Fuel Tech Inc (FTEK) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and year end Fuel Tech, Incorporated earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Ms.Tracy Krumme, Vice President of Investor Relations and Corporate Communications of Fuel Tech. Please proceed.

Thank you, Noelia. Good morning, everyone, and thank you for participating on today's conference call to discuss our fourth quarter and year end results. Joining me on the call is John Norris, President and Chief Executive Officer; John Graham, Senior Vice President and Chief Financial Officer; and Ellen Albrecht, Vice President and 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 conversation 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, Tracey, and good morning, everybody. We appreciate all of you joining us on this call. Our results for the fourth quarter include revenues of 18.1 million, slightly above our guidance range but 44% below last year's record fourth quarter revenues. Net income for the quarter was a loss of 0.6 million or $0.02 per share, in line with our guidance. Of note is that our fourth quarter operating income and EBIT -- earnings before interest and taxes -- were both positive 0.2 million; but a higher than anticipated US tax provision made necessary by losses in our international operations took us to an after-tax loss. Revenues for the full year were a record high 81.1 million, slightly above our guidance range; but this was only up a small amount from the prior record year of 80.3 million. Net income for the full year of 2008 was 3.6 million or $0.15 per diluted share; in our guidance range, but well below 7.2 million or $0.29 per diluted share in 2007.

Our CFO, John Graham, will discuss our financial results in much greater detail it in a few minutes, including the impact of various tax and other charges, including 123-R stock compensation expenses. John will also cover our balance sheet, which remains very strong with end of year cash and cash equivalents of 28.1 million. This is especially noteworthy since in 2008 we completed the purchase and outfitting of our new office building, which was considerably less expensive to buy than alternative lease options, and we invested about 4 million to acquire the assets of TackTicks and FlowTack. Our business model remains strong, with expectations of good earnings growth and positive cash flows. Now I'd like to tell you a bit about the Company business behind those financial numbers. As most of you know, Fuel Tech is a fully integrated Company that uses an extensive 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 group these technologies into two product lines -- a specialty chemical business for efficiency improvements that we call FUEL CHEM, and our Air Pollution Control, or APC capital projects product line.

Let's take a look at the results in both areas. Our APC business sector saw revenues of 44.4 million for the full year, down 7% from last year's record revenues of 47.8 million. This decline was the direct result of the court vacating the Clear Air Interstate Rule, or CAIR, in July of 2008, compounded two months later by the economic crisis which hit the nation and the world. These events led to a dramatic decrease in APC contract awards during the second half of the year, and we finished the year with an APC contract bookings at an anemic $21.0 million level, down 65% from 2007's record level of 60 million. End of year backlog was likewise depressed at 9 million for 2008. Our gross margins for this sector were 45.1% for the year, down slightly from the 46.0% last year. These slight margin fluctuations in our APC business sector are caused by the mix of turnkey installation work that we are called on to manage at times, as this work has lower margin than our core technology projects.

In either case, though, these are excellent margins for this business sector. Now, all is not doom and gloom in this sector by any means. In October, we completed the acquisition of the assets of TackTicks and FlowTack, which greatly expanded our physical modeling capabilities as well as our computational fluid dynamic, or CFD modeling expertise. We also obtained in this transaction the patent pending Graduated Straightening Grid, which performed spectacularly in its first operational deployment at the St. John's River Power Park down in Florida. Best of all, though, was that we now have Volker Rummenhohl as a leader on our executive team. Volker is globally recognized as an expert in catalysts for NOx control technologies, such as selective catalytic reduction, or SCR systems, and for our own patented NOxCascade process. These additions greatly expand our expertise and credibility in this crucial technology segment.

Later, on December 23 of 2008, two months after we completed this acquisition, the court reinstated CAIR in its entirety while it directed the EPA to eventually fix the problems the court identified in the rule. CAIR's NOx control regulations went into effect immediately afterwards on January the 1st of 2009; and that caught utilities in the effective states offguard and largely unprepared. Then a short time later on January the 5th, we completed the acquisition of the assets of Advanced Combustion Technology, Inc. This deal greatly expanded our NOx control technologies into low and ultra-low NOx burners, and Over-fire air systems, which are typically the first modifications any owner will make to reduce NOx emissions at a unit. This was an area we had identified earlier as a critical need for us to have in our technology portfolio, as winning this work in the first phase of NOx reduction establishes a relationship with the client that helps win post-combustion NOx control contracts later on. ACT's High Energy Reagent Technology, or HERT, is a highly competitive form of selective non-catalytic reduction, or SNCR system, which adds to and compliments our pre-existing suite of NOx control technologies.

With these acquisitions, Fuel Tech now has the most complete suite of NOx control -- low cost NOx control technologies -- in the world, at just the right time that the market in the US is desperately seeking low cost NOx control options, due to the last minute reinstating of CAIR, the tightening credit markets and the distressed financial condition of many utilities. As a clear indication of this, we are off to a strong start with 6.4 million in APC sales, and with the most potential project opportunities we have ever seen in our corporate history. We seem to be at the right place in technology and expertise at just the right time for market needs. Now we need to convert those project opportunities to real contracts, and you will see and judge our success in that effort through our contract award announcements. On the FUEL CHEM side of the business, our fourth quarter revenues were 9.4 million, up 19% over the fourth quarter of last year, 2007. Our gross margins for the quarter were 36.8%, down considerably from the 45.8% of the fourth quarter of '07.

This clearly reflects the cost of our record number of projects in the demonstration phase, but especially our demonstrations in India and China where our portion of the risk share was a lot higher than is typical for us. We needed to make those investments in the Chinese and India markets given the incredible potential opportunities those hold for us; but the costs hit us primarily in the fourth quarter. For the full year, our FUEL CHEM revenues were a record high 36.7 million, up 13% over last year's record of 32.5 million. Our full year gross margins were 45.5% in 2008, down slightly from 48.9% in 2007 for the reasons mentioned above, especially the China and India demos. The gross margins of our units in commercial operation phase for the full year was 51.5%. So the business model is working just fine in that segment. For the full year, we added a record number of 15 new demonstration contract awards, of which 13 were coal units. This is an all-time record high, surpassing the prior record of 13 new contracts, 11 of which were coal in 2007.

The status of our units is shown as an attachment to our earnings release and posted on our website. You will note that the overall numbers are the same since the last update in November. As you look at the chart, you will see in the international coal demo list that we have corrected the size on the second China demonstration unit. It was right on the border of small, medium. It really should be small, and that's what we corrected it to. It is a small unit versus a medium-sized unit, and I think our press release had said small. Domestically since the last update, we've added a medium-sized lignite unit, which is our first customer burning that very low grade of coal; and success on this one will be an important data point for other such customers in the south and southwestern parts of the US. Our most recent contract award signed in early February of this year is on a very large coal unit, one of the largest in the world. We and our client have high expectations for success, which could lead to many other near-term opportunities with them. We did have two demonstration projects complete, but we have not added them to the commercial list at this time.

In both cases, the clients found positive impacts and results for our program; but for very plant-specific reasons have decided not to go forward with the commercial contract immediately. The major reasons these or any unit might see reduced benefits come down to the overall economic market impacts on their unit and on the system load their unit is required to supply, as well as on their specific coal supply. As individual manufacturing plants are idled and the system load is reduced, then the power generation units in certain market areas are not run as hard. When a power generation unit runs at reduced load, the boiler temperature is not as hot and there is less slag formed to cause problems. However, other FUEL CHEM customers in other areas are turning to even poorer quality coals to reduce their costs -- things like petcoke -- and end up using us a bit more in the process. So the impact on us is customer and plant location-specific. We believe that the vast majority of our current demonstration projects will go commercial immediately at the end of their demonstration period.

John Graham will address the details of our FUEL CHEM revenues in just a minute; but you will see that our revenues from our coal units have grown about 20% in the fourth quarter of '08 versus the fourth quarter of '07, and a bit more than that in the full year comparison. This is exactly the market we are focused on and we expect the growth to continue. On the non-coal side you will see that the fourth quarter revenues were up 13% versus the fourth quarter of 2007, as the steep drop in oil prices in that time frame caused more of our client units to be in the money and thus operating. For the full year, our non-coal revenues were down about 20% from 2007, as the very high oil prices early in the year kept those units on the sidelines until they finally got into the game in the fourth quarter. The prospects for our FUEL CHEM business are very bright; but we are not sitting on our hands to just offer a proven project like our TIFI -- Targeted In-Furnace Injection program -- to an expanding group of customers. In our R&D area, we are continuously looking to improve our products to better meet client needs we find in the marketplace.

During this year, and without fanfare or announcement, we have developed, demonstrated and now commercially deployed a new FUEL CHEM product we call TIFI Extreme Performance, or TIFI XP. This product works very well on the very most difficult coals from a slagging point of view. We've also developed and demonstrated in our lab our TIFI multi-pollutant product, which has shown remarkable results in removing SO2 without the need for a hugely expensive scrubber. The real test for this TIFI MP will be when we apply this to an operational boiler, and that should happen this year. Likewise, we are looking for alternative approaches to the removal of mercury and CO2. As our R&D department likes to say, we are currently kissing a lot of frogs hoping one of them will be a princess. Our goal is to provide a full spectrum of controls for air pollution from utility, industrial, university and commercial combustion units. In China, we expect to announce in the near-term awards in both APC and FUEL CHEM business segments. As in the US, the amount of proposals and serious discussions we are having with clients is at an all-time high.

In China, it takes longer to actually get contracts signed, which is just their style. Oftentimes in that country, the winning contractors will begin work well before all the documents are fully executed. And we would do that too, but we will only announce awards when all those contracts are officially signed. And we expect to have a good year in China this yea,r and an even better year in 2010 and beyond as they clean up their existing units in their (inaudible) year plan. Now I would like to turn the call over to our Chief Financial Officer,John Graham, to further discuss the details of our financial results.

Thanks, John, and good morning, everyone. As John mentioned, consolidated revenues for the fourth quarter were 18.1 million, down from the record levels experienced in the fourth quarter of 2007 of 32.6 million. Consolidated annual revenues were 81.1 million, a slight increase from our previous record level of 80.3 million experienced in full year 2007. I'd like to provide additional detail behind those numbers for each of our business segments. In the FUEL CHEM segment, fourth quarter FUEL CHEM segment revenues of 9.4 million included 7.8 million from coal units, a 20% increase versus the coal unit revenue reported in the fourth quarter of 2007. For the first time in several quarters, quarterly revenues from non-coal fired units at 1.6 million were up 13% versus the prior year quarter, driven by the recent decline in the price of crude oil resulting in oil-fired units being more profitable for utilities to run and experiencing increased operation. Overall FUEL CHEM segments increased 19% versus the fourth quarter of 2007.

For the full year 2008, our FUEL CHEM revenues of 36.7 million were up 13% from 32.6 million recognized in the full year 2007. Again, this number alone must be further segmented into revenue from coal and non-coal units to further clarify the true growth of the underlying business. For fiscal 2007, of the 32.6 million in total FUEL CHEM segment revenues, 26.2 million were from coal fired units and 6.4 were from non-coal fired units. For fiscal 2008, of the 36.7 million FUEL CHEM revenues, 31.6 million were from coal-fired units, an increase of 20% for the full year over 2007, while revenues from non-coal fired units declined 20% to 5.1 million. The large reduction in FUEL CHEM revenues from non-coal fired units year over year was due to the high price of crude oil in the first nine months of 2008, keeping the domestic oil fired units from being dispatched to the extent they were in 2007. However, we are starting to see this trend reverse itself with the aforementioned 13% growth in non-coal fire revenue generated in the fourth quarter of 2008.

The $4.1 million increase in fiscal 2008 FUEL CHEM revenues from coal fired units versus 2007 comes from the addition of a new incremental unit signed during 2007 and 2008 that became operational in 2008, and from incremental 2008 revenues from units that were operational for only a part of 2007. As you can see from the new FUEL CHEM list that John discussed, the majority of the units signed in 2008 are either still in their demonstration stage or very early in their commercial operation life. As with the overwhelming majority 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 units status. Quarterly gross margins for FUEL CHEM declined from 45.8 in the fourth quarter of '07 to 36.8 in the current quarter, reflecting not only an increased number of demonstration programs at domestic customer sites, but also the investments we made in the form of absorbing a higher than normal level of demonstration costs for our demonstrations in India and China. The base commercial or operational units generated a quarterly gross margin of 52%. So that's a gross margin for the base units excluding the impact of the demonstration program expenses; and as we mentioned earlier, we are currently seeing a record level of demonstrations ongoing at present.

FUEL CHEM has recorded a number of demonstration programs underway with each design to prove the effectiveness of the TIFI application. FUEL CHEM and the customer normally share in the demonstration program's expenses, and the customer typically transitions into commercial status once the program's value has been demonstrated. Full year FUEL CHEM segment gross margins declined from 48.9 in fiscal '07 to 45.5 in '08. Excluding the aforementioned costs associated with the foreign demonstrations, the FUEL CHEM annual segment gross margins would have been 49%. As John mentioned, the annual gross margins our FUEL CHEM operational units was over 51%, so our business model is working just fine in this area. From an operational standpoint, we continue to keep an adequate supply of FUEL CHEM's systems to deploy in the US, with additional units stationed in China so as to be able to install them as quickly as possible upon the receipt of new contracts. We do not want to keep too many on the shelf, however, as that needlessly ties up working capital. We have worked with our suppliers to reduce the time it takes to deliver critical components, and through these efforts have recently been able to reduce the systems in inventory by half, bringing up approximately $1 million of working capital.

Now let's move on to the air pollution control or APc segment. Fourth quarter revenues for the APC segment were 8.7 million, a decrease from the record quarter last year which saw APC revenues of 24.6 million. Our APC backlog at end of the year was 9 million, and we have added over 6 million in new orders so far in 2009. While our backlog is below where we would like it entering '09, 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, nor does it take into account the backlog of the ACT -- Advanced Combustion Technologies -- that we acquired on January 5th, as that deal closed right after the year end '08 number was finalized. The end of year backlog for ACT is still being finalized by our auditors, but is expected to be under 10 million. APC segment revenues for fiscal 2008 of 44.4 million were down 7% versus fiscal '07. For reference, the financial results generated by the assets we acquired of TackTicks, FlowTack and ACT will roll off into the air pollution control segment. None of the acquisitions were completed in time to make a meaningful contribution for our 2008 results.

Quarterly segment gross margins were 44% compared with 51% a year ago, reflecting more lower margin installation-related work in our mix of project business. In other words, the makeup of the contracts had a higher mix of turnkey work, whereby Fuel Tech not only provides the capital equipment for the APC contract but also manages the installation process. Gross margins for our core products excluding the effects of installation work remain very strong. Full year 2008 APC segment gross margins of 45.1% compare to fiscal '07 segment gross margins of 46%, both of which are excellent gross margins -- not only in this business segment, but also I would say in the current economy.

From an operational standpoint, the global behind the scenes activity for contract negotiations, proposals and serious discussions about our full NOx control product portfolio have never been stronger. The reinstatement of CAIR, coupled with tight credit markets, bode well for Fuel Tech's lower capital cost solutions, while allowing our customers to achieve and maintain compliance with commission regulations around the world. On a consolidated basis, the Company gross margin percentages for the fourth quarter of 2008 were 40.2% a decrease from the 49.6% reported in the fourth quarter of 2007. The reduction in quarterly FUEL CHEM segment gross margin due to the aforementioned international demonstration program costs was the driving force of this decline. Full year consolidated gross margins decreased from 47.1 in '07 to 45.3% in 2008, also driven by the FUEL CHEM demonstration costs.

Excluding these foreign FUEL CHEM demonstration costs, 2008 consolidated gross margins would have approximated the prior year. Quarterly SG&A expenses exclusive of R&D expenditures were 6.8 million, flat versus the fourth quarter of 2007. The Company has taken the prudent and responsible actions of curbing personnel costs and reducing near-term discretion spending, while still making the strategic investments required to grow our business globally. For fiscal 2008, SG&A expenses of 28 million were 3.1 million higher than 2007 due to the annualized impact of our Beijing, China, office that was opened in late 2007, an increase in stock based compensation expense under FAS 123-R and employee-related costs resulting from the expansion of the business both domestically and internationally. Our financial and administrative infrastructure is capable of handling global revenue growth of an additional 40 to $70 million with minimal additional investment. Due to this ability to leverage the fixed and semivariable costs in SG&A, we feel a long-term run rate of less than 20% of revenues for SG&A costs is sustainable. Quarterly R&D expenses were 256,000 and were focused on developing and testing technologies with near-term market applications in both boiler optimization and air pollution control arenas.

We continue to watch the domestic and international emission regulatory landscape to ensure Fuel Tech is continually properly positioned to meet the emission control needs of our customers. Full year R&D expenditures of 2.1 million were flat versus 2007. As John mentioned, there are some areas we would like to expand into such as mercury and CO2 control, and we are examining and developing various technology products and solutions to identify ones we feel are commercially viable. Fourth quarter 2008 operating income of 202,000 was substantially below the 8.9 million reported in the prior year quarter. I have often spoken of the inherent power in our business model to leverage our existing SG&A cost structure and the lack of any material need to add to our financial and administrative infrastructures as our revenues increase by 40 to 70 million. The fourth quarter 2007 illustrates this point perfectly. With roughly the same combined SG&A and R&D expenditures as fourth quarter 2008, we generated almost 33 million in revenues, which results in operating income of almost $9 million or over 27%. At this revenue level, SG&A expenses were just under 21%. We expect to deliver a sustainable run rate operating income level of at least 25% at revenue levels above 110 to 115 million.

At this revenue level, the business model generates in excess of $25 million annually in operating cash flows. This is the financial leverage the Fuel Tech business model holds and will deliver as revenues increase. The decline in interest income in 2008 versus the prior year is simply due to a reduction in short-term interest rates. On last quarter's call, I mentioned that due to the mix of domestic and international revenues and income levels presumed for full year 2008, our full year income tax provision was expected to increase to approximately 40%. Due in part to a net operating loss at our Beijing Fuel Tech operation, resulting from additional costs for the FUEL CHEM demonstrations and certain delays in APC orders versus an expected tax one-time amount, we had to establish a valuation allowance that in effect required us to make additional fourth quarter 2008 tax provisions of such size as to yield a full year tax provision -- mechanically speaking, at least -- to 48.5%.

Respectively, we expect the income tax provision percentage to return to a more normalized level of approximately 40%. The increase in the fourth quarter '08 income tax provision percentage from the expected 40% to the actual amount of over 48% had a dilutive effect on our full year EPS of approximately $0.02 per share. Net income for the quarter was a loss of 580,000, driven primarily by the aforementioned increased income tax provision, without which we would have posted a modest income amount for the quarter. Full year 2008 net income was 3.6 million or $0.15 per diluted share. As mentioned, this amount would have been approximately $0.17 per diluted share had the 40% effective income tax rate held for fourth quarter '08. Our balance sheet remains very strong, even in light of the acquisitions we have performed over the past 120 days.

At December 31, 2008, Fuel Tech had cash and cash equivalents of over $28 million. Other than our 2.2 million in debt in China related to the startup of the Beijing Fuel Tech office, we have no other debt on our balance sheet. Our cash balance was reduced by approximately 4 million during the fourth quarter, as we funded the TackTicks and FlowTack acquisitions from cash on hand. Working capital at year end was a strong 44.3 million, a comparable year to year end '07. We have not seen any deterioration in payment patterns in our customers, either domestically or abroad, APC or FUEL CHEM, in the wake of the global financial situation. Our collection metrics remain, as they always have been, very strong.

Full year 2008 operating cash flows were 8 million, driven equally by operating results and working capital management, versus 4.1 million for the year ended 12/31/07. Full year 2008 investing activities used cash of 11.8 million, as the sale of short-term investments provided cash of 2 million, while offsetting this amount was 9.8 million in capital expenditures required to support and enhance the operations of the business. Of the 9.8 million, a little over $5 million was spent for the development of Fuel Tech's new corporate headquarters, with the remainder principally for equipment related to FUEL CHEM Technology segment. We also invested approximately 3.9 million for the acquisition of TackTicks and FlowTack. All of those aforementioned amounts were funded by cash on hand and did not require the use of any borrowed funds. Finally, we generated $1.4 million in cash from financing activities, primarily related to stock option exercise activity. Fuel Tech's domestic and international market interest and sales activity continues at a strong pace, especially in our APC business segment where we are in the midst of a global financial crisis.

While we are encouraged about our prospects for '09, especially in the wake of the reinstatement of CAIR, our recent introduction of the ACT business into our own and the resulting strong start to our 2009 APC orders, we are mindful of the severe economic stress many of our customers are currently experiencing. I fully expect that our revenues and profits for fiscal 2009 will exceed our 2008 results; but given the dynamic nature of the current environment, it is simply too early in the year for us to meaningfully quantify a revenue range at this time. We will consider providing more quantitative guidance on our next quarterly earnings call. John?

Thanks, John. And with that, operator, let''s open up the call for questions.

(Operator Instructions). Your first question comes from the line of John Quealy with Canaccord Adams.

Hi, good morning, folks.

Good morning, John.

On the FUEL CHEM side if we could, India and China and the additional spending there. If I back into the numbers for the quarter in the decreased margin, was it an additional about 2.5 million of costs in the quarter that were allocated for those India and China demonstrations? Does that reconcile to John's comments of 51% ex-China full year?

You have to add in the other demonstrations. I was pointing out not only India and China, but also the other 11 demonstrations that are going on. So India and China was, though, the -- John, you can give him the the real number there.

Yes, John. I don't want to open up the full robe here, but you're looking at a fourth quarter charge for India and China , which would be to date unreimbursed costs. There is potential some funds to come back, but that depends on the success of the program as viewed by the client of about 1.1 million in fourth

Yes.

And another just under 400,000 in fourth quarter costs for what I would call traditional domestic FUEL CHEM demonstration programs. Now, a lot of that -- a lot of the domestic funds, of course, when the program goes commercial would then come back to Fuel Tech; but there is a timing difference related to that, which we have to use a clean cut off of 12/31/08.

Okay, and in terms of the China or Asian-related business how many quarters do you think you're going to be running at those costs, and when do you think those demonstrations flip onto commercial customers?

Those are ending now. The India demonstration on a major industrial customer there was going great, but the problem with India was that the demo was in Mumbai. And if you remember the riots in Mumbai, we had to actually evacuate our personnel there. I think there may been even a shot in his hotel room. And that interrupted it and then it restarted early this year, and we are with the client about doing a bit of an extension, but without us investing more than our typical 50/50 kind of arrangement. In China, the injections have stopped. The client is right now -- they were here early last week -- most of last week -- visiting places like (Inaudible), Cooper and Western Farmers; and before they go back and make a final presentation, the third party evaluation if you recall we had on that, there is going to be a big meeting very shortly where they make their decision of go/no go on commercial status. So there really won't be any more major expenditures on that one. Now, we do have one we have already signed and others we are looking at where we may still do better than a -- better. We may have to invest more, which is not better, on these demos; but nothing like we had to invest on the one in India and China -- especially the India one. The India one was the one that cost us the most.

Yes, the first ones in the country are going to run the highest, as you basically learn how to do business there because these products have not been sold there historically. The other mitigating effect we will have going forward is as we continue to qualify a local chemical source in those countries, we will not then be required to fund those demonstrations per se with US-based chemical that's shipped over, which also increases the cost of the program. Regardless, you will not see that large of an expense in a single demo prospectively that we incurred in India. That truly was an anomalous-type expense made one time to get the investment because of the potential this particular client holds.

And just as an added color on that, we have had to ship we chemical fully diluted in the past. Our supplier has just now developed the ability to ship dry and mix locally. That's a huge cost savings. So there's a couple or two or three different factors -- local supply and a much better way to get the stuff overseas; and the chemical is our largest cost.

Okay. And then broadly as we look at the FUEL CHEM line in total, how do you sort of risk-adjust your expectations where domestically we have to lower power sales, coal prices are lower. How does that sort of bound your expectations for that business for the existing customers in terms of how much chemical they use this year? How are you going about that?

It's a good question. The -- in some areas, John, it is going to have a pretty definitive effect on our customers -- in the Detroit area as an example, where the automakers are having a tough time. In other areas, we have clients looking at burning petcoke, which is even cheaper; and from those clients' point of view -- I know one of them recently told a group that we are saving them 5% of their overall operating costs, fuel and O&M -- which is huge, since I think theres is north of $600 million. We have our newest client that in a conversation said, "We have high expectations on you. You know, if you can deliver what we think you can from what we have looked at, you know, it will not only be a success here but a success here but a success others," because people are looking at that pay back. FUEL CHEM is about pay back. And so you do have some markets where -- and we have looked at it, John -- where I think the pluses are going to outweigh the minuses for us on FUEL CHEM, and I do expect this to continue growing. There is no doubt that some clients are depressed. But you know, that happened to us in the fourth quarter. A number of those things happened early in the fourth quarter as they started throttling back, and yet you still saw 20% up on the coal units. That's a pretty strong indicator.

And then my last question. On the APC side, it certainly seems like the new administration is going after some old new source review lawsuits pretty aggressively and litigations picking up there. Can you comment on -- you've got more products in the platform this cycle. When do you think people start getting some clarity in capital dollars to spend on these solutions?

They are coming to that very rapidly even without the lawsuits. You know, CAIR is pushing them in there. Even though the CAIR price -- you know, the NOx prices have come tumbling down from the first of the year, they are still over $200,000 a ton. The biggest single issue and the biggest single issue on the guidance is really as we look at units and we are in discussions with folks and they say, "Yes, we are going to use you", okay, the next question is, what outage are you going to deploy the stuff on? One tactic that utilities use around the nation is to defer outages. A unit can defer an outage out from one year into another. There are some consequences to that. You know, you could have a catastrophe on your turbine and that sort of stuff; but you could possibly push out 2, $2.5 million of costs just overall for a utility if they defer an outage from one year into the next.

So do they do the installation outage this year or is it going to be done next spring? And that timing -- if we sign stuff over the next -- if they are going to do it this fall, then we will sign stuff over the next three months and at a pretty good clip, and we will have a very good year revenue and profit this year. If they are looking to deploy it in April -- if they are going to move the outages from the fall into April, then you'll see a large contract signing with us in the third quarter -- we will be able to recognize maybe half of that, but it will move more revenues from 2009 to 2010. That's really the unknown for us right now. Looks like a good year, but we are just uncertain as to when some of these outages are going to be with customers we are talking to.

Great, guys. Thanks a lot.

Your next question comes from the line of Ron Oster with Broadpoint AmTech.

Good morning. I was wondering -- I can appreciate the limited visibility on the capital project side of the business, but wondering -- you know, if you look at your FUEL CHEM business, somewhat stable revenue stream here. Wondering if you can kind of -- if -- with the transparency you provided last quarter, seems like you could get to a mid-$40 million range revenue run rate pretty easily in the back half of 2009. Can you kind of -- is there any guidance you can provide for that side of the business given a little better visibility?

Yes, well some. As you are seeing, our run rates -- when we were running first part of last year, we were, what, 8 million a quarter kind of run rate? And then it moved up to 8.5; and as you saw in the fourth quarter, it got up to over 9 million a quarter. And so that puts you at, what, 36 or so for the year kind of run rate already? As units come off -- we have got 13 coal units in demo right now. As units come off, they are going to start generating at an average of about $1 million per unit per year. So you should see as those comes off -- and you'll be able to tell every quarter -- that that run rates should go to $10 million a quarter, hopefully by the third quarter of this year, and then grow beyond that. At a run rate of 10, that puts you in at the 40-some; run rate of 11 puts you in at 44. So we are hoping and expect that we will see revenues north of 40 this year on that side of the equation, with normal movement from demo to the thing. Exactly how high above that depends on when they go commercial and how much they are using us.

Can you provide a little color on that front in terms of where they are in the demo process in terms of being early, mid or late stage among the 13 that are out there?

Most of them are just -- probably half of those are just now being installed. They got -- the outages got pushed back from the fourth quarter into the first part of this year, and they are going in right now. And everything we just announced -- you know, like the lignite and the great big one -- won't start up before about May of this year. So a lot of them are going to be done in the second quarter. The demos are actually going to be performed in the second quarter of this year. It only takes 60 to 90 days to do a demo once they are installed. The delay is really getting them installed. That's why we went to that double list, because we were just having a hard time predicting the outages.

Okay, great. Thanks. Then on the ACT acquisition, can you -- in terms of revenue stream from that business in 2008, I think you provided the '07 numbers when you announced the acquisition. Any update you can provide in terms of what their revenues looked like year-over-year in 2008?

What we can -- I can confirm back what they did back in 2007 with their revenue level in the low 20 million range. This was a smaller company, and they used Quick Books, they did their accounting more in a cash basis. Because of the size of the acquisition relative to Fuel Tech, under the 305 rules in the SEC, we have to go back and have three years of their financial statements audited; and we will be publishing those in an 8-K filing in March, and also showing the pro forma impact of what their financials would have done to Fuel Tech's in our first quarter queue. Until I get those numbers back from our auditors -- and given the quite expansive sort of reshooting of their numbers to take them from their cash based accounting to completion -- I'm going to hold back commenting on where '08 came in. I will tell you that one anomaly relative to us is that they had an inordinate amount of their revenues -- upwards of 25% in some years -- that were totally zero margin installation based; so when we do provide the revenue clarity for '08 with respect to ACT in the prior years, we'll also try to break out how much of that revenue was base product -- i.e., margin-generated -- and then how much was pure installation. The nature of their business being 3/4 combustion modification burners and Over-Fire Air lends itself to a much higher percentage of that revenue installation based work. So we will try to break that out. But if you can just sit back for a week or 10 days until I can get these numbers done and this 8-K filed with that, I think that will give you all the information you need.

Okay, and then a modeling question on the SG&A and R&D front. Was the -- is the 4Q run rates for SG&A, is that a good run rate to look for in 2009? Or should we expect it to increase some as we progress through the year?

I think the fourth quarter run rate for SG&A, we have some costs that we incurred during 2008 that will annualize, i.e., an employee we hired mid-year is going to have a full salary in '09 versus six months in '08. We have also taken steps to -- you know, attrition leaves positions open that we are not filling. Other costs are coming down. So for now, it is a fairly good proxy to look at that going into full year '09 with the facts we currently have in our overall budget. Let me go back to the ACT comment. One last point I want to make on that is that when you take a look at their historical growth, even though their accounting methods may have been very, very simplistic relative to a public held company, they did experience a very good growth from '05, '06, '07, '08.

They never had a down year. And one of the items we liked about their company when we did their due diligence and ultimately culminated in the acquisition was their ever increasing market penetration, new products coming on, the acceptance of their products in the trade. So you will see some fairly decent growth with respect to their numbers when we file the 8-K.

Great. Thanks.

Thank you.

Your next question comes from the line of Michael Carboy with Signal Hill.

Good morning, ladies and gentlemen.

Good early morning out there, Michael.

Such is life. Hey, let's talk a little bit about ACT for a minute. I understand what low NOx burners are doing or what they can do here. Do you see the risk, John, of a derating issue facing utilities as they go in and put low NOx burners in, and that's been in the context of the new source review concern?

Not really, Michael. You know, one of the things that -- low NOx burners spread the flame out as -- you probably know, but just for everybody else -- spread the flame out so it doesn't get quite as hot in the center and you don't create the NOx in the first place; and Over-Fire Air is a continuation of that. The ACT low NOx burners are the best in the business by comparisons that we have seen with some of the major players. They are lower cost and better performance. It is usually the first thing -- and sometimes you can get some pretty phenomenal reduction, like 50% from the low NOx burners and Over-Fire Air combo if you don't have either of those. That's usually the first step people do.

There is an operational issue, but it is not usually much on the derate problem. Where they do have a derate, if you have that, is because you get slag because you spread the flame -- the hot part out and sometimes you can move it on up into the tube area. Our FUEL CHEM does a really good job of helping that. So, no, I'm not -- I think with the -- you know, I have been on the other end at AP of receiving a lot of those notice of violations when I was running a fleet there -- and lawsuits from the EPA. Typically, those take a long time to get resolved, and utilities will go about their NOx control efforts; and then when there's final court resolution, you know, the utilities would have done most of the things they were going to do anyway, and there may be one or two adders. So that's usually the way those things evolve.

Okay, and on this issue of potential for delays and outages -- or deferrals, I should say. Do you have any sort of comparative metrics you can share with us? Are you -- do you usually see one or two of those a year and now are you seeing three or four? Or how should we think about this? Is this a risk or are you actually materially seeing these delays at this point?

Well, we saw some in the fourth quarter of last year move into this year as utilities were going. Most of the spring outages -- most of the time when you move an outage it will be the fall outage, because you are going to move it out of -- you can move it five months. If you can get the labor, you can move it out five months, and say it goes into a different budget year, that's -- Michael, this is nothing new. It is typically what utilities do having -- I think it was almost an annual exercise that we always had. You'd have an outage planned, and then the company needs 10 million more in earnings so you move outages. Now, there is a big risk -- again, probably the biggest single thing is turbines, although you get a lot more tube leaks and maybe hurt people in the process. So utilities don't do that willy-nilly; but it is a practice, and knowing that -- not that they have told us, but just knowing that -- causes us to be a bit more us, but just knowing that causes us to be a bit more cautious about that. So I --

With regard to the dwell period between the completion of the demonstrations to the commercial turn on of a FUEL CHEM situation, certainly China things are taking much, much longer to move from demo to commercial. What's the dwell period that you're seeing here in the US right now?

Usually zero. These particular units -- the two that we had here -- one of them, right as we were finishing the demo, they were able to buy some very good quality for that boiler design. It was actually coal that the unit was specifically designed to burn. Their coal buyer found some on the spot market that were going to cover them through much of '09, so they said, "Hey, you guys did good and we really liked the service, but we have got a lower really good coal here, and while there might be some benefit we are just not going to go forward at this time." Stand by because this coal is going to run out. In the other one, they really like the run. It was much the same thing much the same thing -- got better coal, reduced load. They paid us the success fee. Everything is installed. They said, "Stand by for operation".

And because we didn't inject immediately right away, or right as -- that one is a very recent decision or situation. We didn't put it on the list. We are trying to keep that list pure, because it is for your benefit. I fully expect to see that one go on the list here the next time or two we look at it. And they are in discussions with us about putting FUEL CHEM on another one or more of their units. So they are very pleased. So it was nothing with our performance. Most of the ones that we see don't have any delay, Michael.

Right.

They just go directly. You know, it is a continuation, and they just say "Fine, here is your success fee, keep it pumping."

Just wanted to make sure we weren't starting to see extended eval -- extended analysis periods between the completion of demo and beginning of commercial operations starting to pop up in the US.

Right. That is not the trend in the US. In China, I think in the future we are not going to see that; but this particular one there was one of those where they had -- they wanted their third party to evaluate it, and then they want a big meeting with their executions and everything, because going forward they will be going forward hopefully on a number of units, that sort of thing. And anytime you get a third party government entity, which that one is -- it's a national lab kind of thing -- well, you've got to make sure your calculations and their calculations all jive. From the data, it looks like we have given them a heck of a benefit in one of the most difficult evaluations I have ever seen in my life; and you are and I are both engineers, but I've got to tell you, Michael, they had three -- I think think it was three typhoons hit during our demo period, so the coal pile was more of a lake at the time. And they were being cycled up and down from minimum power to maximum power several times a day. Well, it's a -- how do you calculate efficiency gains across that? It's very difficult. You can do it, but it's very difficult.

I certainly can imagine. Le me pose a couple of questions for John Graham. John, DSOs obviously picked up from 97 days to 116, and inventory turns slow from 11 to 8 turns. Any commentary and color there? And then lastly, I'd like to you elaborate a little bit more on this international tax issue. If I understood your remarks correctly, you said you generated a loss in Beijing and that resulted in sort of a higher tax rate here in the US? I'm just trying to make sense out of that. (Overlapping Speakers) later.

Yes, let me take the tax issue first. We had international -- we had a loss in Beijing. We expected a profit, which would have allowed us to take that at a 25% tax rate. We had just started that operation up. And when the loss was generated, because there's evaluation allowance to an extent we are required to put up against that, it is not really deductible per se. So what we have had to do was we put up this evaluation allowance; so mechanically when you look at the calculation, if you back out the losses from overseas off of the pretax number and then take the provision, which really relates only to the US against that pretax number, you get an effective tax rate in the low 40 range.

So then you fold the loss back in so the pretax number looks smaller (inaudible)?

Exactly. Mechanically it looks higher. We are certainly not paying 48.5% tax domestically. That's why I say as though kick profitable, which are budgeted in 2009, we get back down to that 40 or below effective tax rate. From a DSO standpoint , it's -- what I watch more closely are the DOSs on FUEL CHEM, because it is more of a regular billing cycle, and those are stayed current. We don't have any customers that are egregiously late. We have no bad debt exposure. We took no writeoffs for FUEL CHEM other than a single issue from Mexico that was truly anomalous. When you take a look at the APC, it is difficult to calculate a DSO on ACP orders, because you could have large billings the end of a quarter based upon the achievement of project milestones that artificially drive that up, which would not be perhaps representative of when you actually recognized those revenues. So on a percentage of completion, DSO is not a metric I watch from a company. What I do watch are -- and what we report on weekly -- are the individual account balances for our APC customers and FUEL CHEM customers, and I watch the sheets with respect to what are the amounts due and how many, if any, are past due. So it is more of an account by account, just dating kind of metric as opposed to al DSOs, because that calculation can be very

Terrific. Thanks, folks.

You bet.

Your next question comes from the line of Graham Mattison with Lazard Capital Markets.

Hi, good morning, guys.

Good morning, Graham.

I just wanted to quick follow-up on the tax rate. So your expectation is that the tax rate for 2009 is going to be about 40%. Was I correct in hearing that? Or --

Yes. Yes, I would expect that we return to a 40 or below if -- 40 is a safe number to use. And then we will provide additional clarity on that as the year progresses. But right now we are budgeted in our international operations, as they grow as we introduce ACP products and further education on the FUEL CHEM and other clients over there look for the lower cost solutions to drive both entities into a profitable state, which would have a dilutive impact on the rates on 4Q. The US rate is going to pretty much hold. We do have some tax planning strategies ongoing; but, Graham, I would counsel you use 40 now if you're modeling and then we will provide additional clarity as the situation unfolds.

Got you. And just as the sales sort of roll out and we see more of a pickup in the US, could that rate trend -- what would, I guess -- a year out, two years out where do you see that rate trend?

I would think on a long-term sustainable basis, we would be in that 36 to 38 range depending on the traction our domestic state tax planning vehicles can get. A lot of states, of course, in this time are looking to decouple from certain rules and take away some of the more advantageous tax plannings that we can do. But long-term, in that 36 to 38% range. From a foreign standpoint, when you start looking out at cash taxes paid excluding the provision rates, we certainly do expect to be able to utilize the NOLs we've generated over there respectively.

Got you. And then just, you comment that your expectations that revenues and earnings in 2009 would be higher than 2008. I mean, what's really driving that? Is that mostly going to be -- I mean, are we going to see an uptick in foreign sales? Or do you think it's -- what you are basing that on is more the -- you know, you are sort of starting to see a recovery in the second half in the US?

Well, I think it is a combination of items. As John mentioned, from a FUEL CHEM standpoint, because the use of that program is pretty much ROI based from a customer standpoint -- there is no regulatory requirement to do that -- it is a cash flow generator for them. We do expect to see the growth that we experienced in '08 continue into '09 and beyond; and we are announcing that the new demonstration units that we are winning an whatnot. From an APC standpoint, it is not a case of is the work there, as much as when will the work occur? Given the regulatory landscape, the tight credit markets, and the positioning that Fuel Tech has in that marketplace with lower cost capital solutions and alternatives to larger SCRs, for example, it's really going to be a case of when will the utilities be in a position to have that capital, when are their outages scheduled so that we can get in there and deploy it? The growth of this is -- we are very confident that's going to occur. What we are dealing with right now really is just a case of timing.

Got you. Okay, that makes good sense. Thank you very much. I'm jump back in queue.

Thanks, Graham.

Your next question comes from the line of Rick Hoss with Roth Capital Partners.

Good morning, gentlemen. Tracey.

Hi, Rick.

Two quick ones. First on FUEL CHEM -- and I think this really goes back to, I think, the first question that you had -- the demo periods -- we had the order -- or the demo announcement in January of '08, so we are over a year in on the China one, and as well as the India one, right? So what sort of timeframe can we expect this to compress to? Obviously, I don't expect it -- the next demo to be 13-plus months long, but what do you think is a realistic expectation here?

Most of them get in a lot quicker. The demo period for both India and China, they both ran 90 days. The problem was they didn't get in until the fall. They were (inaudible) to go in earlier, and that's just when it was done. The most recent China announcement that we had on the small units should start up, I think, May of this year. Our -- as an example, in the US the one that we just announced in May -- in February, installation is happening now or next week. I mean, it is very soon, and it is expecting a May startup. So I think the longer drawn out period before they start -- before we get them installed -- hopefully we are going to see that greatly shortened.

Okay. And then secondly -- and this will be the last one -- can you give me an appreciation of the urgency in the utilities as far as compliance with CAIR? You know, you vacate it and then eight days before the original start date you reinstate it. And obviously it is unreasonable to expect that everybody can get their ducks in a row and comply immediately. So can you just give me sort of the anecdotal information that you see out there as far as what their mindset is -- and really the constraints of Cap-Ex this year, considering the economy?

Absolutely. What clients have asked us, Rick -- and this is actually -- they would probably not have asked us except for now we have Volker and ACT folks in. But we have more than one client that has come in and asked us for a system-wide NOx analysis, and for helping them develop an overall plan. These two units they are going to put, you know, low NOx burners Over-Fire Area, or these ones they'll put low NOx burners Over-Fire Area plus SNCR. And then for these two over here, they are going to switch and they are going to go Cascade instead of SCRs. I think the biggest thing on the market is if it is an SCR and it hasn't already been contracted, we see a lot of those coming off the table and folks looking at Cascades, where we can get darn near the same amount. Now if they are under some Court order, that would be the difference; if the Court has already mandated an SCR, they might not try to fight that and go back for a cheaper version.

But for those utilities that aren't under a mandate, I don't think I've seen one that said we haven't contracted this SCR, we have it in our plan and we're going to go forward with that; in almost every case, they are saying, "Whoa, wait a second". In fact, I was meeting with one executive VP who is a good friend of mine. Recently, we were telling him about what we can do, and he asked me to repeat twice. "Now you can give me almost SCR level performance at less than a 10th of the price? Are you kidding me, John?" And I said, "Yes, that's what we are saying." And it is really us involved in their planning process for the first time, and in a number of these utilities it gives us the insight into what we think they are going to award us and when, and that gives us the belief that it's going to be a good year.

Okay. And so really there is no confusion about the demand. I think it has been pretty consistent. There's no confusion about needing these systems and the activity out there -- it's just what -- exactly what can these utilities afford and what can people do as far as securing funding and to be able to put these systems in place. That's really the question mark?

It absolutely is. And what's going on in the market. You're seeing -- I think you saw in Texas recently a 4000-megawatts of gas fire generation was taken off. Well, that will probably mean that the coal units in Texas are probably to run a bit harder in that market. But it depends on what units are coming on. New units -- new coal units -- it is real tough if they are not already under construction for them to go forward. So folks are having to look at deploying controls on units that they may not have planned to control in the past.

Okay. Perfect. Thanks a lot for the information.

Okie-doke.

Your next question comes from the line of Rich Wesolowski with Sidoti & Company.

Good morning. How is it going?

Hey, Rich.

John, now that you have the pre-combustion products to go with your heritage NOx out businesses, and it's one procurement, why would a utility that is informed on both your products and in SCR see the advantage in going with a bigger capital investment?

They wouldn't, I don't think. In the past, Rich -- in the past, having been on the utilities side, utilities liked big capital projects. They could borrow the money at 7.5% -- they earned 10.5, 11% according to what's in their rate base, and that was a good thing. So when you came in there and said, "We have got a low cost capital option," they would politely nod and say, "Wow, that's really nice" and then they would go back and say, "Hey, capital is good." Now that's not the case. A, the markets are tight, and they are really scrambling if they look at earnings and their dividend ratio. Utilities never generated enough to pay their dividends and their capital projects, so they were always borrowing money for the capital projects.

Now they are having to -- can they even raise enough earnings to cover their dividends alone, much less their capital? So it's a different -- it is the most different dynamic I've seen in my career for utilities. I guess the comparison would be back in the 70s and 80s when the interest rates were at 17% and they were scrambling. So capital was -- but it's been that time since the Jimmy Carter era. You know, we are kind of back into it right now. And it really is a different dynamic. I hope that helps in the answer?

It does. Are you investing more in the average FUEL CHEM demo now than you have in the past?

The cost for demos -- just because we are trying to put a broader spread of injectors so they can burn a broader range of coals, so we are -- our costs are probably up to about 200,000 versus like 150 on a medium-sized unit. Bigger units take more. Smaller units take less.

Okay. So on your FUEL CHEM margin -- of course you're forecasting more orders which means more demonstration costs, but also more eventual commercial products. So the best guess for the second margin is still high 40 range isn't it?

Well, for operational it will be in the low 50s.

Right, but I mean what you guys report?

Well, right now our -- oh, okay. You're talking about with demonstrations and everything?

Right.

Yes, it is probably -- right now with the large number of demonstrations relative to the number of operational units, it is high 40s. That's exactly right.

Okay. And lastly, you mentioned the slagging issue somewhere in the Q&A with the precombustion APC technologies. I recalled from a call way back that a customer had removed a FUEL CHEM in order to install Over-Fire Air. Are those two technologies compatible in the same unit?

Oh, yes. Absolutely. If they did that -- when they go in and put low NOx burners in Over-Fire Air, they are using locations, right? Because especially the Over-Fire Air, the burners go in the same spot. But the Over-Fire Air is going to go above the burners and might go in the right -- where we had injectors. And then they are going to see how those things run and on what fuel. Those are absolutely -- in fact, most folks who have low NOx burners and Over-Fire Air get a better benefit from our FUEL CHEM because they are driving the flame up closer to that tube bundle. It will be hotter up there.

Okay. I'm sorry, I had one more. Looking back over the last -- I don't know, three years -- you had about 75% of your TIFI orders in the first half of the year. Is there any reason for that, and would you expect that to hold this year again?

No, there is no reason for it now days. Used to be that they would order it and install it real quickly in the -- before the spring outage. But we have seen their procurement cycle now -- as you saw it last year -- just kind of run throughout the whole year. You'll see some in the spring. You don't sign as many in the middle of the summer, but the rest of the year you just see them coming in along.

Great. Thanks.

Okie-doke.

Your next question comes from the line of Scott Reynolds with Thomas Weisel Partners.

Hey, guys, how are you?

Doing good, Scott. Hope you are.

All right. Two quick questions. Back in the 2Q and 3Q, you guys talked about 6 million of backlog for '09. I would imagine that's still around. Do you guys have an idea of when you hope to recognize that?

The -- we ended '08 with 9 million in backlog. Most all of that will be done this year. I don't think anything goes beyond that. There is one -- maybe a partial on one of the China installations -- I think on a new unit -- is first part of 2010. But I think the vast majority of the 9 million we have and certainly everything that ACT has in their backlog will be done this year.

Okay. And on the ACT backlog, how do you see that being recognized over the year? Should it be in the first six months or?

Yes, their stuff tends to be quicker. Most of that stuff is going to be done in the first half of the year.

Okay. First half. All right. Thanks, guys. Those were all my questions.

Okie-doke, Scott.

Thanks, Scott.

Your next question comes from the line of (Inaudible) with Natexis.

Hi, good morning, guys.

Good morning.

Most of my questions have been answered, but I was hoping you could give a little bit more clarity on Chinese front. I know you mentioned in your remarks that you might have already started working on some projects, ones that you have not yet announced formal contracts. I was wondering if you could provide a little bit more color on that market in terms of what you see in '09 and '10, and also if there is any big impact you see from the Chinese stimulus, especially on the environmental side?

Well, that's a really good question, and you know, they are just announcing more of that. The -- we do anticipate that a certain portion of their stimulus is going to be used to clean up the air in China. And they are moving to get more of that done; and as they do that, you start the process of getting bids out and the whole shooting match, which is why we have got an unprecedented, for us, amount of bids, proposals, discussions going on in China right now. The Chinese style is that they'll tell you you've won and they will give you a due date that you want your engineering done and -- up front, and they have got to be ordering equipment, and they expect you to start work on it and they will get you a contract later. Now, we will start work, but we won't deliver results to them until we get a contract. And we won't start work unless we are sure we've got it. But we are not going to start delivering engineering work to anybody. So that really is our leverage to try to get the final contracts signed. And -- but it's just the fact that it takes longer, even after you know you've won something, to finally get a document.

So how does that basically flow into your private news in that case?

You're not going to recognize any of that until you've got a contract. We won't have any of that -- that's on our risk, I guess, for that amount that you're doing that. But it's usually not very long. It's just six weeks, maybe two months at the outside, that you might know you've won something before you finally get a contract. But you'll never see that -- that will be just costs that we're eating until we get a contract and we can charge it to the project.

So I guess you had previously talked about a portfolio of about $200 million of proposals that you made over a period of weeks or months. So how much of that you think, at least you are seeing activity discussions with your Chinese counterparts?

I'm not sure I caught the amount that you said. I think I have said something in the past about over 100 million of stuff out there; but in any case, there's still a vast amount of work that we are bidding on and in discussions with. It is a different process over there, and we try to put ourselves in the best position to win. If they are going to go out for a bid and they are going to qualify for major Chinese architect engineering firms to bid on it, then we will try to align ourselves with all four of those so that whether we win is not so much in doubt, but rather who it is we're going to be working with is what's in doubt. That's our preferred mode; and actually, we are successful at that more than not. But still, it is never a done deal until the contract is signed. So great opportunities. I think you'll see '09 better than '08, hopefully for us and for the overall Chinese environmental market. 2010 should be better than that, and the mother load for their retrofit work is going to start in 2011.

Okay. Thanks very much.

Okie-doke.

Your next question comes from the line of Brian Shore with Avondale Partners.

Hey, good morning, everybody. Thanks for taking my call.

Hey, Brian.

Hi, Brian.

Just a couple of quick questions. Most -- I think everything has been answered. If I think back to the spring when CAIR was vacated, it seemed to me -- at least at the time -- that you guys -- I don't want to say downplayed, but kind of noted that that ruling wouldn't necessarily have a dramatic impact on, I guess, APC order generation; and it seems like maybe the tenor is a little bit different in this case. Is there any sort of reconciliation there?

Yes, Brian, and it happened two months later. You're exactly right. And we wouldn't so much -- you know, we don't get to make that call as to whether utilities are going. It was -- we had -- actually had a little press conference about that; and based on our discussions with our clients at that time in the latter part of July, they were looking at business at usual, we are going forward. Two months -- a month and a half after those discussions, starting in September and it's accelerating in October ,when the financial crisis hit all bets were off. And they came back and said, "Oh, no, all those projects are deferred. Completely deferred". In fact, utilities issued orders within their ranks that no discretionary capital could be deployed. If it wasn't required by regulation at the time, none could be spent. And that's the thing that totally changed and that's why they got totally caught off guard as a Christmas present from the Court when it was reinstated and you saw the price for NOx go to over $5000 a ton because, everybody is short. Now, it's moderated back as the economy has come down and there's not a lot of trades out there right now, but that's what happened.

Okay. Okay, and I guess with CAIR sort of being in a temporary state now and until a more stringent rule comes into place, I mean, is -- I guess, is there any risk that the more stringent regulations once they come into place -- I don't want to say make your products obsolete -- but have a detrimental impact and require utilities to sort of put the maximum on?

Well, we can get to the maximum. The secret now is that we can do just about what you can do with a combination of all of that. You can get just about to that same level. To put it in perspective, you know, the CAIR takes you down to .15 pounds per million BTU of NOx. And then later in 2015 was going to ratchet back down to .125 instead of .15 -- so come down partially. Our technologies in combination can get you below .1. I don't think anybody out there believes that there's going to be a NOx regulation coming out, even with this administration, that's going to be less than .1 on a fleet average basis. So while we talk sometimes in percentages of reduction, the real number is what is your absolute that you can drag it down to. And we can drag it down to below where any of the -- anybody's going to need to be.

Okay. Great. And then in China, India, any impacts, I guess, from the global economic slowdown there in terms of bid activities?

Well, in China, it's going up because they have got a stimulus. In India, I have never seen them have any concern over NOx or SOx or any other air poll pollutant. You know, they're really -- so we haven't made any sales, don't really have any force going in there for India, other than FUEL CHEM. They have a great interest in that, because that can lower their fuel cost. They can burn really crummy coal without taking all the outages, and they can get more generation from their existing units, and they are short of generation. So their's is all about being able to burn slaggy coals and efficiency which lowers their fuel costs; so it really isn't cost reduction, but air pollution I have not seen anything. But on China, they are really interested in both.

Great. Well, I think that's all the questions I had. Thanks so much, guys.

Okie-doke.

And your final question comes from the line of Carter Shoop with Deutsche Bank.

Good morning,.

Hey, Carter.

Hi, Carter.

Can you discuss what the acquisition-related revenue was in the fourth quarter, and then also highlight what your outlook is for future acquisitions?

Well, acquisitions related to revenue was very (expletive) little.

It was several hundred thousand dollars as it relates to the TackTicks, FlowTack acquisition. Prospectively, as it relates to acquisitions, the Company's -- even with the acquisition of ACT that we funded the first part of January this year -- was done primarily with cash on hand. We expect to have our balance sheet again be clean of debt when we announce first quarter results. The acquisition pipeline -- of course, it is smaller because we bought one of our primary competitors that provided us some complimentary technology, but we are not adverse to that. We've mostly fully integrated ACT -- certainly have done so operationally and financially. I'm sorry -- administrationally and financially. And operationally it's about done as well. So we would not lead the digestion period, so to speak -- we're sort of over that. We never like to buy companies of that size relative to our own until we have started eating -- or digested what we have eaten, so to speak. But the pipeline -- companies are out there, technologies are out there, but we will be prudent about it.

We just -- just note -- and you guys ought to know enough about me and I think about John -- I'm not real keen on debt. Don't really want us to go there. So I'd like to replenish our proffers with cash before we start taking on anything else, and like to do what we do out of cash. Now, there may be an opportunity that comes up out there that we might consider -- you know, some other alternative method of funding it versus just using our cash. But there's nothing on the plate right now in that regard, and it would take a good bit for me to get over that aversion to debt.

That's helpful. So we an say less than 500,000 in revenue in the fourth quarter from acquisitions? Is that a safe assumption?

Yes.

Okay. And then, when we look at 2009, if we back out ACT, do you still expect to see growth in sales and earnings?

We're not going to give that guidance yet right now. It's hard to back out ACT, because we are selling whatever works right now for the client. We might have competed with them in some areas like SNCRs -- whichever's the best. So there's no way of knowing whether that sale would have gone ACT or FUEL CHEM, and we're not going to try to determine that.

Okay. And then, when we look at the base business, excluding ACT and maybe the transition into India and China, we haven't really seen any growth since 2006. And if that base business doesn't grow in 2009, that will be roughly three years. Do you feel that the North American market is still a growth market for FUEL CHEM -- for both the FUEL CHEM products, and also for APC?

Are you talking about FUEL CHEM hasn't seen growth?

I meant Fuel Tech, but the overall Company hasn't seen much growth since 2006 -- if you --

You're right. Yes. You know, we've -- it's a tough market to be projecting outrageous growth in, which is why we're not giving that -- giving guidance right now, but I think we've got the key tools that we were looking for to expand our technology side on the ACT side, and on the FUEL CHEM side, it's been market acceptance, and you've seen that grow. So we ought to be able to see top and bottom line growth for this Company.

Specifically as to the one point made, Carter, when you take a look at the US and Chinese markets, you're dealing with two of the most robust APC markets -- let along FUEL CHEM -- in the world. And with the acquisition of ACT, I can't think of another Company out there that's better positioned in terms of on ground presence or product offering than Fuel Tech is as these markets continue to evolve and the air pollution control requirements really start to take some traction.

Last question for you, can you comment about how the competitive dynamics have changed over the past year for the FUEL CHEM business?

Well, not much. The -- FUEL CHEM remains a return on investment kind of a thesis when you go in to a client to present a program to them and to get them to accept it. We've been growing pretty steadily in that, going from six wins, eight wins, thirteen wins, fifteen wins over the last four years. There's nobody else out there growing, so it's not really about competition, it's been about market acceptance; although there's people that try to compete in that. And that market acceptance, we believe, is growing. So we got to see that continue. It is a tough economic time, and the client has to be really convinced these days that you can provide them a good value. But they are looking for good value.

Great. Thank you very much.

Okie-doke. Well, and I guess that concludes it, operator. Thank you, very much, for everybody tuning in, and look forward to seeing you on future conference calls. Thank you. Thank you, very much, for everybody tuning in, and look forward to seeing you on future conference calls.

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