherever they can. And that's why these urgent meetings are coming up where folks are saying tell me more because they want to learn if they can defer like an SCR and then thus change their plans. Been through these kinds of situations, although this is a more dire situation than we've seen for about three decades in the utility business, but when they're in this kind of mode, really they'll be running series after series of analyses to see what they can change and everybody will then be rolling all of that up and then there will be -- typically they'll ask everybody, they'll roll it all up tanned come back and say cut that by another $20 million or whatever in your department and so you'll be running a whole series of reevaluations. That's what's going on right now. Utilities are cutting every expenditure they can in the short-term and then they're revising all of their capital budgets. That's why these meetings are being asked for. The results of which, you know, we won't know until they come out of them, to be honest with you.

Great. That's helpful. Then just lastly, any chance since we've been talking about China quite a bit, we can get sort of a ballpark in terms of percentage of revenues that you expect from China over the next year or so?

We will provide that early next year. We are right now running that -- going to be finalizing those numbers in the next week or two and then presenting that to our board the first part of December. We don't have that in any sort of form I can talk about right now.

Okay. Fair enough. Thanks very much.

Okay.

And our next question will come from the line of Brian Shore with Avondale Partners. Please proceed.

Good morning, guys.

Hi, Brian.

Just a quick question following up, I guess, on one earlier. On the APC side and the impact of Care, I know you've cited that, I guess the financial economic situation has been one of the big drivers in some of those orders getting pushed off, but -- and you also mentioned a couple of orders delayed with uncertainty over care. I guess is it safe to assume that out -- that the Care ruling isn't having a material impact on orders getting pushed out and that sort of thing, it's just one or two here or there?

When we first did it, we had talked about having actually one customer, one utility that had kind of put their projects on hold and I think we had one project with that utility. Since then, since this financial crisis, we've had one or two other utilities that said -- that were planning on going ahead despite a change in Care because they just saw that this was a momentary blip on the regulatory screen. They actually still believe that that's true, but the financial situation right now is causing them to say internally I don't care how much good guys we want to be, we don't have the cash to be good guys right now if it's not absolutely required today by regulation, we're not going to put it in today, but we know it's coming. I don't think there's anybody, anybody in the country that believes that Barack Obama when he comes in as President, if there's not a -- if Care or something like it is not in existence, is not going to push that as a first priority item to ensure that air pollution continues to be reduced in this nation, whether CO2 is part of that or not. But I think everybody knows that it's coming. The ones that are doing more than just delaying the signing of contracts are really doing so out of a financial crisis item.

Okay. So -- and this may be asking you to I guess peer into a crystal ball a little bit, but, you know, if the financial situation in this country weren't the way it were, you wouldn't expect a material impact because of Care's sort of delay there? I mean --

No. I -- most folks that we had talked to were planning on going ahead with projects as -- and we had said that, we just didn't see a material short-term kind of impact and longer term, you know, we thought they would -- either Care was going to be back in, which, you know, I always thought that was a long shot, but there would be other regulation early that would be passed next year to get us back into the -- at least an equivalent Care kind of situation. So I still think that's true. I think regulatory wise we're going to see those kinds of restrictions. You're just seeing a few utilities look for any reason they can to delay anything they can.

I got you. On the FUEL CHEM side, can you just -- I apologize if you touched on it earlier, sequential FUEL CHEM usage by -- I guess from the second quarter into the third quarter on the units you've got in place, I mean where utilities --

The revenues really went up because the power demand was higher and the units were driven harder, which means they run more and use more coal and our injections are on a per ton of coal utilized. So when their usage of coal goes up, our usage of our chemical goes up. So you see seasonality in our revenue dollars, Brian, that are based on the usage of the utility.

Okay. And then lastly, I guess if I look at your guidance for next year, I mean there's the potential that you guys -- I'm sorry, for the next quarter, based on the full year guidance, I mean there's a potential you guys could be negative in the quarter and I know you touched on some of the added costs on the FUEL CHEM side. Is there any way you could sort of quantify that or quantify your expectations for margins in the fourth quarter that might, you know, expect -- or I guess lead that to happen?

Well, I think you could probably do that yourself, you know, if you take a look at -- John kind of broke out the revenue of $36, $37 on FUEL CHEM, $43, $44 for APC for the fourth quarter. You know, if you assume APC is going to hold its own, then the difference in dollar volume and in margins are really coming on the FUEL CHEM side and it's really driven by -- there's not a lot of costs in our other units, you just don't get profit when you're in the -- when you are hey in the --

Demo mode.

Demo phase. The other exception to that is we did spend a good bit of money on a technical issue that we had in our R&D area that was around FUEL CHEM and testified a very important item and we learned a lot and improved the product a lot. And for the fourth quarter, the major costs that are going to be driving us down are going to be costs in India that are being incurred now and in China that has been recently incurred this quarter so far.

Okay. Great. Thanks for the call, guys.

And our next question will come from the line of Scott Turkel with Turkel Investments, please proceed.

Hi, John, thanks for taking the call.

Hey, Scott. Good to talk to you again.

You, too. I just have a couple of really quick questions. What's the average selling price of the Cascade?

We put out there on our various sheets, it's on a dollar per kilowatt kind of basis, but on an average unit we can probably put a Cascade in there for $15 million plus or minus $5 million depending on the layout that will provide SCR equivalent or close to it levels of performance and an SCR for, you know, 3 or 400-megawatt units for the cost of $150 million. So it's about ten times as expensive as us.

Okay. On the APC side, can you give me the average selling price of the NOx equipment roughly?

Yeah, those are again, if you look on our -- you can get the specific kinds of details, Scott, on our investor presentations that are on our website, but to answer your question, an SNCR, for a typical kind of utility customer is about $2 million a unit. An industrial customer is about a million dollars a unit or so. Maybe a little more expensive in China for those. ULTRAs are slightly more expensive than that, but in that same kind of ballpark. A medium sized kind of coal unit ULTRA might be a couple of million bucks, a little more for larger units.

Okay. And just a couple of sales force questions. In the US, how many sales force members do you have?

It's a couple of dozen with about that many more, twice that many more in manufacture's reps. Hold on a second. I can add these things up. Just in direct -- hold on a second. Direct sales. It's maybe about 18 or so. And then about two times that in manufacture reps.

That's US, right? John, the trend of that sales force, is that going -- is that declining, flat or increasing.

Oh, it's increasing.

Okay.

It's going to increase.

Got it. And overseas, can you just give me a little refresher on the Itochu relationship and are they the people that are selling for you in India as well?

The answer to the latter is no. We have another rep that's doing the India. But Itochu is in China. It's 50/50. They do the selling with us helping them, but they are really the ones that are out there at the pointy edge of the sword in the sales process with their whole team.

Okay. And is that separate from the Beijing office or is the Beijing office part of that?

That's totally separate. The Beijing office does our APC work there.

The APC work, got it. And on just the final question, with the product portfolio being a high return on investment portfolio, especially in a not as good economic period, wouldn't you assume that there would be more demand for Fuel Tech products, especially -- you can't really see a $2 million SNCR or $3 million ULTRA is part of a capital equipment budget. For utility, that's, I would think, a small number. What's the -- I'm just trying to get to the disconnect.

I'm not -- well, we do believe that they will, Scott -- not sure there is a disconnect. We do believe that they will go forward. An ULTRA would be part of an SCR, so they -- the ULTRA would be used for a - as the ammonia supply for a big SCR. So I'm sure that's --

That would be an add on to somebody else's CapEx sale in other words?

Yes. That would be part of that same sale. So they would be impacted by that. SNCRs are not, you know, together, you know, if they do two or 3 units, that's 6 million or so, 5 or 6 million. You would say, well, that's kind of down in the noise. For normal operations, that's true. Right now, the utilities we're talking to, and we're talking to most every one of them, nothing is down in the noise. They're looking at everything.

Okay. John, thank you very much.

Okay, Scott, thanks. Good talking to you.

You, too. Thanks.

(Operator Instructions). And our next question is a follow-up question from Michael Carboy with Signal Hill. Please proceed.

Thanks for the follow up, John. In the past outage cycles or I should say the unpredictability of outage cycles of sometimes the devil's operations, now that we're well into the fourth quarter here, what are you hearing with regard to outage cycles both this quarter and next quarter? Just trying to get a handle on whether we have a potential risk for any disruption there.

For outages, I haven't heard a lot. I have had one unit that they canceled an outage that they were planning on going into in about two weeks. And that surprised me because you have to have the labor and all of that lined up and they just said we're canceling it and taking an operational risk, we can't afford to spend that $2 million on that outage, $2 to $2.5 million is typically what an outage would entail. So they're just going to leave the unit in operation. That -- it doesn't impact us much, unless we're trying to get a FUEL CHEM installed. You know, once a FUEL CHEM is running, that actually tends to have a somewhat positive impact because the outages, don't happen and they continue to run, albeit at a lower level across -- across a low power usage time like right now. I don't think outages, Michael, are going to be as detrimental one way or the other on our chemical usage. You're going to see that more of an impact, but if they do go into an outage how quickly -- once they get the workers out of there, how quickly they come out of it, that could happen. They could just leave a unit off for an extra couple of weeks while they're down and just run other units. We could see some of that. It -- to be honest, they are way -- utilities are in this huge turmoil right now running through their options and we don't know yet what their plans are coming out of those. Those meetings are still going on.

All right. Thanks a lot.

Okay.

And our next question is another follow-up question from Graham Mattison with Lazard Capital Markets. Please proceed.

Hi, thanks, guys. Just wanted you to comment on your cash position in terms of your outlook on that outpost in terms of acquisitions, possibility for stock buy backs or dividends given the near term outlook.

Who knows what we might do. We always look at that sort of stuff. But I think that -- but right now in the current financial situation, prices for other things like M&A might present better opportunities than for any sort of a dividend or today even a stock buy back. But, you know, we're going to -- that cash has got to work for us. It's not working doing a lot right now just sitting in the bank earning interest because the interest rates are pretty low that are being paid out. So we'll try to put that cash to the best use we can for the shareholders.

And in terms of the acquisition, I mean is the -- the acquisition outlook or the activity in the market, has that picked up at all recently or has the outlook on that changed? Are people more willing to sell now at better prices than they were six months ago? Have you seen that yet?

Well, I think in every case, whether the -- that you would look at folks and they would say, hey, how long is the economic downturn going to take. Is my business still as valuable as I thought it was? I think all of us if you look at stock prices you're looking across the board at stuff that was a hell of a lot lower than it was, certainly in my 401k account it's a hell of a lot lotter than it was six months ago or three months ago. So, Graham, I think there are opportunities out there. Whether we do it there or, the Board decides to do something else with the cash is something that we will and are looking at as a Board of Directors. We want to do the best thing for our shareholders, but as we've said all along, I think the best thing we can do for our money is put it in some way that grows this business and I'm not sure a stock buy back right now really qualifies -- is the best necessarily use for that.

Okay. Great. Thank you very much.

And at this time I show no more questions in queue. I would like to turn the call back over to John Norris for closing remarks.

Thank you very much and thanks for your interest in our Company. We're working real hard to help take this Company forward for our investors and that's where we're focused right now, 100% of our efforts. Thank you for your interest and have a good day.

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