Fuel Tech Inc (FTEK) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to second quarter 2010 Fuel Tech, Incorporated earnings conference call. My name is Lomita, and I will be your conference operator today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn this presentation over to your host for today's call, Ms. Tracy Krumme, Vice President of Investor Relations and Corporate Communications. You may proceed, ma'am.

Thank you. Good morning everyone, and thank you for participating on today's conference call to discuss our second quarter results. Joining me on the call this morning is Doug Bailey, Chairman, President and Chief Executive Officer; David Collins, Senior Vice President, Treasurer, and Chief Financial Officer; and Ellen Albrecht, Vice President and Controller.

As a reminder the matters discuss 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. 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 Doug Bailey. Doug, please go ahead.

Thank you, Tracy, and good morning to everyone. We appreciate all of you joining us on this call. Our financial results for the second quarter include revenues of $18.9 million, which were virtually flat from the comparable prior year period. We reported a net loss for the quarter of $0.3 million, or a loss of $0.01 per diluted share, which was the same result for the second quarter of 2009.

In a few minutes Dave Collins our newly appointed Senior Vice President, Treasurer, and Chief Financial Officer, will discuss our financial operating results in greater detail. Dave will also cover our balance sheet in detail. It remains exceptionally strong, with cash and cash equivalents of $21.1 million, $33.4 million in working capital, and debt of only $2.2 million. We have an attractive business model which generates a significant amount of positive cash flow when top line growth occurs.

As most of you know, Fuel Tech is a fully-integrated company that uses an extensive suite of technologies to provide boiler optimization and efficiency improvement, along with air pollution reduction and control solutions to utility and industrial customers worldwide. For reporting purposes, we broadly group these technologies into two principal business segments. One is a return on investment driven specialty chemical business for efficiency improvements that we call FUEL CHEM, and the second is a regulatory driven business for Air Pollution Control, or APC, that consists of capital projects.

To begin with our FUEL CHEM business, segment revenues were $9.6 million for the quarter, down 1% from the comparable 2009 quarter. Gross margins were 48% for the quarter, up from 42% in the same quarter last year. This margin increase was principally driven by costs associated with international demonstrations in the prior year that did not recur in 2010.

In 2009, the downturn in the US economy had a significant impact on energy demand, and to some extent the situation still continues today. In particular, electricity demand fell almost 4% last year while coal consumption in power generating stations declined over 10% marking the greatest annual decline in electricity generation since 1938. This drop in demand resulted in a dampening of electrical generated loads causing units to be run at reduced power levels, or even shut down for periods of time. This situation has impacted our FUEL CHEM segment as certain clients scaled back or temporarily turned off chemical injection on [units and licensed programs]. Our realized growth rate therefore was moderated by those curtailments resulting from an overall weak power market.

So far this year we have announced receipt of three commercial FUEL CHEM orders from two existing domestic collective utility customers. All of these orders were from existing FUEL CHEM customers, and as a result, we were able to proceed straight to commercial status without the need for a demonstration, reflecting a trend that we are increasingly experiencing. This summer started out much warmer than last summer resulting in more demand for air conditioning. Cooling degree days during June were 28% higher than in June 2009. The US Energy Information Administration, or EIA, estimates the total consumption of electricity across all sectors during the first half of this year increased by 3.8% from the first half of 2009.

Consumption is expected to show similar year-over-year growth of 3.5% during the second half of 2010. While electricity demand is up there is more of the demand being met by gas assets and continued alternative energy growth. Several major producers have shut down smaller coal fired assets, while boosting production via combined cycle plants.

Power generation stations are under continuous pressure to achieve maximum availability, highest efficiency, and minimum environmental emissions at the lowest possible cost. In recent years increased fuel flexibility has become more critical financially and operationally than ever before. The growing divergence in pricing for major US coal fields is a powerful driver for our business, as utilities are increasingly attracted to the compelling economic benefits of shifting from [Appalachian] coals, generally one of the fuels with the highest heat content and fewest operational issues, to the lower priced lower quality coals originating in the Illinois Basin and Powder River Basin.

Given the slagging and fouling challenges caused by high levels of sodium found in PRB coals, as well as iron and sulphur found in ILB coals and [inaudible] coals, this ongoing shift in fuel preference should enable Fuel Tech to market its programs to an expanded base in lower [inaudible] in Powder River Basin coal users.

From everything we see and hear, we expect a similar second half in terms of domestic coal-fired generation, and I would also say that we would expect margins to be similar as well. The key for FUEL CHEM is to advance the significant selling efforts in place, and this is being done. We also expect coal pricing in the third and fourth quarters as well as in 2011, to again assist our efforts as additional fuel users will be letting the fuel flexibility as a competitive strategy, and we fit into this strategy very well.

Now turning to our Air Pollution Control, or APC business segment. We generated revenues of $9.3 million in the second quarter, up 1% from the comparable 2009 quarter. The slight increase reflects favorable timing completion on existing capital project orders for pollution control equipment. Gross margins were 35% in the quarter, down from 49% in the second quarter of 2009. This marks a decrease and reflects a sales mix with a lower percentage of equipment supply projects, and a higher percentage of large projects that involve added installation services that typically have lower margins.

Our APC backlog at June 30 was $21 million, which was unchanged from the first quarter of 2010. Subsequent to the quarter end we announced an additional $6.4 million in pollution control orders, reflecting an increasing trend in this segment's order activity. We are especially pleased to have announced five SNCR orders in the five months since signing an alliance agreement with a major domestic power producer. We are working for this valued client on its compliance plans, and we anticipate receiving additional orders in the future.

Now on the regulatory front, the Environmental Protection Agency, EPA, released on July 6th its draft of the much-anticipated proposed transport rule, which is intended to replace the Clean Air Interstate Rule, or CAIR. To recap, for those who may not be fully familiar with the history of this ruling, in 2005 the EPA issued the Clean Air Interstate Rule to reduce sulphur dioxide and nitrogen oxide emissions in 28 eastern states. On July 11, 2008, the US Appeals Court for the District of Columbia ruled unanimously to vacate CAIR in its entirety. The Court later modified its decision in December of 2008 from vacatur to a remand, allowing CAIR to remain in effect until a new rule was promulgated by the EPA. Under the Court's ruling the EPA had to write a rule consistent with the Court's July 2008 [decision].

The Clean Air Transport Rule is the EPA's response to the Court's concerns. The proposed Transport Rule would replace the EPA's 2005 CAIR rule to address sulphur dioxide associated with nitrogen oxide, NOx, fossil fuel power plant emissions that cross state lines. These pollutants react in the atmosphere to form fine particles and ground level ozone, and are transported long distances, making it quite difficult for other states to achieve National Clean Air standards. Among other requirements the proposed Transport Rule calls for further emissions reductions in 31 states, versus 28 previously, plus the District of Columbia beginning in 2012.

Currently the Transport Rule is expected to be finalized around June 2011. The EPA estimate annual compliance costs at $2.8 billion in 2014, and predicts some 50 gigawatts of additional SCR level NOx reduction by 2014.

While the final requirements of the proposed rule are under review, and the final structure of the rule is yet to be determined, we view the proposed accelerated plant schedule and the incremental NOx reduction requirement as a positive driver for our future business. As prospective customers take steps towards implementing their compliance plans in the capital constrained environment, we believe our flexible suite of technologies which enable the layered approach in NOx control will be a preferred solution.

There is also a Bill sponsored by Senator Carper and Senator Alexander, known as the Carper-Alexander Bill, which would be a legislative fix, and put to rest the question of whether the EPA's proposed Transport Rule addresses all of the legal requirements that comply with the existing Clean Air Act. This bill addresses NOx and SOx emissions on a national level, with two separate trade zones, and a cap on mercury emissions with no trading through amendments to the Clean Air Act. If enacted, it would greatly clarify the rules within which emitters must operate, and would allow facility owners to make some informed capital deployment decisions to reduce emissions.

This issue of the final Transport Rule or the proposed Carper-Alexander Bill, either alone or in combination, should provide much needed regulatory clarity. Not to mention expected tighter NOx controls and compliance timelines, which would greatly benefit Fuel Tech. Utilities are now in the planning phase anticipating all possible outcomes. We do expect a ramp-up of new products starting in 2011 to meet these compliance dates.

Fuel Tech has the most complete suite of NOx control technologies of any company we know. And we will use that suite to build our competitive advantage. From the first step a customer takes to control NOx, Fuel Tech offers a client one-stop shopping for all of its control needs. This includes systems such as low and ultra low NOx burners, along with over fire air systems that are designed to limit the initial creation of NOx in the combustion process. We also offer an Advanced Selective Catalytic Reduction, or ASCR system, designed to reduce created NOx at a capital cost comparatively lower than other solutions.

Similar to the domestic APC market the market in China is dependent upon regulatory compliance. We believe this market will not emerge in a major way as we have said before until the country is into its twelfth Five Year Plan, which begins on January 1, 2011. Chinese Ministry of Environmental Protection NOx control technology policy directive sets the framework for this Five Year Plan. Later this year we expect to see specific regulations set forth at the level of provinces, which will implement that national policy. It is of note that Fuel Tech's current suite of solutions does fit nicely into the specific NOx control technologies called out in this policy, primarily on situations based on size, age, and type of coal consumed.

During the second quarter, we announced a low NOx burner Over-Fire air and NOxOUT Selective Non-Catalytic Reduction project for two pulverized coal boilers at an industrial plant in Guangzhou City, the capital of Guangdong Province. Equipment deliveries for this project which is designed to satisfy NOx emission requirements in anticipation of the upcoming Asian Games, are scheduled for the third quarter of 2010. This contract represents our third NOx control order and seventh unit award in the Guangzhou City where the Asian Games are scheduled to commence in November of 2010.

Additionally, this is our first low NOx burner over fire air project in China. We are encouraged that we will receive additional orders since the recent policy directive which sets the framework for the next Five Year Plan, and states that low NOx combustion technologies are the first priority of consideration for the building of plants. Much work has gone into positioning Fuel Tech for the important NOx control market in China, and we do expect to be quite successful here in the next decade.

Now I would like to turn the call over to our new Senior Vice President, Treasurer, and Chief Financial Officer, Dave Collins, who is one week into his job, and he will discuss our financial results in greater detail. Thanks. Dave?

Thank you, Doug, and good morning everyone. I would like to start by saying how excited I am about this new opportunity before me. I have had the pleasure of being involved with Fuel Tech for the last four years as their audit partner, during this time I have worked closely with the management team and the Board of Directors in operational and financial reporting matters. Prior to my joining Fuel Tech, I spent 22 years in public accounting, the majority of which was with large international public accounting firms.

During those years I have worked with over a dozen public companies, assisting with both debt and equity capital transactions. I have worked through numerous acquisitions and divestitures, and assisted those companies with complex financial reporting and structural transactions. I look forward to putting my collective experiences to work, to ensure that Fuel Tech and its shareholders realize their true potential in the marketplace.

Now I would like to turn the attention back to the quarterly results. As Doug mentioned consolidated revenues for the June quarter and first six months were $18.9 million and $36.5 million respectively. These results were consistent with the same prior year period. Our FUEL CHEM segment reported record sales of $19 million for the first six months of 2010, and while our APC segment revenues were flat with the prior year, our backlog at the end of June remains strong at $21 million. We recorded a breakeven net income figure for the first six months of 2010, while our operating income for the first six months has improved $3 million over the prior year.

Now I would like to talk about our two segments in more detail. The FUEL CHEM segment reported revenues of $9.6 million for the current quarter, and $19 million for the first six months of 2010. While the quarter revenues were flat with the prior year period, the six month revenues increased $772,000, or 4.2% over the prior year. As we discussed last quarter, contributing to the six month revenue growth was the one-time risk share payment recognized during the first quarter which totaled approximately $2 million, and related to a successful demonstration conducted during the second half of 2009. As of June 30, 2010, the Company did not have any contingent risk share payments of this of kind outstanding.

For the current quarter, our FUEL CHEM revenues generated from coal and non-coal units were flat with the prior year quarter. For the first six months of 2010, our coal generated revenues have increased by $1.2 million, which does include the $2 million risk share payment, or 7%, offset by a decline of $425,000 in non-coal fired unit revenue over the prior year. Excluding the $2 million risk share payment, our FUEL CHEM segment revenues for the first six months of 2010 would have been down 6.5%. Thus far in 2010 we have announced three new commercial FUEL CHEM programs the latest being just last week.

Of the three new additions, one unit began pumping during the first quarter, and the other two are expected to come online before the end of 2010. Our international FUEL CHEM demonstrations are ongoing despite current delays at customer sites, these delays are of customer origin, and we remain ready to complete the demonstration upon notification. Quarterly gross margin for the FUEL CHEM segment increased 6.2% in the current quarter to 47.8% from 41.6% in the prior year. This increase was principally driven by costs associated with international demonstrations in the prior year that did not recur in 2010.

The six month gross margin for FUEL CHEM has increased by 10.2% and 51.3% from 41.1% in the prior year. 5% of this six month margin improvement was due to the risk share revenue recognized in the first quarter, and the reasons mentioned previously. The FUEL CHEM segment's gross margins for the remainder of 2010 are expected to be in line with these levels.

APC segment revenue increased marginally in the current quarter to $9,291,000, an increase of $114,000 over the prior year. For the first six months of 2010 APC segment revenue decreased by $491,000, or 2.7%, to $17,506,000. This slight decrease is due to the timing of progress work on current contracts.

Our backlog of $21 million at the end of June is comprised of domestic backlog of $15 million, and international backlog of $6 million, which includes $4.5 million for China. A majority of the current backlog is expected to be worked out during the remainder of 2010. Recent announcements since the quarter end have increased our current backlog to more than $27 million. We expect to see continued order activity in the APC segment and air pollution control regulations are further clarified, and as international business continues to expand.

Gross margin for the APC segment for the current quarter was 34.9%, versus 48.9% in the prior year. Gross margin percentages for the six month period were 35.4%, versus 38.8% a year ago. Contributing to the lower gross margin was a more concentrated mix of lower margin equipment and installation projects. One major project in particular that combines significant low margin installation work will continue for the next two quarters, and we therefore expect that our APC segment margins will remain suppressed for the remainder of the year.

On a consolidated basis gross margins declined 3.7% in the current quarter to 41.5%, from 45.2% the prior year. Consolidated gross margins for the six month period increased by 3.7% to 43.7% from 40.0% in the prior year. Reasons for these variances have been previously discussed.

Selling, general and administrative costs were down $858,000 in the current quarter, and $1.5 million for the first six months compared to the prior year. A majority of this positive variance for the current quarter can be attributed to reduced stock compensation expense. For the six month period a large portion of reduced SG&A cost savings can be attributed to a reallocation of corporate resources. We will continue to monitor our SG&A spending, and where needed take action to maintain reasonable spending levels.

Investment in Research and Development activity was up slightly in the current quarter and six month period over the prior year. We continue to look for specific development opportunities within our existing portfolio of products, and will be opportunistic in identifying new development projects as our markets continue to develop. Our tax rate for the remainder of 2010 is expected to be 50%, principally due to the significance of permanent items within the overall rate recc. Any increase in operating profits above the expected levels will dilute the permanent add-backs and reduce our overall rate.

Net loss for the current quarter was $309,000, compared with a loss of $278,000 in the prior year. Our six month net income has improved by $1,745,000 over the prior year, from a loss of $1,840,000 to a loss of just $95,000. Included in our reported results for the three and six month periods of 2010 are noncash stock compensation charges of $1,189,000 and $2,519,000 respectively. Our stock compensation charges have declined by $647,000 for the first six months of 2010, and we expect to see this trend continuing through 2011 and 2012, as the large stock option grants in 2006 becomes fully vested.

Our cash balance remains strong at $21 million, and our working capital is $33.4 million which provides us with a unique opportunity to make investment decisions quickly. Quarterly cash flow for the first six months totaled $1.3 million. Cash used in investing activities was predominantly related to the purchase of equipment for our FUEL CHEM demonstration and commercial programs.

Cash used in financing activities is attributed to a repayment of a portion of debt in China used for the startup of our Beijing Fuel Tech office. Fuel Tech's domestic and international market interest in sales and activities continues at a strong pace, especially in our APC business segment. While we are encouraged by our business prospects for the remainder of 2010, we do not believe that it is prudent to provide any additional quantitative revenue or earnings guidance at this time.

I look forward to a long and prosperous career with Fuel Tech, and to speaking with all of you in the very near future. Now I would like to ask the operator to please open up the line for questions.

Operator, can you please open up the line for questions?

Sure. (Operator Instructions). Your first question comes from the line of Jeremy Sussman from Brean Murray. Please proceed.

Hi, good morning.

Good morning, Jeremy.

I was wondering, can you give us, I appreciate your comments on the Transport Rule, and maybe to follow up on that. Can you give us a sense, I know it is not a long period of time since the proposal came out, but if there has sort of been any change in discussions with customers at all since then, or have you have gotten any feedback on how they are looking at this?

I don't think there has been a substantial impact on that dialogue. I think that everyone is still waiting on final rule clarification. The customers that we are working with are proceeding with the available control technologies in light of what they see the long-term trend to be, regardless of whether it is the Transport Rule or Carper-Alexander that is enacted. Probably those customers that are operating in states that they are a dominant producer, maybe wondering what the cap and trade rules would be on an interstate basis which still has not been finalized. They have lesser alternative.

Generally speaking, our quotation activity remains strong. I think we are going see a very strong second half in APC, particularly domestically as well as in China. But I think that it is just a little bit too soon to say that what we know about the regulatory announcements to giving people final clarity.

Great. And then just a follow-up. I appreciate that. On the FUEL CHEM side you talked about, utilities switching away from high heat content Appalachian coal to Illinois Basin and Powder River Basin type coal. Can you give us a sense if, at this point utilities are leading one direction over the other, Illinois or PRB, and if you sort of have a preference for one or the other?

It wasn't that long ago that they were switching to central Appalachian coals. Obviously it depends upon their geographic location. If both the mine mouth price and the delivered transportation costs, the BTU value, the burning characteristics, all of those factors of course play into their fuel sourcing decisions. Generally speaking they, of course, make contracts that may in the short run prohibit fuel switching, or if they are planning a fuel switching, they may be committed to contract remaining terms, as well as inventories to work through.

So these are kind of long cycle phenomena, but generally speaking I would say there is a favorable trend towards more use of particularly Illinois Basin. You are seeing expanded investments in capacity in mines there, with strong demand interest this those coals. It is a well developed field, as you know. You are also seeing the trend away from certain traditional mining methods in the East, such as mountain top removal environmentally. So that is eventually going to reduce capacity there.

The Powder River Basin produces over half of the nation's coal output, and will remain a strong supplier of coal to far reaching states. So it is very much a competitive market between all three coal fields. And import/export demand factors also influence pricing and supply, but generally speaking I would say our outlook over the next year is increasing use of Illinois Basin, and moderately increasing use of Powder River Basin over central Appalachian coals.

That is great color, and certainly encouraging to see the backlog up on the APC side. Thanks.

You bet.

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

Hi, good morning.

Good morning.

On the FUEL CHEM, how many are suspended currently?

Of our coal fired units over half are not operating.

Wow.

And a great portion of oil as you know is not operating. There is just not a lot of demand for oil-fired units. It has been a significant phenomenal trend over the last year and a half during this recession with electricity demand down. Even if the units are running, and they are idled back at night, they are able to shed load and shed slag, and have lesser demand for FUEL CHEM programs.

We are certainly in a trough period I think, where we have seen units started, and I can divide them into perhaps three categories. Ones that we really do solve a problem for based upon their fuel strategy, and it is a very effective and continuing to provide a great return on investment, and there is steady revenue. It is constantly resold, because it is not under a multi-year contract, or anything like that. But there is a base business which we are operating today that is very steady.

There are also some units that have been down for a while, I am talking about one or two years, that are beginning to reevaluate coming back. And we have made that a priority because we think there is a little bit of customer education that can benefit their understanding and use, and it goes back to the fuel switching, fuel flexibility strategy that is a trend towards coals that do slag more, yet are cheaper to purchase. We are beginning to see some signs of some of those returning.

Then there are some in the middle that just simply don't require our programs, because they are not slagging, or they are simply idled. And until they are operating again we have little opportunity to bring those units back online. That being said, that does not deter our selling efforts, because there are many, many other plants out there, and particularly existing customers who have additional units. They understand and realize the benefits of the program, and they certainly are ideal target customers to expand the programs, because they realize the economic benefit. Others who haven't tried it have to be sold. I think that is sort of the three columns I would put the customer base into.

So if every single unit was running, then we would be well over $15 million then on a quarterly basis?

Oh, yes. Well, over twice what you are seeing.

Okay.

But we are also seeing another trend which has to be factored in, and that is the FUEL CHEM program is increasingly being sold on larger megawatt size units, and while that counts as a unit, you can have a 900 megawatt unit, and a 100 megawatt unit, and obviously one secures a lot more FUEL CHEM product than the smaller one. So because we are increasingly showing performance on larger units, I would say we are expecting to see on average an improving trend in revenue growth per unit.

Okay. And then as far as China goes, there is the demo for a while, and I think the a demo in India for a while. Did those ever convert to commercial status, or what is the status on those?

The commercial demonstration in China that was run in 2009 has not gone commercial as of yet. There is another demonstration in China that is currently ongoing. As far as India is concerned, we ran a demonstration in 2009, and we received an extension for that demonstration, which will start up in the latter half of this year.

And what has been the reluctance for the, let's say, the China demo to go to full commercial?

There is still I guess clarification for the customer on return on investment, also just best use of technology. They were happy with the demonstration, and the results were favorable, and it is just internal delay.

I think we largely expect the China market near term to be driven by the Air Pollution Control segment. FUEL CHEM will develop, it will develop more slowly, but it is the regulations that are driving the APC projects. And I think you are going to see some significant growth particularly next year. We are already beginning to see signs of bookings that we have in our pipeline, much of which will be realized in 2011 but indeed our second half in 2010 for China will be higher, measurably higher than the first half on a small base, but that begins to accelerate dramatically in 2011.

FUEL CHEM on the other hand I think will be a slower growing market over there. A big market but slower growing. It is just a little early to indicate the likelihood of significant revenues in FUEL CHEM until some more demonstration projects go commercial, and more provinces see the benefits.

Your next question comes from the line of John Quealy from Canaccord Genuity. Please proceed.

Hi, good morning folks, welcome Dave. Going back to the APC backlog, and Doug I'm sorry if you mentioned this, could you talk about the relative mix in that APC backlog, whether it is by technology? What I am trying to get is by the margin profile if we should be expecting these margins given that APC visibility in the next several quarters?

Sure. Both Ellen and I could answer that. We have contracted projects that will continue to produce recognized revenue domestically in the APC segment for the second half of 2010. A significant portion of those revenues are for low NOx burner over-fired air programs, and there is one program in particular that has a large amount of revenue, but it also includes a lot of engineering procurement construction lower margin work associated with it. So the revenues are significant for that project. Average margins are lower simply because it is a blend of our traditional APC margin, plus some work we chose to contract for, but is at a traditional EPC-type margin.

We also are seeing from the existing contracted projects use of the HERT system, that came from the ACT acquisition, as well as traditional SNCR that Fuel Tech has always had. In the third quarter we already see some additional bookings and expected further bookings, and I largely expect those to be SNCR related. So you are seeing a nice mix of low NOx burner over-fired air, in other words the combustion modifications solution, HERT and SNCR, both technologies used for post combustion. While we are still actively quoting our advanced SCR, we have not announced into major projects yet. But we do expect to see that, those will be larger revenue per project as well. We are working on those both domestically and in China.

And my second question on FUEL CHEM, just so I understand the moving pieces. So almost 50% of the coal units are offline, due to obviously the demand in spark spread perhaps, and yet coal fired revenue only down 1% year-on-year. Were there one-time items that are causing that relative flatness? And then secondarily, can you talk about the units that are still online using FUEL CHEM? Are they base load units for utility or geography, because clearly it seems like some folks continue to use the process and the chemical quite robustly?

There are two elements to answer your question with respect to the number of units and the revenue we reported. As was stated, part of our revenue mix was a realization of about $2 million of gained share, that was in quarter one, not quarter two. That was for work actually performed in 2009, and that happened to be for a relatively large unit. So as we put the systems in place on larger units, we are seeing greater revenue per unit, even if the number of units has not gone up or has declined.

So there is a little bit more concentration of those revenues as we book those units, but when we look at the other units that customers such as those have, a market potential for expanded use, knowing their fuel programs that are in place, and their inherent slagging problems, we think that as we demonstrate success not only with the existing products we are using in the FUEL CHEM business, but very importantly with some new products that we are developing for the FUEL CHEM business, that will lower the cost through these utility customers, while maintaining our performance, I think we will see an expanded growth with the existing customer base.

Okay, great. And then my last question, bigger picture, going back to the Transport Rule. In some of the business that you folks are booking now, Doug, what are your customers telling you with regards to if they think the Transport Rule is going to take hold, or a multi-pollutant strategy with the new Congressional session in the beginning of the year? Can you talk about what your customers are saying about the likely outcome, and what you are looking for indications of that?

I don't have any direct quotations to offer you from customers. Like us, they are trying to assess what the final rule formulation will be. Whether it goes via the Transport Rule or the Carper-Alexander, one thing is clear, is that NOx emissions must come down sooner.

There is a lot of discussion as to the policy around whether mercury reductions are going to be included in the legislation. That is actively being debated relative to requiring a 90% site by site reduction. And whether or not that will be separated from the SOx and NOx rules, or coupled with it remains to be legislated.

Ellen, do you have any other comment? I am not in the position to really offer you what I would consider really good quotational evidence at this early stage of hearing about the Transport Rule.

That is helpful, thanks, Doug.

I would say the other thing I would add, is we need clarification on whether cap and trade policies will be limited or for expanded interstate rule. That is a big deal, because to the extent there is going be more interstate trading allowed or not allowed, that has an important impact on the number of units that will require implementation of control technologies versus selling credits. You know the NOx credit market has been very low priced, so that has been a little wind in our face, in terms of selling our solutions when they can buy those credits. I would hope maybe by the next call we could probably give you a little clearer answer, because it will quite honestly be more clear to us as well.

And your next question comes from the line of Dan Mannes from Avondale. Please proceed.

Good morning. A quick follow-up question on the Transport Rule. Looking back to your experience in 2005, or actually it would be before 2005 when the Clean Air Interstate Rule was proposed, and obviously there were a lot of questions at that the point about that proposal versus conflicting proposals coming out of Congress. Is your experience in sort of the 2005 to 2007 timeframe is that at all instructive in considering what things are going to look like now, or is the much shorter timeframe under the Clean Air Transport Rule? Do you think that will be a bigger driver? I am just trying to get my arms around if there is any historical precedence for the time we are in now?

Well if my memory serves me, the CAIR required NOx reductions to take step wise effect by 2009, and then again by 2015, I believe. And so definitely there was some effort between 2005 and 2009 to comply with those requirements. That being said, there still was quite a bit of cap and trade allowed. We are in this time period between 2009 and 2015, where sitting here in 2010, while it may sound like there is a lot of time, there certainly is not a lot of time, if the requirements get tightened or moved up by even a year.

So I don't think they are comparable periods because of the two different step wise legislative requirements. I think what is different today is the intense capital costs associated with SCR compared to alternative blended solutions such as what Fuel Tech has to offer, coupled with just a general better understanding of how to reduce NOx, from both its creation to its removal, is going to put us in a period of less intensive investment in SCRs, such as you saw in the prior decade compared to what I see in the decade going forward. It is just a general observation.

Sure. And understanding it is kind of hard to handicap that given the uncertainty, but I imagine it was fairly uncertain then too, and it did end up playing out that I think at least relative to the [VIA's] expectations, or at least EPA's, it seemed like there were a good deal more SNCRs put in than maybe they had expected. I think EPA tends to think a lot more utilities will put SCRs in, and they end up looking for lower cost solutions.

Certainly I think that the SNCR market is alive and well.

Got it. Then briefly just shifting over to SG&A. The first and second quarter you were about $800,000 below prior year, and I know you mentioned the roll-off of the stock based comp. Is that a similar level of change year-over-year, or in the fourth quarter it looks like maybe we already start lapping when some of those reductions occurred?

That is correct, we did see an increase year-over-year, a decrease of about $630,000, and we do expect that to continue.

Even in through until Q4, or just for Q3?

No, we will expect the change in Q3 but we will see a drop in Q4 as well.

Got it. Any other moving pieces on SG&A, or is that the primary?

That was the primary for the quarter. On a year-to-date level, as Dave mentioned, there is some savings due to some reallocation of corporate resources.

Okay.

And we should continue to see throughout the remainder of the year.

Great. And then one final question. Any update you can give us on a CEO search? Is that a priority or Doug, getting back in the CEO role and focusing, are you maybe comfortable being in that role for an extended period of time?

I was comfortable stepping into the role, and I am even more comfortable being in the role. We just had a Board meeting and a report on the CEO search was made. We have a search firm that has identified candidates. Most of those candidates have been resume screened, telephone interviewed, and moving towards the face-to-face interview stage with our recruiter.

I think the Board is very pleased with the way the management team is operating. We have brought Dave Collins onboard. I had identified him when I stepped into the job as my preferred choice, and that received the enthusiastic support not only of fellow management who knew Dave over the past four years, but all of our Board. We did have a CFO search going on at that time. I did not find the candidates at that, that were producing when I stepped into see that pipeline, to be those that measured up to Dave. We focused on getting Dave onboard.

Obviously we had to change our audit firm. That went smoothly. We are now with McGladrey & Pullen, and so after I assumed the role, we did commence the CEO search. The Board basically says they don't want to make a mistake. They want to make sure if they are going to bring somebody in from the outside, that that person has got top-flight credentials, and so whatever time it takes. Sitting here today, I don't know if someone that walks on water is going to show up two weeks from now or six months from now. I have known the Company, as an investor in the Company, and a member of its Board for 12 years. I have known of the Company for 12 years prior to that.

So I think having a working knowledge of the Company, having served in this role on multiple occasions before for other affiliate companies we have been involved in, I find it a pleasure to perform the job, a great team of people with whom to work, and I can assure that you that the job of the CEO is being carried out. And we are making decisions and driving the Company forward whatever that timeline is. Like any CEO I serve at the pleasure of the Board, and it will be ultimately a decision based upon the candidates screened.

Sounds great. Appreciate the color.

You bet.

Your next question--.

I think back in 2004 where I stepped in as an interim CEO, and it lasted 2.5 years at another company. I have no idea what that tenure may be, but I have told the Board I am prepared to serve in that role as long as I am needed.

And your next question comes from the line of Jeff Osborne from Stifel Nicolaus. Please proceed.

Good morning. Just had one quick one. I think you mentioned that there were seven units that you have installed in the Guangdong Province. I was just trying to get a sense of, through the competitive process over the last 12 to 18 months in that region, do you have a sense of what your share was, basically if you lost units what type of technology were they using, and what type of competitive pressures were you seeing? Thank you.

That is a good question. And I recall we did an analysis of that, and we did it based upon the projects that went out for quotation. I am sorry, I don't have it before me, but I will use my best recollection. We looked at the number of projects that went out for bid and the number that we actually won, and if my recollection serves me, I would say that we realized about a 25% win rate when we adjusted for those that got canceled, or jobs that perhaps some bidders were not eligible for. There certainly might have been some that we withdrew, but my rough recollection is that it was a 25% share.

Great, thank you very much.

And certainly we could give you a little bit more detail on that if you wanted to do so on an offline call.

Perfect. Thank you.

(Operator Instructions). Your next question comes from the line of Graham Mattison from Lazard Capital. Please proceed.

Hi, good morning, everyone.

Good morning.

You guys always had some great traction with your Alliance customer. Can you give us an update, are you actively working to build additional Alliance Agreements, and if so is this something that we might be seeing in the second half of the year, or more of a 2011?

Our whole Alliance Agreements in the past, obviously being able to work with certain power producers for multiple units within their fleet is obviously preferred. The current Alliance Agreement we have, we are seeing additional projects come online before year end. As far as additional Alliance Agreements with other customers, that is a possibility for the future, but as far as the remainder of 2010, currently what we are working on is the one that we have already announced and just expanding within their fleet.

Got you. Okay, helpful. And then given your cash balance now, just wondering if you could comment on the M&A outlook that you are seeing out there? Is there something you are actively looking at, just given some of the internal things you are going through right now as a Company, and just your thoughts on that market?

Sure, there is always some level of dialogue or investigation. Currently there is nothing that we are doing that is likely to be resulting in any near term announcement. Some things get studied over a fairly longer period of time. But even in the four months or so I have been in this position, I know of at least one such opportunity that has caught my attention.

But I would say the priorities is to focus on the base business, and to solidify its growth rate and profitability in a way that commands my priority attention. I believe that is my responsibility to the Board and shareholders. But we are always putting our eyes out, looking for things that could potentially fit.

Great. Very helpful. I will jump back in queue. Thank you.

Your next question comes from the line of Carter Shoop from Deutsche Bank, please proceed.

Good morning, Carter Shoop from Deutsche Bank. Doug, given the volatility in the executive suite over the past six months, and now we have the CFO in place. Help us understand what your priorities are as the interim CEO? Can you walk through one, two, three bullet points about what your priorities are at this point?

Absolutely. The changes were limited to two positions as you know, John Graham just announced he was stepping aside for another opportunity. We didn't lose any momentum, there was no turmoil. Ellen did a very capable job, and we commend her for her role as interim CFO, and we've had the ability to call upon any resources we have needed, either from Grant Thornton or other members of management, so we did fine there.

Clearly the Board was looking to see the company turn around its stock performance, realized its growth rate, and the decision was made to have me serve as interim CEO. And so the transition between John Norris, whom I have worked with for a number of years since he came even in as a consultant and stepped in the job of CEO, to his last day of employment was very smooth. And my focus was to, A) create a culture in the organization that was one, motivated to win, succeed, and be properly rewarded.

So early on I focused on things that drove higher morale, higher spirits, and put in place an incentive system based upon 10 key results that we identified, five in each business segment, and one related to team work excellence and commitment. And we put that key results incentive plan in place, and I think that has inspired our employees, and focused their attention on things that really count and have made a difference.

I found that the existing incentive plan that was more based upon corporate financial goals was not well understood, and we needed things that were really clear and understandable, and objectives that people could make an impact on. So we got that done. We obviously had to attend ourselves to filling in the much-needed hires, such as Dave. That was a process that took time, because it required us to consider a decision to hire Dave, as he was employed by our audit firm, and we knew we had to change audit firms. But the assessment of that was one, that we were betting on someone who was a proven person, and really knew our business, understands it, and step into the job and accelerate.

You could comment on saying do you want to wait for the next CEO to pick his or her CFO? My answer to that was why do that? You have an incumbent management team that will defend their jobs, not knowing who is going to be the next CEO. Dave was no different. He was willing to accept that uncertainty. But they knew who I was, and so I focused on getting the management team priorities clear, that translate into returning the Company to growth. I've also looked at areas that are both well organized and maybe not so well organized in the Company, and to the extent that we need to realign some organizational structure around those priorities, we will be doing so.

The other thing I have made as a priority is to return the Company's commitment to new products, and developing new processes and technologies that will create a future. Our APC segment is well established, we are a known player. Some of those technologies are more mature, and some are coming off patent. We added to that portfolio two acquisitions, I think that positions us well. But we need to further strengthen our competitive condition on an intellectual property basis there.

Same thing with FUEL CHEM, we need new products, new chemistry formulations that can make our FUEL CHEM business more competitive. Because we have seen some new entrants come in to bat. I would say from the Board channeled through me, the priority has been to better understand our markets, to put in place plans that drive growth, and to build that foundation growth on things that are really at the bottom-most level of plant.

For example, China is a very, very big market. That market cannot be measured just in terms of the number of power plants or boilers operated. We have to think about how we want to execute in that market knowing that we will have significant competition, and what kind of A team of players will we need to put in place over there. I expect a lot of our added team and resources to be of a caliber that will create a business presence and a standalone company, that can very well be as big as Fuel Tech is today with the right business plan.

So a lot of back to basics planning. Turning the culture into one that is very sales marketing driven, and one that is very supported by enthusiastic engineering and technology resources that are going to not only execute the projects that we have efficiently and to the delight of customers, but also to further our time to developing the new products and processes that we will be able to sell in the years ahead. That is my priority.

This concludes the question and answer session. I would now like to turn the conference over to Mr. Doug Bailey for closing remarks. You may proceed, sir.

Well, thank you very much, operator. I was delighted to receive those questions, and I certainly stand ready as Tracy, Dave, and Ellen do, to take any individual calls if you would like further clarity. The business is doing well despite the economy. I think it has tested our business model in a way that it shows the resilience it has and I am looking forward to seeing the market that we serve grow, because we are finding those opportunities grow despite what the economy is doing.

It is a pleasure to have the job that I have, and to be able to work with the people that I do, and to have the investors and shareholders that we have. We appreciate your support greatly. As you know, I am a major investor in this company myself, and so my lot is cast with you, and I stand ready to take your questions at any point in time. Some people might be seeing me tomorrow at the Canaccord Genuity Conference, and I look forward to those questions as well.

Thank you, operator. Thank you all for attending, and we look forward to the next call.

My pleasure, sir. Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.