Fuel Tech Inc (FTEK) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2009 Fuel Tech, Incorporated earnings conference call. My name is Francine and I will be your coordinator for 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 this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Ms. Tracy Krumme, Vice President, Investor Relations and Corporate Communications. Please proceed.

Thank you, Francine. Good morning, everyone and thank you for participating on today's conference call to discuss our second-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 second quarter of this year include revenues of $18.9 million, up 1% from the $18.8 million last year. Net income for the quarter was a loss of $278,000, or $0.01 a share, versus a profit of $447,000, or $0.02 a share last year.

Included in the results for the second quarter of this year is a one-time expense of $550,000 related to employee severance costs from the workforce reduction we did in May. With the actions taken in this reduction, plus actions we took earlier as the world economic crisis became evident, we eliminated over $2 million in annual personnel and related costs. We should begin to see the results of this reduction in the second half of the year. Note that if you exclude the effects of this one-time charge of $550,000 that our net quarterly results would've been a profit of about $56,000.

In a few minutes, our Chief Financial Officer, 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. John will also cover our balance sheet in detail, but it remains exceptionally strong with very little debt and with a strong and growing cash balance. Of note, our net cash provided by operating activities for the first six months of this year is $4.7 million, up 42% from $3.3 million during the first half of last year.

Now let's talk about the business that is producing that cash. 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 productlines -- a specialty chemical injection business for efficiency improvements that we call FUEL CHEM and our Air Pollution Control, or APC, capital projects productlines. Let's take a look at the results in both areas.

Our APC business sector saw revenues of $9.2 million, a decrease of 12% versus the $10.5 million in the second quarter of last year. This reduction is in the domestic APC area as our foreign APC revenues are actually up 19% in the quarter versus last year. In fact, of the $15.6 million in APC contracts we have announced year-to-date this year, two-thirds of that total is for non-US projects.

The primary weak area in our business results is our domestic APC sales. And that reflects the effects of deferred capital spending by electric utilities and industrial customers as the combination of reduced electrical demand, tight credit, weak utility cash flows and an ongoing uncertainty over the ultimate outcome of the Clean Air Interstate Rule caused utilities and major industrials to defer installation of NOx pollution control equipment until 2010 or beyond.

A good indication of the dramatic effect of the combination of these factors is the value of NOx credits in the market. Shortly after the court reinstated CAIR in late December of 2008, the price of NOx credits in the market went from about $1500 a to $6,000 a ton. Then in March, the EPA told utilities that in order to fix CAIR to resolve the objections of the court that there would not likely be a cap and trade approach taken when they revised CAIR early in 2010.

While knowing that NOx credits may be worthless after this year and with a depressed economy and a very cool summer resulting in reduced electrical generation and thus reduced NOx emissions, utilities are using up or selling their bank of NOx credits and the price in the market has plummeted. It is now down around $600 a ton.

To put that in perspective, a large selective catalytic reduction, or SCR system, would have NOx reduction costs of over $3000 a ton, while even our very cost-effective technologies result in cost of $1000 to $1500 per time range. It is thus much cheaper for 2009 emissions to buy credits than to actually reduce NOx. But those days are coming to an end.

Utilities do realize that CAIR will be revised early in 2010 and it will be in a much stricter way, so they must start to deploy NOx controls again. We are seeing a significant uptick in bids for systems to be installed in the spring of 2010 and that should be reflected in contract awards over the next several months. The timing of those potential awards to us will be crucial to our full-year results this year in the APC sector.

Gross margins in the APC sector were 49% in the second quarter versus 46% in the same quarter last year. This is a bit higher than typical and reflects a partial reversal of the charge we took in the first quarter as we settled a dispute with a contractor about a domestic APC contract. Still, the solid gross margins show that we have been able to maintain the quality of our contracts even in this tight domestic market.

Internationally, things are much brighter in the APC segment. In Europe, we are off to the strongest start since I have been here at Fuel Tech. The areas showing the best potential for us in Europe are in the UK and in Eastern Europe. In China, the business environment is even better, especially in Guangzhou City and Guangdong Province where new NOx regulations were announced in May in the city and June were province-wide respectively that require up to 80% NOx reduction from utilities and major industrials. We are bidding on a lot of work there right now and expect the awards to begin in the next month or two. For the rest of this year and the first part of next year, we expect the primary NOx reduction focus to be in that province, with the rest of the nation being affected when national regulations come out in preparation for the twelfth five-year plan, which begins January 1 of 2011. Those rates should be out either late this year or early next.

The recent bids in China are for the full spectrum of our NOx control technologies, including our recently acquired expertise in low NOx burners, overfire air, high energy reagent technology and advanced selective catalytic reduction systems, which is beyond our typical CASCADE systems, in addition to new designs for our traditional ULTRA systems.

On the FUEL CHEM side of the business, our second-quarter revenues were $9.7 million, up 17% from the $8.3 million last year. This is the best second quarter and the best first-half FUEL CHEM revenues in our corporate history. Given that a lot of our clients are running their units at less than full power due to the cool weather and reduced industrial loads, revenues from most of our operational units are actually down from last year. When our client units run at only partial power then they use less and sometimes a lot less of our FUEL CHEM injections. The large revenue increase is due to having more operational units and due to the impact of some very large demonstration programs that ran in the quarter.

Now this latter point is clearly reflected in the gross margins for the segment, which were 42% for the quarter, down from 50% in the second quarter of last year. The gross margins from just our operational units are a good bit higher, just north of 45%, but still down a few percentage points from traditional levels, which are in the low 50% range as we have some fixed charges at each site that must be borne by the lower revenue base.

Now the really good news in all this is that we have about $1.3 million in unrecognized risk share that will come to us later this year as pure profit if we are successful in these demonstrations and they go commercial.

Even with the extreme economic conditions in our market, we have had great success in winning new business in our FUEL CHEM business segment. We have announced nine new FUEL CHEM contract awards since our last earnings call in May, many of which were commercial contracts without a demo phase. As these units come online and as our current customers use more as the economy begins to recover, we think we are poised for some very nice results in the future in this segment.

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 revenues for the second quarter ended June 30 were $18.9 million, a slight increase over the second quarter of 2008. Even with a slightly higher revenue level than last year, the incremental costs associated with our three recent acquisitions, including the amortization of identifiable intangible assets, coupled with the one-time charge associated with a workforce reduction undertaken in May 2009, drove the quarterly bottom line to a net loss of $278,000, or a negative $0.01 per diluted share, compared with net income of $447,000, or $0.02 per diluted share in the same year-ago quarter.

Now let's talk about each of the business segments a little bit more in depth. In the FUEL CHEM segment, second-quarter FUEL CHEM segment revenues were $9.7 million, as John mentioned, the highest amount ever recorded for a second quarter and the second-highest quarter in Fuel Tech's history. This amount included $8.8 million from coal units, a 20% increase versus the coal unit revenue reported in the second quarter of 2008. Quarterly revenues from non-coal-fired units of $910,000 were down 7% versus the prior year quarter, primarily due to a general slowdown in demand. Overall FUEL CHEM segment revenues increased 17% versus the second quarter of 2008, driven primarily by additional customer units.

Despite the economic recession, we continue to have a very strong market penetration for new FUEL CHEM demonstrations both in the US and abroad. As John mentioned, since our first-quarter release in May, we have announced nine additional FUEL CHEM orders and many of them will be going straight into commercial status, thus avoiding the traditional breakeven multi-month demonstration phase. This will also avoid some of the gross margin dilution normally associated with a new order that involves a demonstration period.

Quarterly gross margins for the FUEL CHEM segment declined from 49.8% in the second quarter of 2008 to 41.6% in the current quarter, the joint result of larger demonstration programs underway and a net decline in year-over-year revenue in certain larger customer sites, coupled with the effect of the continuation of fixed expenses at these sites necessary to maintain whenever a unit is pumping chemical.

Excluding the impact of demonstration programs, the base FUEL CHEM business generated a gross margin of approximately 45%. While this is down slightly from historical levels, it is primarily due to the dilutive impact of fixed operating costs such as personnel and 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 indicative of any other negative underlying trend.

At present, we have 11 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 into commercial status once the program's value has been demonstrated.

From an operational standpoint, we continue to keep an appropriate supply of FUEL CHEM systems ready to deploy in the United States with additional units stationed in China so as to be able to install them as quickly as possible upon the receipt of new orders.

Let's move on to the Air Pollution Control segment. Second-quarter 2009 revenues for the APC segment were $9.2 million, a decrease from the second quarter of last year, which saw APC revenues of $10.5 million. Our APC backlog at the end of the second quarter was $13.6 million, down about $700,000 from the end of the first quarter. While near-term revenue recognition in this segment is suppressed, the signs of recovery remain strong as indicated by the ever-increasing bid activity, especially in the US and China. We expect a much stronger level of contract awards the remainder of the year.

Quarterly segment gross margins were 48.9% compared with 46% a year ago. Recall that we booked an accrual in the first quarter related to a vendor dispute on one of our APC contracts. The resolution of this matter in the second quarter, which led to a reduction in the accrual, had a modest accretive impact on the second-quarter APC segment gross margins. Even absent this item, the gross margins were still on par with the prior year and reflect the strength of the underlying core business in the APC segment.

On a consolidated basis, Company gross margin percentages for the second quarter 2009 were 45.2%, a decrease from the 47.7% reported in the second quarter of 2008. Quarterly SG&A expenses, excluding R&D expenditures, were $8.9 million, an increase of $1.5 million versus the second quarter of 2008. Of this increase, approximately $1.1 million is due to the net incremental SG&A costs associated with the October 2008 acquisition of Tackticks and FlowTack and the January 2009 acquisition of Advanced Combustion Technology and includes the amortization of identifiable intangible assets of $396,000.

Also contributing to the year-over-year increase was a one-time employee expense of approximately $550,000 related to the previously announced reduction in workforce the Company undertook during the second quarter of 2009. For modeling purposes, the June 30 year-to-date amortization expense related to the identifiable intangible assets from these acquisitions was $743,000 and the year-to-date FAS 123(R) stock-based compensation expense was $3.2 million.

Quarterly R&D expenditures were $77,000 and were centered upon the development and testing of technologies with near-term market applications in both boiler optimization and Air Pollution Control arenas. The quarter-over-quarter decline versus 2Q 2008 is due to the Company moderating its near-term R&D expenditures in the wake of the general economic downturn. However, we do remain focused in our approach and the pursuit of commercial applications for our technologies outside of traditional markets and 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 the ones we feel are commercially viable.

The second-quarter 2009 operating loss of $409,000 was below the $636,000 operating income reported in the prior-year quarter. The one-time charge for the workforce reduction and a very large FUEL CHEM demonstration program and the additional expenses related to the recent acquisitions, including the incremental amortization costs, were the primary drivers. We expect third-quarter operating results to be somewhat suppressed due to the below-average size of the APC backlog and the timing of those contracts available to be worked off prior to September 30, but modestly offset by the personnel cost savings associated with the workforce reduction. As we look to the rest of the year, we do, however, expect a much stronger fourth quarter, especially as the current bid activity converts to contracts in the APC segment.

The year-over-year decline in quarterly interest income is due to the reduced cash balance available for investment as we spent over $26 million for the acquisition of three strong companies in the fourth quarter of 2008 and early 2009. The change in other income expense is driven by foreign exchange translation movement.

Due to the mix of forecasted domestic and international revenue and income levels presumed for the full year 2009, we have set the full-year 2009 tax provision rate at 40% and will adjust quarterly as necessary. Net income for the quarter was a loss of $278,000, or $0.01 per diluted share. Excluding the effect of the one-time charge for the workforce reduction, quarterly earnings would have been slightly positive.

Even after the cash outlays for the three acquisitions and funding the purchase of a new corporate headquarters building, our balance sheet remains very strong. Cash, including restricted cash, has increased to about $12 million and other than our $2.2 million in debt in China related to the startup of the Beijing Fuel Tech office, we have no debt on our balance sheet. Working capital at quarter-end was a strong $26.4 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.

A new item this quarter is the restricted cash of $5.5 million that is present on the June 30 balance sheet. This was related to the switching of domestic credit facilities from Wachovia to JPMorgan Chase at June 30. Until we are able to get all of our outstanding letters of credit and bank guarantees moved from Wachovia to Chase, we are required to cash collateralize them with Wachovia and thus, we have to record the cash as restricted. Now that was the status as of June 30.

As of today, the majority of these instruments have been moved to Chase and a bulk of the cash related to those instruments that was put up as collateral is no longer restricted and is now free to be used for general working capital purposes. This amount should be greatly reduced or eliminated by September 30.

An accrual was made in current liabilities of approximately $1.5 million related to the Advanced Combustion Technology net working capital amount calculation. The payment of these funds was made on July 23, 2009. That was the final true-up of the net working capital per the asset purchase agreement and we have six months to make that calculation complete. Any future payments to ACT will be solely related to the three-year earnout calculation as outlined in the asset purchase agreement. No adjustment was made as of June 30 to the $2.3 million contingent liability recorded in the first quarter of 2009 per FAS 141(R) related to the fair value or present value of the probable ACT earnout payment as of the date of acquisition. This amount remains properly segregated between short and long-term liabilities.

As just mentioned, on June 30, 2009, Fuel Tech entered into a $25 million revolving credit facility with JPMorgan Chase. The facility has a term of two years through June 30, 2011, is unsecured, bears interest at a rate of LIBOR plus a spread range of between 250 and 300 basis points based upon a formula tied to the company's leverage ratio and has our Italian subsidiary as the sole guarantor. Fuel Tech can use this facility for cash advances and standby letters of credit. There are really no restrictions on the funds; although there are annual buckets put in place for CapEx and acquisitions as further detailed in the 8-K we filed with the agreement.

As of June 30, 2009, there were no outstanding borrowings on the facility. The credit agreement and the related note were included in their entirety as exhibits with our 8-K filed with the SEC on July 2. Our prior facility with Wachovia Bank was terminated on June 30. Our Chinese facility was in effect renewed with Chase with similar terms as the expiring line except with an increase in the PBOC-related rate to 120% of the People's Bank of China [published] rate.

Year-to-date operating cash flows were $4.7 million, driven by some pretty good solid working capital management. Cash used in investing activities of $20.9 million was primarily for the ACT transaction in January of this year. Maintenance CapEx will remain below 2% and the majority of all CapEx year-to-date and expected this year will be to support and enhance the operations of the FUEL CHEM technology segment. Now I would like to turn the call back over to John Norris.

Thanks, John. Before we open the call up for questions, let me address the issue of guidance for the remainder of the year. At the 2008 end-of-year earnings call back at the first of March, we said that we expected to beat 2008 results this year, but gave no other specifics. Currently, we are running only about $3 million below last year in revenues, but much further behind in profits after our weak first-quarter results. Now whether we do better than last year in revenues and profits depends largely on the timing of wins in the domestic APC business segment. And we will know the answer to that question over the next two and a half to three months. You will see those announcements as they happen, so you can track our progress at the same time.

At this point, our chances of exceeding last year's revenue look very reasonable, but exceeding 2008 earnings looks more problematic. Given the uncertainty of the timing of awards in the APC segment, we are not going to provide any quantitative guidance at this time and we will see what unfolds over the next two and a half to three months in those APC contract awards. Now operator, I would like to turn the call back to you and open it up for questions.

(Operator Instructions). Rick Hoss, Roth Capital Partners.

Good morning, gentlemen. Just a little bit more detail on the discussion about point source requirements. Now this implies that utilities are not allowing overcompliance with one unit and vice versa and undercompliance with another. So how would this affect the NOx credit markets assuming that there will be NOx credit markets in 2010, '11 and beyond?

Two answers to that, Rick. First, there has been no specifics from the EPA, no detailed specifics, but a couple of the items that they have to address per the court order and the court objections. First, the court objected to cap and trade at all for NOx control. The issue was you could have some plant that is upstream of, say, a major city that is having problems with ozone compliance and that plant might not actually control, but buy credits and thus, the city doesn't get any better even though everybody is in compliance. So the court had a real problem and actually rejected CAIR back last July mainly over the whole issue of cap and trade.

The court also had problems with the EPA's CAIR rule in that they said that waiting until 2015 to get down to 0.125, if that was low enough, was too late. So they thought the regs should be tighter sooner.

You take a look at those kinds of issues with the court and what the EPA said to the utilities was that to comply with the court objections, it is not likely that, unless there is legislation, it is not likely that there will be a cap and trade. So there will be no such thing as NOx credits as we know them today once that rule goes into effect and is effective.

The question you run into then, if there is no cap and trade, will it be on a site-specific basis that you have to control down to or will it be unit-specific. If it is site-specific and you have five units, you might overcontrol on two or three of the units and undercontrol on the others and be okay on a sites basis. If it is unit-specific, then that is broader.

Utilities would definitely like to keep some sort of cap and trade in NOx. It is much more cost-effective. They would have to deploy a lot. They are resigned that if there was any way to keep cap and trade, it is probably going to have to be legislation like Senator Carper is working on.

If they were to get legislation and the legislative discussions, they are talking about, in those discussions in Congress, about much lower levels, 0.125 or most of the discussion is around 0.10 pounds of NOx per million BTU rate. But Carper would allow cap and trade.

So there is a lot up in the air, but the EPA has basically told utilities don't get used to these credits because certainly the new rule will be in effect not later than 2011 I believe. So you may have credits next year, who knows. But certainly the plan like we had at the AEP when I was there where we were overdeployed very early, CAIR went into effect -- I mean the SIP Call went into effect May 1, 2004 and we started deploying SCRs in 2001 to build up credits and use those for years. Utilities really don't believe they have that option right now. Does that help answer your question, Rick?

Yes, I think so. So basically if they require point source reduction then the ultimate level of reduction would probably be less intensive compared to if they specified an overall reduction level, which would be --.

Rick, I don't think that is true. No, I don't think that is true. And we are guessing about what they are going to do, but the court had a problem with 0.15 pounds per million NOx per million BTU. The EPA, in their putting out with CAIR, said that wasn't enough. That's why they were going down to 0.125 in 2015. The Court said that is way too late; it ought not be later than 2013 and maybe that is not even low enough.

I think under any rule, whether it is site-specific or plant-specific or even in cap and trade, you are going to see lower rates than 0.15 pounds of NOx per million BTU. The regulations are going to get stricter and utilities -- we used to be able to get an SCR down to 0.07. Our graduated straightening grid helped St. John's River get down to 0.05. I think that is the best ever achieved. Our advanced SCR that we have now can get down to that 0.07, 0.05 range too at a much cheaper cost than SCRs. That is what utilities are having to look at. They are going to have to take NOx down and mercury down to much, much lower levels than they have had to date.

Okay. And then as far as your domestic-based APC orders for this year or -- and you can even lump in the quoting activity for domestic units, potential domestic units, these are all at this point associated with SIP Call, right?

No. Most of these units are not in SIP Call areas. Everybody that is in the CAIR region is affected and they are going to have to start getting down to lower levels. Utilities want to more levelize their capital requirements. They can't come up on a deadline, they can't take all the units down at one time to put on stuff. And so some of these installations may have to be done over several outages. So utilities have to spread this stuff out a good bit, so they are starting with the spring of 2010 to start significant deployments and most all of these are in non-SIP Call areas. They are all in the CAIR region.

Okay. So you are having utilities order product in anticipation of -- well, I shouldn't say in anticipation -- but associated with CAIR knowing full well that CAIR is most likely to be revised?

Revised in a more strict way, yes. But the levels we are being asked to take units down is much lower than we had seen in the past, but we have advanced our technologies to where we can do much better than we have ever been able to achieve in the past. And we have gone beyond a discussion phase with this in utilities. We are talking about active bids, bids that have already been put in and we are waiting on the awards. Hope we will win, but these are actual pretty major contracts that we are bidding on that would start work almost immediately for the 2010 installation. And the timing of those -- they are won in September where you get more work done this year. They are won in the middle of October, then you get less work done and you just can't judge that timing right now. That is the problem with giving you a good estimate of what our earnings might be.

Okay. And then a couple of easier ones here and I will let others ask some questions. The R&D was way down. What is the impact -- is it to a specific product?

Of what, Rick? Say again?

You talked about the R&D being down and you talked about what you were focusing on. I was wondering what is being ignored I guess in this case.

Well, we are not really ignoring in that we have a number -- we have what we think -- we are focusing on what we think the market is going to need right now. And if there are some technologies that you might be able to acquire where you don't have to do necessarily the R&D on them to do that, and some of our R&D now with our shop in Durham is actually a lot cheaper for us to develop. Those guys in Durham are awesome in developing models and using that like a wind tunnel does to develop our CFD codes in ways we had never fully appreciated. So we are getting a lot bigger bang for the buck and we are just shepherding our cash.

Okay and then last one. Headcount reduction. Can you identify a specific product or is that just kind of like a couple of people associated with APC, a couple people associated with FUEL CHEM, a couple --?

Yes, we took -- the biggest single area was our project execution area, our engineers, the field engineers that are out executing APC projects. That was the biggest single -- the work wasn't there.

Okay, thanks for taking my questions.

Graham Mattison, Lazard Capital Markets.

Good morning, guys. A question on the margins in the APC side. I know you talked about -- there was the project -- the contingency that came back during the quarter, which helped it, but how should we think about margins going forward? Are those under pressure just in general given all the changes in the economy going forward or do you think we can sort of stabilize around this sort of 45%, 46%?

Well, whether it is 45% or 43%, our traditional margins on that APC segment have been in that 43% to 46% range, right, the low to mid 40%. Right now, I think that is holding up in both domestic and in China. Our foreign stuff is coming in in that range too. Right now, we don't see pressure on that, Graham.

So there is really no reason to think that it shouldn't stay at that level going into the second half of this year and into 2010 and beyond?

Not that I know of today. No. The competitive forces can change that in a heartbeat on you, but today, no.

Got you. And then just on the FUEL CHEM side internationally, outside of -- you have had some very good traction in some other countries. What other areas do you see as potential growth markets where you could start to introduce the FUEL CHEM product beyond the ones that you are in right now? Are there other big opportunities for you?

Well, clearly, you have got to go where the fossil plants are, right and it was really encouraging for us to get into Korea with those commercial units and in Mexico. I think you will see -- I hope we will see expansion in both areas with Korea and Mexico. I think you will see some in some of the Latin American countries, Chili and some of the others that are in good economic shape and are now starting to put in some air pollution. That'll be true on the NOx side too, especially down in Chile. But on the FUEL CHEM side too. Those are the probably big ones. There is not any super new market that we are going to try to penetrate in the short term, Graham.

And then one last clarification. With the tie-up with ITOCHU going forward, how much longer does that last? Is there an update --?

Well, we have extended it -- we've extended the exclusive nature of the arrangement through the end of September and we will be discussing with ITOCHU how we want to do things going forward. The existing projects that we have done with ITOCHU that we have contracted and negotiating with them, and even ones that are being negotiated, those would continue as a team. You are not going to pull out of that arrangement for those. The question is do we continue as an exclusive arrangement with them going forward.

Got you. All right, great. I will jump back in queue. Thank you very much.

Rich Wesolowski, Sidoti & Co.

Thanks, good morning. How's it going?

Hey, Rich.

Taking a hard look at the FUEL CHEM margin, if I add back the $1.3 million that you mention in the risk share that will hopefully come in in the second half to the first-half results, I get a margin of about 45% versus 49% a year ago, and given that rate was down a little bit from '06, '07, does that reflect lower revenue per unit in the fixed costs or is there something else at play?

Yes. Nope, you got it right there. We have personnel there and if the units run and if our injections are at half of their normal amount, those same people are still there servicing it. We have amortization on our equipment that we own. If they are running at half revenue, then that is the issue. The electrical load is way down. Those of you who follow electric utilities, the industrial load is way off. And to date, I think I saw from the National Weather Service, certainly here in Chicago and in Columbus, Ohio, my other home, it is the coolest summer in recorded history or the second coolest summer in recorded history. So those are having an effect on -- and when you run a unit at half power, it is not as hot, you don't get as much slag, so you really don't -- you don't need us as much in there.

So the revenue per unit numbers that we have been working with for the large, medium and small, they still work, but they work in a normal economy?

That's exactly right. That is precisely right, Rich.

So if I assume that we get back there in 2010 and I add up all the potential revenue from the units that you have commercial and those in demonstration, I get to about $50 million. Is that reasonable?

I have not added that, but that doesn't sound outrageous right there. It would be close to that, sure. The real thing is -- as the economy comes back -- we are trying to keep winning these awards with customers and proving our worth and we believe that, as the economy recovers, there is a base of business there that is underappreciated by many at this point.

Okay. The last call -- excuse me -- this call last year, you had spoken about, for the first time, $100 million plus maybe $100 million to $150 million in new bids for Chinese APC. Are those the same crop of bids that you are hoping will come through in the second half of this year?

No, they were -- a lot of those -- around the Olympics as people were talking about reducing NOx and we expected the national regs to come out, well, when the world economy crisis hit, the Chinese put all that on hold. They are not going to hurt their businesses with NOx regs. They are sure as hell not going to hurt them with CO2 regs anytime soon. But they were not going to put out regs. So all of those went on hold for the economic crisis. Now as they are coming out of that, they have the World Fair down there this year and the Asian games down in Guangdong in 2010. These new regs are coming out and they are pretty tight and they are very quick requirements.

So these are a whole set of new bids, mostly in the Guangdong province, I think most all of the stuff. There is some stuff around in some of the other areas, a few cats and dogs, but the majority of them are down in that region. And they are very fast decisions for Chinese and very quick projects.

Okay, and then lastly, John Graham, I think the press release says $2.5 million in annual cost reduction as a result of the restructuring. Is that from the annualized first-half run rate of SG&A absent the $500,000 in restructuring?

If you take -- what that number represents is -- and it is a gross number. If you take the personnel and related costs and benefits and a little bit of travel those folks would have been doing from the workforce reduction, the singular event we did in May and a few other positions we had done prior to that since January 1, people had quit and just attrition, not fill them back in.

And even back in December, November.

Even back in a little bit before then and took those as a lump all together aggregate and then annualized the out-of-pocket cash cost savings we expect to experience, that is where I get the $2.5 million number.

Okay. So a minority of that would already have been reflected in the first half?

No, you wouldn't have gotten any of that. We paid our folks through the end of May.

From the RIF. For folks, a small portion, call it 5% to 8% may have come through the first six months from those folks that left without any sort of package back in very late fourth quarter. But the bulk of that is going to start to come through beginning July 1 as this has been the first quarter where we have had everybody absent those expenses.

So you're looking at about a $500,000 to $600,000 good event per quarter roughly.

Perfect. Thank you.

Carter Shoop, Deutsche Bank.

Good morning. I understand it's difficult to separate out the legacy Fuel Tech business from the recently acquired companies, but I was hoping to get your guys' best estimate in regards to what the sales did in the legacy business on a year-over-basis.

Yes, the -- I think John's trying to pull that up right now. Just let me say, we didn't -- we're not operating those as independent, but as an example, our SNCR business was a -- the competition was hurt out of ACT. We don't make a distinction -- we go to the client and look at the specific situation and if it the best solution is a HERT injector, then we'll use that. If the best solution is an SNCR, our typical NOxOUT-SCR injection, then we'll use that. But we'll try to have -- John, do you have --?

Yes, what I can provide you, Carter, is a high-level breakdown, not so much of the business, because right now we have, especially on the ACT, legacy ACT, we have the salesforces commingled, but I can provide you what some of those productlines would have driven for us.

The combined Tackticks FlowTack acquisition did just shy of -- did about $1.3 million first six months. And that's on a year-to-date basis. And then on a year-to-date basis for the ACT, the products that came over with that acquisition, you're looking at approximately $7.0 million, $7.5 million of revenue. For the quarter, the combined companies would have put in just a little bit north of $4 million in top-line revenue from the products and services that came with those acquisitions.

That would all be in the APC sector?

Yes.

Just to clarify, you said --.

You're talking about 40%, 45% of the revenues in that sector in the quarter.

Did you say the -- yes, just to clarify. The ACT $7.75 million, was that for the quarter or for the first six months?

The ACT productline, products and services, spare parts, whatnot, year-to-date through 6/30, brought in about $7.5 million, just a little bit less than $7.5 million of top line. Year-to-date, Tackticks FlowTack, about $1.3 million. So what is that? $8.8 million almost between the two roughly split evenly between first and second quarter.

Great, that's helpful. In regards to FUEL CHEM on a worldwide basis, you have five large and four medium sized boilers. In a year from now, what's your best estimate in regards to how many of those will transition into full paying commercial customers?

You're talking about -- on the worldwide, on the large, we've got 11 commercial, right?

I'm sorry. We are talking about demonstration projects. We have got five large --.

We have got five demonstration projects. I got you.

And four medium sized demonstration. How many are you going to transition into commercial customers?

Well, I hope they all do. I'm serious. (multiple speakers).

I understand that, but --.

We expect them all to. Let me rephrase that. We fully expect all of them to. We don't have very many that don't.

Okay. And I guess the question was, given all the puts and takes that happen in this industry, what is the likelihood of those nine being up and going?

The nine? Which -- I'm sorry.

The five large and the four medium-sized boilers that are demonstrating the product now.

There is one of those that has been -- once they go through the demonstration phase, we think they will go commercial. The installment on one of them in China is delayed until September and on one of them in the southeast part of the United States might be delayed until next spring. But once they go through that, I think that our batting record is that they will all go commercial. Carter, I have no expectation that they won't. We are not signing these up just for grins.

In regards to the engineers that were laid off as part of this most recent restructuring program, how long does it usually take to get an engineer trained and back on the staff? Is this a relatively short cycle time or does it take quite a bit of learning to get these engineers in the field deploying the technology?

Well, understand that we acquired companies that added engineers to our Company and we acquired I think and added something like 25 folks to the Company. When the economy -- right after we did the -- as we are doing these, the economy is tanking and our business, especially after the EPA told utilities they are going to revise CAIR, the floor just dropped out of the APC business in the US.

It was really -- we had to get rid of that additional amount of people that we had. We have not gone down to the bare nubbies here on our staff, Carter, so we don't expect hiring back anytime soon any of those folks. And we look at our staffing as to what we needed. We had brought on a whole lot of people and a lot of costs associated with those that we just didn't have work for them.

That's helpful. And the last question, R&D right now, you are spending about $300,000 on annualized rate. Do you think that level is going to be sufficient to drive continued innovation of the Company or do you expect to continue to expand your product offering via acquisitions.

Well, where we need to develop a new product, an example, we are having a whole new design on our ULTRA system for markets where they don't have oil and gas. It would have cost us a whole lot more to do this except now with our Durham facility, we can do that for a fraction of what we even normally could. So we are getting a lot of bang for the buck that we have got.

Some of the new technologies that we are looking at, especially around Mercury control, whether we can develop it better than somebody else has it and wants to join the team, that will be a question. If today we saw something that we needed to develop quickly to go after, we would do it. I don't have a lid on these folks that says we are not doing R&D. It's just that we are not going to spend it for basic research, not at this time.

Okay, thank you.

(Operator Instructions). We have no further questions.

Well, thank you very much, operator and thank you very much, everyone, for participating. The second half we believe is going to be exciting for us and we look forward to seeing how it unfolds. Hope you all have a great day. Bye-bye.

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