Fuel Tech Inc (FTEK) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first-quarter 2009 Fuel Tech, Inc. earnings conference call. My name is Jim and I will be your operator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Jim. Good morning, everyone, and thank you for participating on today's conference call to discuss our first-quarter 2009 results. 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 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 conference call is being broadcast over the Internet and can be accessed at our website, www.FTEK.com.

With that said, I would now like to turn the call over to John Norris. John, please go ahead.

Thanks, Tracy, and good morning, everyone. We appreciate all of you joining us on this call. Our results for the first quarter this year are disappointing to us. Our revenues were $17.3 million, down 15.4% from $20.5 million in the record-breaking first quarter of last year. Net income for this past quarter was a loss of $1.6 million or $0.06 a share versus a profit of $1.6 million or $0.07 a share a year ago.

The three basic causes of this poor performance are a one-time reserve for an APC contract dispute, a reduction in topline revenues, and an increase in costs especially personnel costs as a consequence of recent acquisitions. These last two factors affected both of our major lines of business and both of these factors are in the process of being addressed and we expect significant improvement in both areas by the second half of this year.

In just a few minutes, our CFO, John Graham, will discuss our financial results in much greater detail, including the effects of various tax and other charges such as 123(R) stock compensation expense and the accounting treatment of our recent acquisition. 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 $11.3 million despite having paid out over $26 million in acquisitions since last October. Our business model anticipates growth in revenue, profit, and cash this year and accelerating in the future.

As most of you know, Fuel Tech is a fully integrated company that uses a suite of technologies to provide boiler optimization and efficiency improvements and air pollution reduction and control solutions to utility and industrial customers worldwide. For reporting purposes, we broadly group these technologies into two product lines, the Specialty Chemical Injection business for efficiency improvements that we call FUEL CHEM, and our Air Pollution Control or APC capital projects product lines. Let's take a look at the results in both areas.

Our APC business sector saw revenues of $8.8 million, down 24% from $11.7 million in the first quarter of 2008. As you may recall, the first quarter of 2008 benefited from a very strong backlog of $28 million at the end of 2007 while the first quarter of this year was working off a backlog of only $9 million at the end of 2008.

Gross margin for the APC segment was 28.4% this past quarter in part reflecting the impact of a reserve we have taken over a dispute with a construction company on one particular job. Now we hope to resolve that dispute at a cost less than that reserve, potentially a lot less of course. But this reserve also impacted our net income for the quarter.

Another factor depressing our APC margins for the quarter was some low risk but low-margin work we did for a client associated with SCR Catalyst Management. This work is in our APC sector, but it is not typical of our traditional fixed-price APC work and it carries a lower margin.

The real culprit here, though, is the lack of significant topline revenue growth which is driven by contract awards and the timing of revenue recognition. Regarding revenue recognition, due to the timing of unit outages when equipment can be installed, started up, and checked out for performance, we did not recognize as much of our backlog revenues we had hoped as much of that work will be done in the second quarter of this year.

Regarding our new contracts, we have signed over $13 million in new APC contracts so far this year. The majority of that has been for international projects, especially in Europe and China. The weak area in our APC sales has been the US market. When the US District Court of Appeals for the District of Columbia vacated the Clean Air Interstate Rule, or CAIR, in July of last year, and then the financial crisis developed a few months later, utilities and industrials dramatically cut projects that were not absolutely required. Then when the Court reversed itself on December 23 and reinstated the rule effective a week later on January 1 of this year, it was too late for utilities to order systems to install in the spring outages.

The next major installation opportunities for capital equipment will be in the fall of this year and the spring of 2010. Equipment orders need to occur four to six months before installation and most of them in the four-month time frame nowadays, so we expect to receive a few orders over the next couple of months and then a stronger order flow in the third and fourth quarters of this year. Now for CASCADE systems, the orders take a little longer in lead time, so they will not be so seasonal in their award timeline.

The good news in all this for Fuel Tech is we have the lowest cost, best-performing technologies in the world. That combo is now of high interest to utility and industrial clients and we have an unprecedented level of project opportunities that we are bidding on, or in advanced discussions and negotiations for. We have high expectations of converting these to actual contract awards this year.

With the acquisitions of Tackticks, FlowTack, and Advanced Combustion Technology, Inc., a wealth of technology and expertise joined the Fuel Tech team. But along with that came the cost of 24 new employees. We have taken some steps to reduce our personnel costs and we will be taking more significant steps in the very near future.

We've also utilized this temporary slowdown in APC business to cross train a number of our employees on the various technologies and those extra personnel costs have also depressed our APC margins a bit this past quarter.

In Europe, we are off to the strongest start in sales since I have been at Fuel Tech, and we expect that to continue. In addition to the sales of our traditional SNCR technology, we are seeing keen interest in our ULTRA systems and our new CASCADE, which is really an advanced SCR system. We have very good prospects for CASCADE orders in that market and we expect to see an order or orders for Phase I engineering on those opportunities later this year.

In China, I recently announced $4.6 million contract for ULTRA systems on four new units has been in the works for several months and it is good to finally get that signed. We have a number of other opportunities for which we are likewise in advanced discussions. We expect to have a reasonably good year of orders this year in China, with more expected next year and a significant ramp up in 2011 when China begins to address the retrofit market for their over 4000 coal units in their 12th five-year plan. Currently most of our wins in China are for ULTRA systems on new units where they are installing SCRs for NOx control.

On the FUEL CHEM side of the business, our revenues were $8.5 million for the quarter, down slightly from the $8.8 million in the first quarter of 2008. FUEL CHEM margins were 40.5% for the quarter, down from 48.6% in the quarter last year. The lower margins this past quarter were primarily driven by the reduction in the load factors on our customer units due to significant reduction in electrical loads especially for industrial customers.

I don't know whether you saw last week as an example Southern Company who was a customer of ours reported that their overall sales dropped 8.8% in the first quarter, driven by a 17% drop in the electrical load of industrial customers. Now our customers in the upper Midwest have been hit by even greater reductions.

When a utility or industrial customer runs the unit at half load, then they use our chemical -- their use of our chemical injections is also greatly reduced. When that happens, our margins are likewise reduced as we have some fixed costs in people and equipment that are unchanged in the short term.

We also have a number of demos under way at this time. That also depresses margins especially when the operational revenues are reduced. As of the end of the first quarter, we had over $600,000 in risk share revenue outstanding and we hope to recognize those when those units go commercial.

Now if you take a look at the list that we provide at the end of our earnings release, where we show operational and demonstration units, you will see a few changes. First, if you are looking at the list, on the demonstration side, you will find a reduction of three in the US coal unit numbers. One of those that was taken off the list in a turn of events can give you a feel for the overall market conditions. We originally ran a demo for that client on a small unit at this multiunit site in the upper Midwest. The demo was very successful and was even certified so by a third party, but the utility could see by the time the demo ended that that small unit would be rarely dispatched. So they asked us to move our equipment over to a larger unit on that site.

On that unit, there was no risk share and the utility would pay full price. But we kept the unit in the demo column but moved up its size to medium size unit. Before we could even start pumping chemical though, the utility decided that even with this larger unit, it would run at such a low load that they would not need us there at this time. So we removed that medium-sized unit from the demonstration list.

On a more positive note, two other medium-sized units began their demonstrations in January and were recently in April declared successes, and they have moved to the operational column. Now one of those was the first lignite boiler ever to use our FUEL CHEM program. That demo was announced right at end of last year I think December 29. So demos do sometimes move quickly. And this one is especially important in proving to other potential clients the positive results we can achieve on lignite fuel.

Now looking at the operational column, you see that has changed. We have removed one large and two medium-sized units all from the same customer serving the same region. That customer is running at significantly reduced loads and is now able to buy Appalachian coal with their much reduced slagging characteristics with coal prices dramatically lower. They are thus not going to need us for a while, so we took them off the list at this time.

In addition, we permanently lost a small industrial coal unit in the upper Midwest when the factory the unit served was permanently currently closed. Thus four were removed overall and two were added. In the non-coal international area, we removed five units. Two of those were at a pulp mill in Canada that went bankrupt and closed down. The other two were small oil-fired units at a station down in Panama and that is being replaced by a larger coal unit being built down there and we have taken them off the list permanently. Now, these five reductions will not have any significant impact on our financial results.

There is some very good news to report on our first demonstration program in China, which as you may recall was conducted on a large unit in the fourth quarter of last year. The valuation of the demonstration program is the most extensive I've ever seen and it took place in the first quarter of this year and showed significant positive results. This evaluation was reviewed by an independent government entity, which also did its own independent measurements and analysis, and all of that was reviewed by a distinguished panel of experts.

The results were all very positive. We hope to be able to release the full report soon and we believe this will be a major springboard for more rapid deployment of FUEL CHEM in China. We and our teammate, ITOCHU, are now in discussions with the plant utility management about a commercial contract for that plant.

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.

Thank you, John, and good morning, everyone. As John mentioned, consolidated quarterly revenues for the first quarter of 2009 were $17.3 million, a 15% decline from the $20.5 million reported in the first quarter of 2008. Due to the lower quarterly revenue level coupled with acquired personnel and business costs from our three recent acquisitions and the establishment of a contingent loss provision on an APC contract, we did generate a net loss for the quarter of $1.6 million or $0.06 per diluted share, compared with net income of $1.6 million or $0.07 per diluted share in the same quarter one year ago.

Now let's go through each of the business segments in a little bit more depth. In the FUEL CHEM segment, first quarter FUEL CHEM segment revenues of $8.5 million included $7.4 million of revenue from coal-fired units, a 3% decrease versus the coal unit revenue reported in the first quarter of 2008. Quarterly revenues from noncoal-fired units of $1.1 million were down 8% versus the prior year quarter, primarily due to the discontinuation of a unit in Venezuela in response to concern over that government's nationalization efforts and a general slowdown in demand.

Overall FUEL CHEM segment revenues decreased 3% versus the first-quarter of 2008. Despite the economic recession, we continue to have good market penetration for new FUEL CHEM demonstrations both in the US and abroad. As John mentioned, we had wonderful news from our first FUEL CHEM demonstration in China, which may establish a foundation for potential multiple deployments and we continue to have a domestic demonstration program to convert to commercial status.

As a reminder, our FUEL CHEM programs typically generate revenues that allow them to operate at or near a breakeven point during their demonstration periods and then roll into commercial status once they have concluded their demonstration programs and proved the effectiveness on the individual boiler.

Quarterly gross margins for the FUEL CHEM segment declined from 48.6% in the first quarter of 2008 to 40.5% in the current quarter, the result of a decline in year-over-year revenue coupled with the effect of the continuation of certain fixed expenses and customer sites that are necessary to maintain whenever a unit is pumping. Excluding the impact of demonstration costs, the base FUEL CHEM business generated a gross margin of approximately 44%. While this is down slightly from historical levels, it is primarily due to the dilutive impact of fixed operating costs such as personnel depreciation that when taken as a percentage of revenue with client sites experiencing reduced chemical demand, dilutes the underlying gross margin percentage. This is not however indicative of any other negative underlying trend.

At present, we have 10 FUEL CHEM units currently in demonstration, with each designed 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 in the commercial status once the program's value has been demonstrated.

From an operational standpoint, we continue to keep an adequate supply of FUEL CHEM systems ready 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.

For our Air Pollution and Control or APC segment, first-quarter 2009 revenues for the APC segment were $8.8 million, a decrease from the record first quarter last year, which saw APC revenues of $11.7 million. Revenues associated with Tackticks, FlowTack, and the ACT acquisitions contributed $4.7 million to the quarter.

Our APC backlog at the end of 2008 was $9 million and we announced $8.5 million in APC orders during the first quarter of 2009. We also added approximately $5.7 million in backlog as a result of the ACT acquisition that closed on January 5 of this year. As a result, we ended the corridor with an APC backlog of $14.3 million.

Subsequent to March 31, we have announced a $4.6 million Chinese order for four NOxOUT ULTRA units. So while the near-term revenue recognition in this segment is suppressed, the signs of recovery are strong. We expect more announcements this quarter and a much stronger level of awards in the third and fourth quarters of this year. While our backlog is below where we would like it to be entering the second 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.

Quarterly APC segment gross margins were 28.4% compared with 47.3% a year ago. Obviously with a decrease of this size there are a few anomalous contributing factors. First we had a hardware sale in our catalyst management program whereby Fuel Tech acted as the conduit between the fabricator and the customer. We also provided consulting services to this customer at our normal commercial rates but the hardware sold at a nominal markup and thus diluted the segmented gross margins.

Second as John mentioned, we reported a contingent lost provision of approximately $500,000 for an APC contract. Although this individual contract is still very profitable for a turnkey project, contract gross margins of course diluted due to the provision recorded. These items together suppress quarterly APC segment gross margins by approximately 7 percentage points. Gross margins for our core products excluding the effects of installation work remain strong however.

From an operational standpoint, the global behind-the-scenes activity for contract negotiations, proposals, and serious discussions about our full NOx control product portfolio has truly 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 emission regulations around the world. Mitigating this of course is the continuing uncertainty of the global economic crisis.

On a consolidated basis, gross margin percentages for the first quarter of 2009 were 34.3%, a decrease from the 47.9% reported in the first quarter of 2008. Excluding the impacts of the contingent lost provision and the catalyst management program sale, quarterly consolidated gross margins would have been almost 37%. The reasons for this have been previously discussed.

Quarterly SG&A expenses excluding R&D expenditures were $8.3 million, an increase of $1.3 million or 18% versus the first quarter of 2008. Of this increase, $1 million is due to the net incremental SG&A costs associated with the October 2008 acquisitions of substantially all the assets of Tackticks, FlowTack, and the January 2009 acquisition of substantially all the assets of Advanced Combustion Technology.

In addition, almost $300,000 is due to incremental FAS 123(R) stock compensation expense. The company has taken the prudent and responsible actions of curbing personnel costs and reducing near-term discretionary spending while still making the strategic investments required to grow our business globally. We will be making more substantial reductions in these areas in the coming months to ensure a level of profitability until our revenues pick up especially in the second half of this year.

Even after considering these steps and other cost-saving measures to be taken in the second quarter, our financial and administrative infrastructure will still be able of handling global revenue growth of an additional $40 million to $70 million with minimal additional investment. Due to this ability to leverage the fixed and semi-variable cost structure in the SG&A area, we feel strong that our long-term SG&A expense as a percentage of revenues from a run rate perspective of less than 20% is not only achievable but also very sustainable.

Quarterly R&D expenses were $154,000 and were focused on developing and testing technologies with near-term market applications in both boiler optimization and Air Pollution Control. The quarter-over-quarter decline versus the first quarter of '08 in this area is due to the company moderating its near-term R&D expenditures in the wake of the economic downturn. However, we maintained our focused approach in pursuit of commercial applications for technologies outside of our traditional markets and in the development and analysis of new technologies that could represent incremental market opportunities.

As always, 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. For emissions like Mercury and CO2, we continue to examine and develop various technology products and solutions to identify ones we feel are commercially viable.

First quarter of 2009 operating loss of $2.5 million was substantially below the $2.3 million income we reported in the prior year quarter. The revenue shortfall coupled with the additional expenses absorbed from recent acquisitions were of course the primary drivers. We expect second-quarter operating results to be suppressed due to below average size of the APC backlog and the timing of those contracts available to be worked off prior to June 30 and modestly impacted by the expected charges associated with second-quarter personnel cost reductions.

As we look to the rest of the year, we do however expect a much stronger third and fourth quarter in terms of operating results as the current bid activity converts to contracts especially in the APC segment.

The decline in quarterly interest income versus first-quarter 2008 is due to reduced cash available for investments primarily due to the $26 million we invested in three companies in the past six months. The change in other income expense were driven by foreign exchange translation movement and not a cash flow impacting event.

Due to the mix of the forecasted domestic and international revenue and income levels presumed for full year 2009, we wet the full year '09 tax provision rate at 40% and will adjust that quarterly as necessary. Net income for the quarter was a loss of $1.6 million or $0.06 per diluted share. But even after the cash outlays for the three acquisitions and the funding of the purchase of the new corporate headquarters building both in '07 and '08, our balance sheet remains very strong. Cash has increased to above $11 million and other than our $2.2 million in debt in China related to the start-up of the Beijing Fuel Tech office, we have no debt on our balance sheet.

Working capital at quarter end was a strong $24.6 million and we have not seen any deterioration in payment patterns from our customers either domestically or abroad, APC or FUEL CHEM in the wake of the global financial situation.

As you will read in our first -- in our just filed Form 10-Q for the first quarter, we completed the purchase price allocation related to the ACT asset acquisition. FAS 141(R) effective January 1, 2009 for Fuel Tech requires us to book an amount that represents the fair value, i.e., the present value, of the probable earn-out payment as a contingent liability as of the date of acquisition. Due to the mechanics of the earn-out structure, specifically the language that the shareholders of ACT would forfeit a portion of the aggregate earnout to be paid if they left Fuel Tech's employ before the end of year two, specifically Fuel Tech's earnout obligation would reduce 25% for each shareholder who left up to a maximum 75% forfeiture.

FAS 141(R) only allows for the 25% that is not subject to forfeiture to be recorded as a contingent liability so that all earn-out payments will be expensed when paid except for that portion that has been set up on the books as of the date of acquisition as a contingent liability. As a result of that, we have recorded a $2.3 million contingent liability on the first-quarter balance sheet properly segregated between short-term and long-term. We will review that amount at each quarter end and adjust the financial statements to always reflect a probable current year payout. The only silver lining to this accounting rule change is that it will allow for the immediate deductibility tax wise of the expensed earn-out payments versus having them recorded as goodwill and deduct it over 15 years for tax.

But it will affect the bottom line results this year if an earnout payment is made. As with all such items, we will provide a very transparent analysis of any actual expenses incurred.

Quarterly operating cash flows were $6.5 million, driven by solid working capital management. Cash used in investing activities of $23.4 million was primarily for the ACT acquisition. We expect maintenance CapEx will remain below 2% for the year and the majority of all CapEx will be for FUEL CHEM equipment for demonstration and commercial programs.

Our domestic and international market interest and sales activity continues at a very strong pace especially in our APC business segment. But the industry continues to be impacted by the global financial crisis.

While we are encouraged about our business prospects for 2009 and we believe we will win substantial new contracts this year, the timing of those awards during the year remains highly uncertain. Thus, we do not believe it prudent to provide additional quantitative revenue or earnings guidance than we did two months ago on our last conference call. We will continue to evaluate our progress and will likely provide such guidance on a second-quarter earnings conference call this August. John?

Thanks, John. With that, operator, let's open it up for questions.

(Operator Instructions) Graham Mattison, Lazard Capital Markets.

Good morning, guys. Just to clarify on your last statement about guidance, on the last call you said you still expected revenues and earnings to be for '09 to be above 2008. Are you still expecting that?

Yes.

Got you, okay, great. And then looking through the 10-Q and the pro formas with the acquired businesses, it seems last year in the first quarter they would have added about $0.04. Are they performing better or worse than you expected? Can you give a little color in terms of how they have come in? Are they also being hit harder by the economic downturn than you would have previously expected? Or is there -- are they actually outperforming and it's rather the core Fuel Tech business that's --?

The impact hit all of us. The projects from those business units are hitting their gross margins just fine and the opportunities are very impressive. It's just ACT and FlowTacks and Tackticks and us were all hit by the same issue with regard to care, where it was kicked out and then it wasn't kicked in until right before it started in January. There was no time for utilities to react for the spring outages. Now utilities are reacting for their fall outages and for the spring of next year. A typical installation for the kind of technologies that ACT brought to us as an example takes about a 16 week lead time for us. So if you've got an October outage, you are not going to see the utility contract that before June in all probability.

So the performance by them and by us were all impacted domestically in this first quarter with depressed signings. If you take a look at our overall projects, the whole length of the projects, our projects are still on our APC side roughly in that if you look at from start to finish across the full year when they started, are still in that 47% range. Our depressed margins this quarter and our depressed revenues this quarter are really having to do with timing in the quarter. Graham, does that help answer your question?

It definitely does, thank you. One other question. Could you give a little bit more color on the contingent loss on the APC side or when we might get some resolution on that or what the next steps are there?

We are -- that particular contract has a mediated settlement mediation and we have formally entered mediation. I should hope that that will be resolved in the second or third quarters of this year. We don't -- this is not going to drag out for a long time.

Okay, got it. Great. I will jump back in queue. Thank you very much.

John Quealy, Canaccord Adams.

It sounds like a reduction in force is coming across the business. Excluding the charges related to that, do you think you guys will be profitable or are you looking for another operating loss for the Q2 period?

I don't know yet in the Q2 period and specifically. We want to get our cost structure down to roughly pre-acquisition levels. Whether we are going to make a profit in the second quarter or not largely depends on the -- we've still got two months to go and how much revenue recognition we get on our APC projects. I don't expect huge changes on the FUEL CHEM side, maybe a little bit better as some units are coming out of outages right now. And if the weather will warm up a little bit, the load will pick up. That would be good for us.

So the second quarter is uncertain, but I don't think it will be -- it won't nearly be like the third and fourth quarters, because I think the third and fourth quarters are going to be -- we expect that to be much, much improved.

And then supporting that outlook, John, in terms of bidding opportunities, can you quantify it a little bit for us whether the number of opportunities on the APC side have expanded or it's the average size per opportunity? What exactly is giving you confidence that these are indeed going to hit in the back half of the year given the regulatory issues with CAIR and how this sort of intra versus interstate cap and trade will work on NOx?

Well, the latter is certainly an issue in the minds of utilities, but they are also looking at units that they know they've got to do something with. And the first part of your question was -- what was that first part of your question, John?

Just really I guess what I'm trying to get at is in terms of your guidance or at least your outlook I should say because there is no guidance.

I got you, I remember, I got it now. Yes, the positive outlook has to do with not just -- it's not just we hope that there's something out there. I'm really talking about working with the clients exactly on bids that we have resubmitted or situations where we have already been selected and they are refining exactly which technology -- do they do low-NOx burners, over fire here, and HERT or SNCRs, do they go to a CASCADEs? For the CASCADEs, potential clients are -- the typical process is they select an engineer and a technology they want to work with and you will end up doing a Phase I engineering work for them that will be hundreds of thousands of dollars in size. And then you use that to refine the project that they would then go to the Board for approval and that would be a number of millions of dollars.

I don't expect to see those kind of Board approvals because I think the first step we will see in the second half of this year are Phase I engineering studies for those. But if you take a look at our stuff like burners, the new stuff like burners, SNCRs, ULTRAs, it's not just hoped for work. This is work that we would put a reasonably high probability of winning during the timeframe that we are talking about.

And then lastly, just from a broad perspective, what takes more precedence right now? We are seeing some of your multinational competitors report the same sort of end market sort of acceleration, whether it's Europe or China. Is it growing the order book in revenues, John, or is it keeping the business profitable? What is the primary driver for the remainder of '09?

Well, if I grow the order book, it will be profitable. There is -- this quarter we've looked at in 16 different ways from Thursday, the cost to make sure they isn't something fundamental here, and there is not. We just had some timing issues on a number of our APC projects and in general the FUEL CHEM projects have -- were down in the first quarter.

But as we work on clients on FUEL CHEM, I see that the third quarter will pick up considerably in that regard. We got some major demos going. I think our sales efforts in China are on the FUEL CHEM side. I expect to see that pick up and you should see announcements accordingly there.

I am very happy to see our efforts in Europe, John, growing. That is really indicative of the fact that a lot of European utilities and industrials are hurting financially too, maybe even worse than the US. And they are really now appreciating that low-cost CASCADE approach versus SCRs. So I think it's all of that that gives us a good reason to believe that the company is going to be just fine this year and longer-term.

John, the other data point we are seeing is, without giving specifics, specifically for the acquired technologies from ACT. We are getting invited to bid lists and to submit RFPs or responses to them for burner jobs and over fire jobs that ACT on their own simply would not have been able to do because they were not either large enough, well-known enough, or property capitalized or just i.e. too small to get on there.

So the benefit of them joining Fuel Tech allows them to take their prior technologies a part of us out to these jobs. So again, as John mentioned, the foundation signs for an order activity pickup are very strong and we are starting to see that break through a little bit. The timing of when those can be done, whether it's a fall outage or a spring outage will be the primary determinant for near-term revenue recognition.

Great. Thanks, guys.

Rick Hoss, Roth Capital Partners.

Good morning, gentlemen. Could you tell me again what the ACT backlog was? I know that total 14.2, I missed it earlier.

$14.3 million is what we would calculate, but you are in that ball park. Since then we have added $4.6 million.

ACT and the $14.3 million was $5.8 million.

Oh, you are talking about ACT. I thought you said APC. Sorry, Rick.

Okay, so $5.8 million left on the ACT backlog --

No, no, no wait a second. That $5.7 million was what they brought to us in backlog in January. We have worked some of that off and we have won some new stuff in those announcements. We are not going to separate that out because it's --.

It's all commingled right now.

It is all commingled.

Right, I guess what I was trying to get at was how much of that acquired backlog was recognized in the first quarter versus second quarter is really what I am looking for?

Yes, I think about $2.8 million of that.

They worked about half off.

Okay. All right. So the assumption is that second half of that $5.7 million will be recognized in the second quarter as well?

Yes, ACT was hit by the same lack of orders at the end of the year that everybody else was. So they ended the year with for them a pretty real low backlog number and we expect their business to pick up substantially. As you can tell if you look at Note L in the 10-Q, what the business would have been had we all been just doing what we were doing last year at this time.

Right, okay, thank you. And then as far as China goes, it was a good order that we saw in that ULTRA last week. Where do you see the greatest opportunity for APC work? Do you see it on new units or legacy or retrofits?

In the short term, it's new units, Rick. It's going to be largely ULTRAs but we are seeing keen interest in our burners there too. Burners and over fire air system, the ACT, low-NOx burners and ultra low-NOx burners and over fire systems are some of the top in the world in their design. They are much sturdier, longer lasting than most of our competitors and when the Chinese have been looking at those specs, they've been very impressed. So we are finally now getting bids into China on that -- on those technologies. But by and large right now it's new units of all kinds. They are going to start some retrofits next year, but the big retrofit market starts in 2011.

Okay, and then you may have released this earlier. I can't recall what it was. What is the size of the unit that that FUEL CHEM demo is on in China?

It's a big one.

Okay. So a large unit.

Okay. It's the second largest that we've ever done a FUEL CHEM on, if I remember right.

Okay. And then finally, how do you see carbon regulation affecting your business? There's been a lot of talk particularly given the EPA's recognition of greenhouse gases as harming human activity. So how do you see that playing out assuming that there is the implementation of a carbon cap and trade?

It's according to whether it's totally Draconian, which I hope the US doesn't just jump off a cliff over this. A reasonable CO2 Reg is probably going to help our FUEL CHEM considerably because we can drop CO2 for a typical unit we will drop them 5% or 6% in CO2 production and that may have real financial benefits now especially over the next decade or two.

So I don't -- what you won't have is a lot of new coal units being built in the United States, but you can't afford to replace all the coal units either and I think the effort will be to make them more efficient. So in the US, I expect to see some uptick. In China and India and elsewhere, I don't really see carbon legislation in any way like we are talking about here in the US. So I do think the Chinese are very mindful of efficiency. They like using less coal and they like the added benefit of less CO2. But I don't think they are going to put a tax on their society around CO2. So right now from what we are looking at I think it will be a modest uptick, Rick.

Okay, all right, thank you for taking my questions.

Always, sir.

Rich Wesolowski, Sidoti.

Good morning, how's it going? Could you confirm just from the new FUEL CHEM unit list potential sales of both the existing and the demo units in the mid-$40 million range? That is what I am coming to -- if everything is commercial.

Right, what we have said on all of those roughly 26 and five plus adding a few, I think right now for a run rate on our FUEL CHEM units you are looking in the $35 million to $40 million range right now. Now if we -- if things get back to normal, I think it will be -- you will see that nudge -- normal in their normal load for those units, that you will get -- you will see that get back up to that $40 millionish range.

Right, thinking more for 2010 than '09.

Oh, hell yes. As the thing picks up and probably this summer you will see that begin to nudge up. And we are going to be adding some other units this year, so FUEL CHEM even in this economic situation, a lot of customers are very interested in what we can bring to the table especially. So right now it's in that $35 million to $40 million range. Probably I would tell you that I would look at it for '09 to be in that $37 million range right now. But these same units in a more normal run rate are just over $40 million.

John, on the sales process, the company has announced about half the number of demos during the past 12 months as they had the 12 month's prior. Could you broadly discuss the sales process for FUEL CHEM and specifically how you aim to overcome that hurdle that the costs and the benefits of the program accrued at different divisions within a utility?

Well, we are working on that and it's different with each utility. If the utility is unregulated, they don't have those kinds of issues. In China they don't have those kinds of issues. In the US for regulated customers, you do have those. What we are seeing now is a lot more utility buyers, utility fuel buyers, that portion of the company be willing to step up and go for putting the cost of the FUEL CHEM into the price of fuel. Because the major benefit or one of the key benefits you get is reduced fuel costs, which goes to their customer.

So there is a really good logic for it. They're looking for ways -- in this financial crisis they're looking for every way they can to reduce cost and it's actually getting a lot stronger play and it's still a hard sell. But our real way around that right now, Rick, is that we are selling not only to the utility power plant manager and to the guy who runs power generation, but also to the fuel procurement guys. And that play is falling on some pretty fertile ears right now.

Is that something new or is that something you had done all along?

We have been trying it all along. It is being more receptably received now.

Okay, that helps. Can you confirm if there's any departure from the expectation over time of a low 40% margin for APC and a high 40% margin for FUEL CHEM?

I think that expectation is going to be for a mid-40% margin for APC and a 50% margin for FUEL CHEM. There is nothing fundamental about our business, but our depreciation costs, you know, went up a couple hundred thousand dollars in the first quarter this year over last year because of the new demos that are out there. But yet our total revenues were down, so that has a dilutive impact. That's just one example of a dilutive impact on the margins, but you get back to a normal run rate and those are down in the noise.

So as I look at the margins for ACT preacquisition, on average they look more like what you reported this quarter than the higher margins that you typically report. Do you aim to bring those margins somehow up to what FUEL CHEM normally reports in APC -- excuse me -- what Fuel Tech normally reports in APC?

And you said ACT. Did you mean that?

Right. I was saying on average they did high 20s, 30% or so as outlined in the 8-K. Are those margins going to come up to where you are or is that going to water down?

There may be some misunderstood -- their gross margins for their actual projects were in the low 40s. So they are right in our --

What you saw in the 8-K and what John is talking about is when we look at margins, although we report everything of course in our financials, when we look at margins you will hear me use the term in these calls of base product because the ACT work many times has a very large installation cost associated with it. And like us, their policy was to pass through those installation costs, which were subcontracted out at a very nominal high single-digit type markup.

So when we look at the base product revenue between the two companies, the gross margins are comparable and in that 43% to 44% range. And we expect that to be sustainable over time. Right now the lack of order flow is not due to the fact that the products are priced too high. It's due to other market conditions out there. But you are right. When you take a look at the overall margin, when you throw in that installation work, you make decent money on it for not doing a lot of work other than managing a project. But it will be suppressive and dilutive to those gross margins. We will take that work all day because it is incoming cash, but when we try to give you margin analyses, we always try to do it on a base product perspective.

That's a lot of sense.

But as an overall sector, I don't think -- I think we see it in the 40s range when you roll them all together. All of that together and across whether it's burners, which have a bit more of an installation kinds of issue than say a HERT system or over fire air. You've got to tune those. But if you take a look at your overall gross margins for our Air Pollution Control product line, our old one, the new stuff we brought over, it's still in the 40s.

Okay, lastly in China you mentioned ULTRAs on new units are your best opportunity which would imply that they are choosing to equip the new units with SCRs. Can you give us an idea of why you are so confident then that they will retrofit the existing units with SNCRs when 2011 rolls around?

Two reasons. One, a lot of the new units that we are bidding on right now, the SCRs are typically those built near and around their major cities. They want to put maximum control on those as evidenced by an award last year where we put SNCRs on brand-new units in Mongolia, in inner Mongolia, where they are not near major industrial areas. They are going with SNCR technology.

Linda has worked with the Chinese government in helping them shape their regulations to achieve the results they need and the places they need lead us to believe that SNCR and low NOx burners and over fire air will be the technology of choice for retrofits on most units. A lot of those Chinese units are built on very small footprints near towns and villages. There's not a lot of room to put a big SCR on those small sites. So you are very limited in a retrofit being able to fit in what you can. And our new HERT SNCR program coupled with low-NOx burners and over fire air are getting that combo like 60% reductions, which is way more than what the Chinese have indicated that they are going to want out of those more rural type locations. That gives us pretty high confidence that we are going to be looking at a real enhanced market here in just a couple years.

I appreciate all the detail. Thanks.

Jeff Osborne, Thomas Weisel Partners.

Yes, good morning. John, I was just wondering on the APC side, you seemed pretty confident that you would get some orders over the next couple of months and how do you just kind of ascertain whether there will be an installation in the fall outage period or the spring outage period? Because that seems to be really the swing factor on whether you folks would show year-over-year revenue growth this year or not.

Jeff, good question. The ones we are going to sign, most of the ones we will be signing in the next month or two are going to be for fall outages just because of the timing. Utilities don't typically these days sign that far ahead for a spring outage. The question is going to be really the ones we sign in June, July, August, because we are giving them a 16-week minimum leadtime, so the timeline they have to contract is really in that kind of time frame.

Now so anything you see in the next -- we're going to tell you by the way, Jeff, we are going to tell you that if this is for a fall outage, this is for a spring outage, we're going to try to add that in the release so you guys are going to be able to know and you know all of our technologies on the APC side still follow that bell curve in the first third of the time 20%, in the middle third 60%, and then the final third 20% kind of revenue recognition pattern. So we are going to try to give you guys as much heads-up as we know so you will be able to watch and be able to see which ones are which.

So obviously it sounds like the discussion pace is heating up for you folks, but just do you get the sense from an overall perspective that the capital budgets are freeing up relative to maybe two or four months ago?

We look at that and try to handicap each one of those when we go through our sales meetings and we go through those every two weeks on every, every potential opportunity that we are talking with on clients. And one of the things that's reported on each time is is there money, the money is allocated for this or they still have to go to the Board? Or in the case of one of our projects, the financing was contingent upon funds that turned out to be in the Bernie Madoff situation. So we took that project off of our most likely list right now.

So we look at funding for every one of those as best we can tell before they go into our probability of being let this year.

Excellent and then just two more quick ones here. The $4.6 million order out of China, I believe it ships in the fourth quarter, but when should we think about revenue recognition there? Would the pace of rev rec be any slower than it is domestically just given that it's China and its your first major installation there?

Two units will be this fall and we will get total revenue recognition on two units, which will probably be just over half of that total because the engineering will be done. The other two units are in the spring of 2010, and that's when the other half of that will be.

Got you. And then just for John Graham, the aggregate dollar of SG&A, is it right to think that 1Q just on a dollar basis is probably the peak for the year?

No, because you will probably see -- normally speaking I'd say yes because we have -- we acquired ACT so early in January for all intents and purposes they were a full quarter. You will see an anomalous charge one time in there for personnel and other items in the second quarter. I do not think that to be certainly $0.01 or less per share for that based upon earned estimates, but I think you can say the second quarter should be your peak for the year.

Excellent, thanks for the help.

Sunil Sibal, Avondale.

Good morning, guys. Actually this is Sunil Sibal from Natixis. So I just wanted to go back to your contracting activity in China and see if you guys could remind us, you know, in terms of the magnitude of the project on which you have currently build out and, you know, when can we see (inaudible) on those bids?

China, everything takes longer. We knew we were selected on the one we just announced last year. We have a number of bids that are in or are being submitted and if they were on a hard-core timeline here then we would have great expectations this year. You are going to see other wins in China this year. The timing of those on the APC side are going to be spread out through the year. They are not nearly so easy to call as to the seasonality. Often times because getting the contract just takes you forever.

I mean this past one we signed, we just got it signed and our design drawings are due this week, next week. So it's one of those you wait till the last minute to sign it and then you've got to have a flurry of activity to catch up with the projects. That's just the nature of signings and contracts in China. I expect to see a pretty good year this year. So expect to see other awards, but they are not going to be lumped in any given quarter just because of the way China contracting is done.

But the ones we are looking at that we're counting on right now are all ones where they've said they want to get this under contract this year. So we are pretty confident that we are going to win a good number.

Yes, and just in terms of magnitude, those will be in the few million dollar ranges or you are even bidding for much bigger size contracts?

The ones in the near term, Sunil, are probably more in the $2 million to $4 million contract range for contract right now. And I suspect that that's what we'll see this year. We do have some opportunities for some much larger ones but whether we see those this year or next is the real uncertain. But I would say most of the ones in China are going to be in that $2 million to $4 million to $6 million range this year.

Okay, that's very helpful. And I just wanted to also go back to the ACT acquisition that (inaudible). So the total revenues of ACT in 2008 more to the tune of like $48 million and I know you guys talked about thinking about that in terms of two components. One is the base revenue and the other is more of a pass-through revenue. I was wondering if you could give us a sense of how much of this was kind of the base revenue in which you made good margins and the other part?

What you find with -- you are talking about the revenues that we recognized in the first quarter of '09 from the ACT-acquired backlog.

Or was that your question? I thought you were asking for last year what their overall margins.

Right, actually when I look at the 8-K filing last year in 2008, they had a total revenue of close to $48 million and then their operating income was $2.8 million. So I was curious, you know, out of that $48 million how much is the base revenue kind of stream on which you made good margins? I assume that out of that $48 million you have a certain component which is just a pass-through revenue stream.

Basically here's the rule of thumb as you look at the '08 numbers that were in the 8-K. Of the $47.6 million of total revenue reported upwards of $10 million would have been related to low-margin installation work. When you backed all of that out, the margins were a little more representative of their overall base business. There's always going to be, especially on a company with really only two product lines -- combustion modification and SNCRs as they were -- there's always going to be some product mix in there. But when we acquired them and looked at base product revenue relative to our overall APC segment margins, we feel that they are going to have a neutral impact on our consolidated segment margins, excluding any installation work.

Okay, so all but $48 million or take down $10 million low-margin works, so that's previously $38 million or two or so, right, on the good margin work? Is that what I should think about it? Or am I missing something here?

No. The $38 million of that $47 million would be appropriate to think of as non-installation revenues.

And out of that, the operating income was $2.8 million, right?

Yes.

So that's a margin of close to 6%, 7% operating margin.

That is what we are charging today for that. ACT historically may have passed that through at something more breakeven. Our policy as a company is to try to get 8% to 12%, somewhere in that range for pass-through work because there are some costs associated with this, but we do not have an exact number with respect to the margins on that. What we've seen based upon a representative sample of installation work is something much lower than the even low margins we charge for that. So basically I would take out about $10 million from both the revenue and the cost line for their installation work to give you a fair number.

Okay, that's very helpful. Thanks, guys.

Dan Mannes, Avondale.

Good morning, everybody. A couple quick follow-up questions. First, on the FUEL CHEM segment, you noted that one of your customers have switched over to Central App Coal given the greater availability. Just two questions on that. First, do you see other current customers of yours potentially switching to Central App, number one? And that being a threat either to usage or installations? Or two, I guess is that sort of -- does that indicate maybe a market that FUEL CHEM is not really that appropriate for, i.e. plants that are burning design coal, which is most likely Eastern Central Appalachian coal?

You really have two things going on. A, we don't see a fundamental shift that is going to impact. We take units off because this was list is for you all, right? It is good for a quarter. It is for your benefit, not for us, and even if we leave the equipment in there and getting ready, if we don't think you are going to get revenues from a customer in a quarter, then we will be taking them off and adding them on to try to give you guys better visibility for at least the next quarter.

The -- what you really have is where you have got an opportunity as the customers that we took off there, where they burn coal that's closer to their design and their only running at 50% load, so the heat in the boiler is way down. And they have less SoC problems. They have less slag problems and they are just not using us right now. We made the decision to take them off that list as units --.

You know, I saw where I think one of the analysts was it Oppenheimer or one of them upgraded the coal stocks because they see coal prices rising this year. As that turns around, you'll see other folks going back to Powder River Basin or eastern or Illinois Basin and even Appalachian coals that are higher sulfur or more problematic. That's part of it. The other part is running hard.

If you are running at half power, you can burn a lot of stuff because the heat in the boiler is way down. The temperatures are way down. They just don't slag as much, so the real comfort here is not so much the fuel switch, but its units that are running half to one-third load for voltage support and they're just not needing us right now. But we know they will.

Got it. Switching topics real quickly over to the APC side, you know you've given us a lot of detail about an order pickup especially in the back half of this year. It sounds like primarily domestic. Can you talk at all about the current dynamics for the domestic market? You know, CAIR was reinstated but there was a lot of compliance activity put in place well before CAIR was actually vacated originally and then reinstated. And given both lower overall coal usage and number two, the risks of a new standard being completely different, how big is the market right now for people who are trying to comply with CAIR rather than waiting for the next rule?

Well, it's a mix and no pat answer is going to be exactly right in this because people are in a whole broad array of stuff. While there are underlying laws here, the Clean Air Act, you know utilities when they are slashing budgets, they are cutting everything that is not absolutely required right now by law for some reason. And for some of them even in 2009, they are looking because they don't know whether there's going to be a cap and trade after 2009 do they keep their powder dry in the first half of the year and count on this year being able to buy real cheap credits when they have to ante up, but taking a look see at what they think the regs are going to be in the future?

Most all people out there believe that the regs are only going to get more restrictive, not less, and they are looking at -- they can't wait until the last minute and try to load up their capital budgets all at one time. So that is why you see even in the face of regulatory uncertainty people will start doing things like low-NOx burners, over fire air, and some sort of SNCR, even those that are planning on later upgrading with a catalyst addition to some sort of advanced SCR CASCADE kind of arrangement.

And that's where you -- it's all in that play and you really have to get close to each client and they are all in a little bit different state of being on this. Right now with the low load, they are running the units that have less controls on them to the best of their ability to dispatch those less than units that have SCRs on them or -- and the SCR units though are really hurting because when they are running at partial load, they are off-line. So that's not really helping them in their NOx control.

So utilities right now in their air pollution are really struggling because they didn't anticipate loads this low when they looked at their environmental compliance planning and they are seeing that because they can't run the SCR units full out as much, they are planning to deploy NOx controls on units that they might not otherwise have controlled as much right now. Especially if the cost of compliance is relatively low and that is what we bring to the cable.

That's a complicated answer, but utilities and customers are all over the map on this particular issue.

Right and just one last thing because you mentioned CASCADE a couple times. I know you had pretty good success in the [task] of CASCADE up in New York. Can you talk a little bit about what a revenue per unit would be on the CASCADE and what the margin structure would be just given that so much of the unit is going to be stuff that you guys wouldn't supply, specifically the layer catalyst?

You have to pick a size unit. I will take a like a 400 megawatt unit where an SCR would cost north of $100 million or in that range if not more. You could probably do one of these for $20 million some odd all in. Now of that you might have I don't know $1 million worth of catalysts. You're going to have several millions of dollars worth of low-NOx burners, over fire air, SNCR. Then you've got a couple of layers of catalysts and the construction around that. You've got ammonia injection grid. And you've got a Graduated Straightening Grid. All of those layered components are now what make up what we are calling an advanced SCR design, which is a follow-on to our old NOxOUT CASCADE that can get you down to levels commensurate with the very best SCRs running at full power can.

And you can stage those in how you operate the unit and you can stage that deployment. But I think the overall margins on those projects are probably going to be in the same range that our overall projects are going to be. Now we are going to team in all likelihood to do that with some major engineer constructor to do the construction management on those. Because those will take millions of dollars worth of steel because you are going to have to expand the ductwork and some extra supports for that catalyst. You don't have to build a whole new structure that is as substantial as an SCR so that is where you are saving a lot of money.

But we are still going to want to have a partner with us and how much our scope is and theirs probably is determined whether we are prime, which we will be on a number, or whether a large AE firm is going to be prime and will be the sub. And it can go either way according to what the client wants and what we believe is the best fit. But we don't expect a serious erosion on the margins for the scope of work that we will be providing. The overall project margins will be less because there is just less margin in construction work and in the catalyst itself and in some of the startup stuff.

So (multiple speakers) $12 million total cost on the plant, I mean how much of that is -- are things that you would provide and get your 50% margin on versus how much is construction and other stuff is I guess what I am asking? I am trying to compare this to the (multiple speakers)

Those will all be very specific, but I think our portion would be about two-thirds.

Okay, great. Thank you.

(Operator Instructions) A follow-up from John Quealy, Canaccord Adams.

John, very quickly just in terms of expectations for the APC business moving through the year, what are you and your customers thinking about right now on clarity on CAIR? Obviously there's a lot of chatter on mechanical technology for intrastate trading, but what is the timelines that you are looking for?

John, I think there's two likely paths and it's an open question on our customers on which path the country decides to take. If it is left to EPA to fix CAIR in accordance with what the court said, and they would do that in early 2010 absent legislation, then I suspect you will not see cap and trade at all but you'll see a per unit control that would also probably ratchet it down to well below the 0.15 kind of number in CAIR -- or pounds per million, NOx per million -- pounds of NOx per million BTU. I would suspect that would move closer to the 0.1.

There is considerable interest right now in Congress especially by Senator Carper and others who have recognized this problem and they would like to keep the concept of cap and trade especially as people are wanting to talk about cap and trade it for CO2 and there is legislation being drafted that will they call it the 3P, which will be SOx, NOx, and Mercury, and for -- and that -- and what they are talking about NOx and SOx would be cap and trade probably again though at a lower level. My guess is around 0.1 overall. And then Mercury would be a point source controlled or at least a site controlled reduction.

So I think it will take one of those two paths and today you could probably toss a coin and get about as good odds as which way those two go, John. And the timing of the legislation will need to be done sometime this year. And I would suspect some time summer or later and the EPA absent legislation, you will probably - -I think they have already announced that said that they are going to come out with their proposed fix on CAIR in early 2010.

Earlier in the call you mentioned a lot of utilities wanting to move ahead of that, giving visibility on CapEx and other considerations for these projects. If in fact we get some sort of resolution in the next nine to 12 months, if you will, on the outside for this issue, do you think there is an incremental batch of utilities that are just sitting on their hands right now waiting for regulatory and financial markets to settle down? Or do you think you are talking to everyone you possibly can and it's just a matter of when they decide to pull the trigger?

No, I think it's the former. In addition to the ones we are talking to, we know a number of folks who are sitting there and if they knew that there was going to be cap and trade next year, they would deploy right now to build up credit so they could sell those. They would move quicker to fix some of the units that they know they have to fix.

So there is in addition to the ones we are talking to another group of folks who are waiting on the sidelines to see which way that frog jumps off that lily pad and then they are going to make a call and if it's for a cap and trade, I think you will see a move more quickly on some of the units to build up credits.

Thanks, John.

This concludes the question-and-answer session. I would like to turn the call back over to Mr. John Norris, CEO.

Thank you, Jim, and thank you, everybody, for participating in the call. We continue to believe this is going to be a good year at the end of the year for Fuel Tech and we look forward to much more pleasant calls with results, that is, in the future. Thank you very much. Have a good day. Goodbye.

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