Fuel Tech Inc (FTEK) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Fuel Tech Incorporated earnings conference call. My name is Jeff and I'll be your Operator for today. At this time, all participants are in a listen-only mode. Later we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host today, Mrs. Tracy Krumme, Vice President of Investor Relations and Corporate Communications for Fuel Tech. Please proceed, ma'am.

Thank you, Jeff. Good morning, everyone, and thank you for participating on today's conference call to discuss our fourth-quarter 2010 financial results. Joining me on the call this morning is Doug Bailey, Chairman, President and Chief Executive Officer, Dave Collins, Senior Vice President, Treasurer 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 and 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, everyone. We certainly appreciate all of you joining us on this call. Our results for the fourth quarter of 2010 include revenues of $25 million, an increase of 34% from the fourth quarter of 2009. Net income for the quarter was $1 million, or $0.04 per share, an improvement of $800,000 over the prior year. Adjusted EBITDA was $3.8 million, up from $3.2 million in the fourth quarter of 2009. Revenues for the full year 2010 were a record $81.8 million, up 15% from $71.4 million in 2009. This was driven by equally strong increases in both the Air Pollution Control and FUEL CHEM segments. Net income for the year was $1.8 million, or $0.07 per diluted share, up from a net loss of $2.3 million, or a loss of $0.10 per diluted share for the prior year. Adjusted EBITDA in 2010 was $12.1 million, an increase of 54% from the $7.8 million recorded in the prior year. Our working capital at year end 2010 stood at $36.6 million, an increase of $6.1 million over the prior year end, and our balance sheet remains strong with very little debt. In a few minutes, Dave Collins, our Chief Financial Officer, will discuss our financial operating results in much greater detail.

As most of you know, Fuel Tech is an integrated Company that uses an extensive suite of technologies to provide boiler optimization and efficiency improvements 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. The first is FUEL CHEM, an ROI-driven specialty chemical business for efficiency improvements. And the second is a regulatory-driven business for Air Pollution Control, or APC, that consists of engineering and design services, a large portion of which are capital project-related.

So, let's start with our FUEL CHEM business, which achieved record revenues and operating income for both the quarter and the year. I'm extremely pleased with these results as we were able to deliver in the FUEL CHEM segment, especially when you consider that this was accomplished during one of the tougher economic periods. The economy, while showing recent signs of recovery, still remains sluggish and is especially weak in the utility sector where we have seen plants shut down, assets sold and operating budgets remaining tight.

Natural gas prices remain low, as currently indicated as spot price of about $3.90, which puts pressure on coal-fired powered production as some plant operators will run the cleaner gas units and not have the slagging and fouling issues that they would if they burned Illinois Basin or Powder River Basin coals. That dynamic combined with lower electrical demand and the rise of alternative fuels has caused certain coal customers to operate at reduced power levels or even shut down for a period of time. This means our revenues per unit are dramatically lower in some cases. That said, we are pleased to be winning new business in this challenging environment and commencing new programs at coal-fired power plants, predominantly on larger sized units which is making up for some of those lost revenues.

What has emerged in this economic environment and which has us quite encouraged is that plant operators have increasingly made fuel flexibility a high priority both for financial and operational purposes. This is due in part to the wide spread in US coal prices which continues to be a significant driver for our businesses as utilities are attracted to the compelling economic benefits of shifting from the Central and Northern Appalachian coals, generally one of the fuels with higher heat content and fewer operational issues, to the lower priced, lower quality PRB and Illinois Basin coals. Given the slagging and fouling challenges caused by high levels of sodium typically found in PRB coals and high levels of iron and sulfur that are typically found in the Illinois Basin coals, this ongoing shift in fuel preference should enable us to market our programs to an expanded base of Illinois and Powder River Basin coal users.

This trend is evidenced by five new TIFI, or Targeted In-Furnace Injection contracts, that have been awarded in the last six months. Of these five awards, four were the result of utilities switching or wanting to blend more PRB in Illinois Basin fuels into their mix. In one case, our client was switching from burning central Appalachian to Illinois Basin coal as current prices for Illinois coal were $47.50 per ton versus a Central Appalachian coal price of $77.70 a ton. When you adjust this to a comparable million Btu basis, this was approximately one-third savings in fuel costs. When you take into consideration that this client burns approximately 4500 tons of coal per day, you can easily see how these savings are significant. From an operational standpoint, we continue to keep an adequate supply of FUEL CHEM systems ready to deploy in the US so as to be able to install them as quickly as prudently as possible on the receipt of new orders.

Now let me turn to our Air Pollution Control, or APC business segment. During the fourth quarter, we were pleased to receive our eighth and ninth Selective Non-Catalytic Reduction, or SNCR, order from a major domestic powder producer as part of an alliance agreement which was signed in March of 2010. Additionally received an order for two ULTRA Systems on coal-fired units in China marking our twelfth coal-fired unit award for ULTRA Systems in that country. Domestic quotation activity remains quite active due in part to the EPA's proposed transport rule, which was released in July 2010 as expected to be finalized sometime around June of this year. While the final requirements of the proposed rule are still under review and the final structure has yet to be determined, we do view the proposed acceleration compliance schedule and the incremental NOx reduction requirements as a positive driver for future business.

The EPA's initial transport rule based on the 1997 National Ambient Air Quality standards, or NAAQS, for particulate matter 2.5 in the ozone, the EPA is looking to issue additional transport rules based on the 2008 NAAQS standards for ozone from which the reduced NOx level requirement will come. This second transport rule is expected to be proposed towards the end of 2011 with an expected 2014 compliance date. This yields relatively little time for utilities to comply, particularly if they're interested in larger SCR projects. Utilities know this and as a result, are moving into the planning phase.

The open question is the trading of NOx credits and whether or not the final transport rule will allow for intrastate trading of admission allowances or if it will include a defined level of interstate trading. This should be addressed when round one of the transport rule is finalized. Past history for the NOx industry where trading across the affected domain was permitted shows bookings for NOx control were spread largely over four years. Bookings peaked one year before the implementation date and spread about one year after the implementation date. If the EPA does not allow any trading, there will be a somewhat more concentrated span of bookings, and very few will occur after the implementation date. So, the booking range will shift at least one year earlier than the implementation, which should bode well for us.

If more extensive trading is allowed, our combustion technologies in SNCR Systems are flexible low-cost cap -- cost solutions, that should easily thrive and have thrived in cap and trade environments. We will also do well with limited trading as our combined technologies with our advanced SCR approach can achieve NOx reduction levels close to conventional SCR systems with significant capital savings. No matter the outcome, respective customers will take steps towards implementing their compliance plans and capital constrained environment where potential domestic labor and worldwide SCR catalyst availability could be in question. We believe that our lower capital cost solutions, broad number of technologies that enabled a layered approach and our shorter lead time installations will enable Fuel Tech to benefit from this accelerated compliance schedule as our technologies become a preferred solution for NOx control.

Other APC opportunities are emerging in the industrial market. The boiler maximum achievable controlled technology, or MACT, and solid waste incendiary rules were just issued in late February. These EPA requirements potentially affect more than 1600 plant sites and include stringent controls for a number of pollutants. These complex rules have been a revised since the June 2010 draft and they now specify emission levels that are much more realistic. Although the final outcome following an upcoming comment period does remain a bit uncertain, compliance would be required by 2014, creating additional near-term opportunities for Fuel Tech, particularly on units where improved combustion is required and where biomass may be utilized as a fuel source.

Similar to the domestic APC market, the APC market in China is also dependent upon regulatory requirements. As part of its twelfth five year plan that will soon be finalized, China will tighten pollution control standards for its existing fleet of fossil fuel plant, as well as for fossil plants to be built in the future. In anticipation of the finalization of this plan, China's Ministry of Environmental Protection has issued several documents describing the very specific nature of the regulations to be implemented in support of reducing harmful pollutants and further defining technologies that are recommended to achieve these reductions.

The most recent documents defined the regulations for NOx is applying to all thermal powered units that have a steaming rate of 6500 tons per hour, in other words about 12 megawatts or larger. Newly constructed units and existing units that were approved subsequent to December 31, 2003 must meet the same stringent emission standard, while existing units approved prior to December 31, 2003 must meet a standard that is less stringent. In addition, all units that are in key point regions must achieve the same standard as the newly constructed units. Key point regions are defined as those areas that are highly developed or highly populated and are sensitive to environmental overloading. All existing coal and oil-fired thermal units must comply with the proposed regulations by January 1, 2014, while new units must comply by January 1, 2012, very near end.

These same documents recommend that NOx reduction should be achieved via the use of low NOx burners and over-fire air systems in combination with SNCR or SCR where appropriate to achieve the required emission levels. The combination of SNCR and SCR technologies in tandem is also considered as a viable technology choice. While the current documents in China do not specifically comment on the use of Urea as the preferred reducing agents in the NOx controlled population-- process in highly population density areas, we do believe that technologies to convert Urea to ammonia will be deployed in the key point regions in support of safety objectives. This practice has already been implemented in major cities such as Beijing, Wonju and Shanghai.

We believe our broad portfolio of low capital cost technologies will be effective in helping fossil plants address the NOx emission control policy guidelines that have been released thus far. In particular, our unique ability to combine technologies on a project specific basis ranging from low NOx burners and over-fired air to NOx reducing hybrid systems affords us a competitive position in bidding on power plant units of all sizes. We've seen an increased order flow from discussion with power plants and industrial units in anticipation of these upcoming regulations. Additional bid activities for combination system requiring multiple technologies have increased as well. You will recall that during 2010, we also announced our first low NOx burner and over-fire air project in China. So far in 2011, we have announced our first SCR design services award in China as well as an award from China's largest electric utility for two ULTRA Systems, and an award for an advanced SCR which incorporates our combined LMB, OFA, NOxOUT-SNCR and SCR technologies.

Much work has gone into positioning Fuel Tech for the important NOx control market in China. In November 2010, Dr. Linda Lin and our Beijing Fuel Tech team hosted and organized the NOx and Particular Control and Boiler Energy Efficiency Improvement Technologies Workshop, which was held in Suzhou a city in the Province of Jiangsu. The goal of the Workshop was to help educate potential clients and governmental regulatory bodies on systems to alleviate air ever worsening air quality issues while helping the power sector utilize fossil combustion and generate fossil power at higher efficiency.

Over 200 participants were in attendance including power plant managers and engineers, utility owner executives, senior personnel of environmental engineering firms and government officials. The need for ongoing information exchange in the areas of air pollution control and energy efficiency was quite evident by the interest of these participants and sponsors associated with this workshop. This event and others likely to be held in the future will continue to facilitate our sales efforts in this key growth market. Now I'd like to turn the call over to Dave Collins, Senior Vice President, Treasurer and Chief Financial Officer, who will discuss in greater detail our financial results. Over to you, Dave.

Thank you, Doug, and good morning, everyone. We are reporting solid financial results for the current quarter and full year of 2010, both in revenue growth and improvement in operating margins and net income. Additionally, we have presented an adjusted EBITDA table, which we believe will assist in understanding our performance metrics and strength of our underlying business model. Consolidated revenue for the current quarter increased by $6.3 million, or 34%, to $25 million from $18.7 million in 2009. Further, our consolidated revenues for the full year increased by $10.4 million, or 15%, to $81.8 million from $71.4 million in 2009. Our revenue increase was driven by current quarter and annual growth in both of our segments with our Air Pollution Control, or APC segment, reporting quarter and annual increases of 25% and 18% respectively, and our FUEL CHEM segment reporting quarter and annual increases of 45% and 11% respectively. We believe our opportunities for growth in both segments remains healthy moving into 2011.

Breaking down our revenue by geography, our domestic revenue growth for the full year was 25%, $69 million in 2010 versus $55.4 million in 2009, while our full year international revenue declined by 20%, $12.8 million in 2010 versus $16 million in 2009. Contributing to this decline was a decrease in Canadian revenues of approximately $1.5 million. In January 2011, we announced orders from our Pacific Rim operation totaling $2.7 million and our year-end Pacific Rim backlog totals $5.7 million. The $2.7 million is reflected in our year-end backlog figure. On a consolidated basis, gross margin decreased by 2% in the current quarter to 41% from 43% in the prior year. Consolidated gross margins for the full year 2010 increased by 2.2% to 42.8% from 40.6% in the prior year. Our consolidated net income for the current quarter and full year was $1 million and $1.8 million respectively, which equates to diluted earnings per share figures of $0.04 and $0.07 respectively. Our adjusted EBITDA for the current quarter and full year was $3.8 million and 12.8-- $12.1 million respectively, representing increases of 19% and 54% over the prior year.

Now let's look at each of our segments in more detail. Our FUEL CHEM segment reported record quarterly revenues of $11.8 million and full year revenues of $40.9 million representing increases of 45% and 12% respectively. During 2010, we announced six new accounts, five of which pumped in 2010 contributing to the overall increase in segment revenues. Most of the new additions came as a result of expansion within our existing customers' fleet. These expansions to additional units have by passed the demonstration phase and have gone straight to commercial status. We believe this is reflective of the continued understanding of our ability to provide significant value to our customers and increased market acceptance of our technology. In addition to the new account revenue discussed above, our annual revenue increase was favorably impacted by a one-time $2 million risk share payment recognized during the first quarter of 2010. As of December 31, 2010, the Company did not have any contingent risk share payments of this kind outstanding.

For the current quarter, our FUEL CHEM revenues generated from coal increased by $4.1 million, or 59%, $10.9 million in 2010 versus $6.8 million in 2009, while our revenues generated from oil and other were down $360,000, or 28%, $940,000 in 2010 versus $1.3 million in 2009. For the full year ended December 31, 2010, our goal-generated revenues have increased by $4.9 million, or 15%, $37.4 million in 2010 versus $32.5 million in 2009, while our revenues generated from oil and other were down $600,000, or 16%, $3.5 million in 2010 versus $4.1 million in 2009. The decline within our oil and other customer base was partially due to higher oil prices and partially due to demand needs. Contributing to our annual increase in coal revenues was $2 million risk share payment received in the first quarter and new customer business.

Our international FUEL CHEM demonstration in India was completed during our current quarter. The second China demonstration is ongoing and we expect this demonstration to wrap up in early 2011. For those who may be new to our story, a risk share on a FUEL CHEM demonstration is when revenues are put at risk during the demonstration period and then recognized when the customer deems the demonstration a success and moves forward with a commercial program. The risk share will show up on our books as additional revenues, but with no increase in the cost of sales since we have already recognized all of the costs associated with the demonstration during the periods in which they were incurred.

Quarterly gross margin for the FUEL CHEM segment increased 3.2% in the current quarter to 51.2% from 48% in the prior year quarter. The improvement in margin is attributable to customer mix with higher margin customers representing a larger percentage in 2010 versus 2009. The full year gross margin for FUEL CHEM has increased by 8.7% to 51.6% from 42.9% in the prior year. This is partially attributed to the timing of the risk share payment discussed previously. Our FUEL CHEM segment gross margin for 2011 is expected to be in line with historical levels of 48% to 50%.

Now let's move to our APC segment. Our APC segment reported revenues of $13.2 million for the current quarter and $40.9 million for the full year. Our quarterly APC revenue increased by $2.6 million, or 25% over the prior year, while our full year revenue increased by $6.2 million, or 18% over the prior year. During 2010, we announced APC contract awards with the value of $32.2 million, of which $9.6 million was awarded during the current quarter. We continue to carry a strong backlog figure at year end of $19.3 million comprised of domestic backlog of $13.2 million and international backlog of $6.1 million.

Gross margin for the APC segment decreased by 7.4% for the current quarter from 39.1% in 2009 to 31.7% in 2010. Gross margin percentages for the full year declined 4% from 38% in 2009 to 34% in 2010. Contributing to the lower gross margin was a more concentrated mix of lower margin equipment and installation projects. Specifically, we had a large equipment order that combined significant low margin installation work for which we recognized a significant amount of revenue in the current 2010 quarter. This large project with the lower overall margin profile was also responsible for our lower annual gross margin percentage. Our core project margins continue to be in excess of 40%.

Selling, general and administrative costs for the current quarter were $7.6 million representing an increase of $400,000 from the prior year. Or SG&A costs for the full year 2010 are $30.9 million representing a decrease of $1.4 million, or 4.5%, from the prior year. The majority of this positive variance for the full year of 2010 can be attributed to reduced personnel related costs, which include a reduction in our stock compensation expense of $1.8 million. 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 full year 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 2010 was 52.4%. Our 2010 tax rate was higher than our normalized rate of approximately 46.5% due primarily to higher than expected losses in our Italian subsidiary for which we do not provide any benefits. Our foreign losses increased our overall rate in 2010 by approximately 7.1%. We expect our 2011 effective rate to approximate our normalized rate of between 46.5% and 48%. This rate is reflective of the expected impact of permanent items within our overall rate reconciliation and is dependant on the level of pre-tax operating profits realized by the Company. Any increases in operating profits above expected levels will dilute the permanent add backs and reduce our overall rate.

Net income for the current quarter improved by $800,000 to $1 million from $200,000 in the prior year quarter. Our full year net income improved by $4.1 million to $1.8 million compared to a loss of $2.3 million in the prior year. Additionally, our current quarter and full year adjusted EBITDA was $3.8 million and $12.1 million respectively, representing increases of $600,000 and $4.2 million over the prior year. Adjusted EBITDA includes the add back of stock compensation expense of $4.3 million for 2010.

Our cash balance increased by $9.6 million during 2010 to $30.5 million, and our working capital increased by $6 million to $36.6 million. Cash flow generated from operations was $12.2 million for 2010, which was down slightly from the prior year amount of $13.5 million. Cash used in investing activities was predominantly related to the purchase of equipment for our FUEL CHEM demonstrations and commercial programs and totaled $2.2 million. Cash used in financing activities is attributed primarily to repayment of a portion of debt in China used for the start-up of our Beijing Fuel Tech office and totaled $700,000.

For 2011 for modeling purposes only, we expect that our maintenance CapEx will remain below 1% of consolidated revenues and the majority of all CapEx to be associated with new FUEL CHEM accounts. Our stock compensation expense is expected to be $2.5 million to $3 million. We are also increasing our budget for research and development as we believe this funding is critical to the advancement of key technologies which will drive future growth in our business. We further expect that overall SG&A expense will continue to decline on increasing revenues. Fuel Tech's domestic international market, interest and sales activity remains at a strong pace, especially in our APC business segment. While we are encouraged about our business prospects for 2011, we do not believe it prudent to provide any additional quantitative revenue or earnings guidance at this time. Now I'd like to turn the call back to Doug.

Thank you, Dave. Well I would say that we are very pleased with the financial report that we provide to you for the full year 2010. I think as we entered the year there was a lot of uncertainty and I think we achieved a very impressive result in light of all of the economic challenges we face. We have an energetic organization and we're looking forward to sustaining renewed growth as we move forward through 2011and we share an optimistic view of our future. So, I know there will probably be a number of questions and we'd like to turn this over to the audience for those questions. And we thank you for the time you've taken to be on this call. Operator, if you'd like to ask for questions from the [candidates] on the call.

(Operator Instructions) Looks like first up we have John Quealy with Canaccord Genuity. Please proceed, sir.

Hi, good morning, congratulations on the quarter. I have a couple questions for you. First in terms of the commentary about APC and relative expectations for next year, I know you're not giving specific quantitative guidance, but I thought, Dave, you mentioned something in the margins of more historically relevant margins of about 40%, can you just clarify that for us, please?

Yes, that's our core product lines that we sell. We expect those margins, the ULTRA products, things that we have proprietary positions on to be around the 40% mark. If we have a large burner job, that's of course been diluted. And that's what did happen last year. So if I were to model, I'd feel comfortable in the 38% range for next year.

Okay. That's helpful. And then, if we can go domestically for a minute about the transport rule and obviously there's a lot of things going on in Capitol Hill with regards to the EPA and push back, some of the things that we've seen suggest that maybe a Phase 1 reduction, and I think Doug, you had talked about this somewhere in the 2012 time frame, however, Phase 3 reductions look like it's in the 2014 time frame. Can you just give us a little bit more background about what your expectations are given the current set of circumstances and expectations? And then if that's the case, with a year and a half or so between implementation dates, how that would impact your business?

Well, I wish I could give you a good answer, John. It's a fair question. I don't know that a lot has changed as to what we know from the last call. We know what the requirements are. There's still a lot of debate about trading as I pointed out. Generally speaking, we are prepared to respond to whatever those regulations are with a range of solutions. And I guess you have to layer over that what will be the political influence over the cost of attainment in light of an economy that's weak on job creation, high on unemployment. To me, I think the overall domestic economy will grow increasingly important issues related to the deficit. Just a very fundamental macro economic issues that I think will continue to cause debate. But I will say this, there's only one direction that I think standards are going, and that's tightening. So I'd rather not try to prognosticate on exactly what we'll see come out of this, but I generally feel that we have a favorable back wind. I just don't know how strong it's going to be.

Okay. That's fine, Doug. And then my final two questions, on the FUEL CHEM side, can you talk about pricing for the Mag Hydroxide, where we are with that agreement? I don't know if it's Martin Marietta or if there's other suppliers and are there certain volume thresholds that can enable volume discounts? And then secondly in China, can you talk about some of the efforts you've undertaken to target that market perhaps with a new approach or new oversight on the Chinese market from a Fuel Tech perspective? Thank you.

Yes first, John, on the first question about Mag Hydroxide, we haven't seen any significant price change in that, so we're not expecting to see a difference. Yes it's a long-term contract. So did you want to address the second?

Would you repeat the second question for me, please, John?

Yes, sure. Just in China as you try to attack the new economic plan coming out on Air Pollution Control, I know there's been some movement in the office or approach in China, so if you could just give us a little bit more background about how you're planning to attack that opportunity in the coming years?

Sure. I would say first and foremost I think we're strengthening our organizational approach. You'll recall last year, Vince Arnone returned to the Company as Executive Vice President of Worldwide Operations. In his new position, the Beijing Fuel Tech organization does report into a very capable proven former executive of Fuel Tech. We're also strengthening the Executive ranks of Beijing Fuel Tech and are currently in the process of recruiting a Managing Director.

The outlook for growth is keen. The outlook for the competitive environment is expected to be severe. As these regulations unfold, the-- I would say there's a number of these regulations that indicate that we're well positioned. We're going to have to not only market effectively, but increase our overall sales organizational approach. To that extent, we'll be adding additional Reps and more reach because we think that there'll be a number of companies trying to pursue this market. At the same time, I think there will be a number of entrants that will seek to emulate what we do, so protection of our intellectual property, our know-how is paramount in our minds. And I think success will be built upon proven performance installation. By installation over there just as it was achieved in the domestic US market.

The initial regulations when they came out would suggest that we were probably more favored on smaller to more intermediate sized units with certainly large new units favoring SCR. The real benefit that I think we'll ultimately be able to effectively market is our layered hybrid approach that can achieve SCR like reductions. And I would say that probably the market for existing units is one that will penetrate greater than new units. So I think building the organization, developing a solid knowledge base of what would be effective marketing strategies that are certainly different there than they are here, having the organizational talent and the size of this is with the right partnerships at various levels is going to be what makes the difference for us over there.

All right. Thanks very much.

Our next question comes from the line of Rick Hoss with ROTH Capital Partners. Please proceed.

Good morning.

Hi, Rick.

Could you talk a little bit about FUEL CHEM on a quarterly basis throughout 2011? Should we be expecting Q1 and Q4 to be a little bit lighter or-- and Q2 and Q3 to be a little bit higher, is that kind of how we should think about it?

Certainly Q1 of 2010 included a large risk share payment of $2 million which we've frequently noted. And the current Q1 of 2011 is not going to show a big up tick. However, with the longer sales cycle, the ability to expand to additional units inside existing customers and the ability to achieve new opportunities with a number of customers we have not penetrated, in our opinion, still bodes well for long-term growth. This is a business that you continue to sell day in and day out. We have to emphasize that. It's just because it's been sold before doesn't mean we don't have to maintain our effective validation of all of the benefits that the FUEL CHEM system offers, particularly in light of possibly changing fuel strategies.

I'd say right now with the Coal markets the way they are, that there is a lot of consideration now given to burning the kinds of coals that require our program to achieve the slagging and efficiency improvements. That being said, Natural Gas prices are low. There's a lot of pressure on the utility industry to shut down Coal-fired units. So I would characterize the marketplace as one of significant challenge that requires effective verification that what we're doing is delivering benefits. The example I cited in my prepared remarks certainly show, if you do the math, a tremendous return on investment. The ROI benefit of FUEL CHEM has never been greater. So there'll be operational challenges, which I think will be mitigated as the economy improves and electrical low levels increase. I still-- I think we all think that this is still a growth year for FUEL CHEM, but one of very significant committed selling effort. And that's the way I see our FUEL CHEM sales organization approaching the marketplace.

Okay. And then with a continued slow economic recovery and addition of more new customers, would you say a $50 million run rate is out of the question?

Well, I can't specifically give you a number.

Right.

You look at the revenue mix we had last year it was evenly divided at about the $41 million run rate for APC and FUEL CHEM. It's my belief that we're going to see, based upon all of the market data we know, probably stronger growth for our solutions in the APC side as in terms of a growth rate than in FUEL CHEM. Do we expect to at some point cross over that run rate? Certainly do. We're in it for growth. But as I said, I think it's a challenging year.

Okay. And the last question is more with the $30 million you have in cash or should we be thinking about anything how you're going to be deploying your cash maybe in the M&A market or organic growth, how should we think about that?

Well, I view the availability of cash on the balance sheet as not necessarily the driver for an acquisition. I think acquisitions have to be viewed based upon good investment decisions, how they're financed, whether cash, debt, stock, those are financing decisions. We want to continue to build a strong balance sheet. We think that certainly helped us through the economic downturn when access the to credit and limitations on cash resources strained other companies. I think it's a good, prudent position to be in. I think it's a particularly appropriate position to be in when you've got sales that are based upon long selling cycles, regulations that can change. And we certainly are constantly looking for non-organic ways to growth but we'll be selective. And when the opportunity comes as it did a couple of years ago, we will have the cash needed to do it.

Okay. Thank you for your time.

But also it-- by the way, increasing those reserves opens up the opportunity for larger potential acquisitions. So by no means do I feel that we are sitting on excess reserves.

All right, thank you, gentlemen.

Our next question comes from the line of Lucas Pipes with Brean Murray. Please proceed.

Hi, good morning. There has been a number of announcements from utilities about coal plant retirements, you mentioned that briefly. How would you describe the plants that are potentially being shut down? Are those already operating at reduced capacity or how would this affect your business?

Well, I think it's the smaller units, the less efficient units that probably are more vulnerable. A large efficient Coal-fired plant may be operating at a reduced level due to the demand requirements but doesn't necessarily mean that it's economic to shut that down, particularly when there are control technologies available. The switching to gas has been a major consideration, but I for one am a believer that most people in the utility industry have always recognized that coal has been the lowest cost per million Btu fuel. It's a secure supply. It does not suffer the exposure to pricing fluctuations and will continue to be a very important part of our base load, electrical utility industry. On the margin, switching can occur or retirement can occur. I don't think I'm in a position to comment on each and every one of our customers' plans. You hear varying views by utility executives as to what they intend to do with their fleet, so it kind of depends upon what their investment infrastructure looks like and what their opportunities look like. But certainly, the marginal units will retire out.

Thank you, that's helpful. As a quick follow up, you talked at length about the regulatory developments in China, that was very helpful. Just in terms of timing, when do you think that the regulations could kind of translation into quotation activity?

Well I think they're already translating into quotation activity. Compliance begins after they go into effect. And as far as we understand, we're in the month in which all those regulations were to be finalized and have consistently stated in the past that around March 2011. There have been as I said recent papers issued. We know what the NOx reduction requirements are both on new units and existing units. We know where these key point regions that are have to achieve levels of reduction on existing units equivalent to that of new units. That alone is generating significant amount of quotation activities. We know what the recommended technologies are. In some cases we're very well positioned. In some cases, full blown SCR will be the choice.

The other thing that we've noted is that while this new public version of the regulations doesn't specifically comment stating you have to use Urea versus Ammonia. We do know that Urea is the preferred Reagent in NOx reduction in the more highly populated dense areas. And that's why you've seen us achieve success in our ULTRA system sales. My hope that our advanced SCR layered approach will be a preferred solution as it's so capital efficient.

So generally speaking, I think we're at the cusp of seeing not only legislative enactment, but as-- I've also said it's a fairly short time frame. If you think about new units being in full compliance by January 2012, that's about nine months away. But in this industry, 2014 is a very near end time frame for planning purposes. So we're seeing a pickup in quotation activity. I think a lot of our sales in the past were a little bit more in line with doing the right thing in politically important areas. And I think this year forward may be peaking in a couple of years, will be the kinds of response to these regulations that plant operators will be doing there. As I've said, I think we'll also see a lot of competition. We have to be quick on our feet, effective in our marketing strategies, ensure successful quality engineered programs that validate us over others as the most reliable supplier of these solutions.

That's very helpful.

That's what made us successful in this country. I fundamentally think that's what's going to make us successful in China.

Thank you very much for all that color.

Our next question comes from the line of Dan Mannes with Avondale Partners. Please proceed.

Hello, good morning, everyone.

Good morning, Dan.

I just wanted to follow up on Fuel Tech. I wanted to make sure I understood some of your prior answers. So in the fourth quarter, which was up substantially both year over year and sequentially, you benefited from some new customers, but I just want to clarify, those are ongoing fees from new customers, not any sort of one-time payments or anything like that?

Dan, you said Fuel Tech and I think you meant FUEL CHEM, right?

I meant FUEL CHEM, yes.

Yes, there was no one-time risk share or any other revenue recognition in the fourth quarter.

So with that as a-- sorry, keep going.

That was a current run rate.

So at $11.8 million in the quarter, is there any reason to believe, especially given than Q4 is not necessarily the seasonally strongest quarter for Coal-fired generation, that, that wouldn't be a baseline number quarterly for 2011?

It's generally reasonable, although, I would say that we pointed out that we are increasingly selling to larger units. And if there are any operational interruptions or delays on some of those larger units, you can you see a material fluctuation. We can't predict those. So either a planned or unplanned outage or reduced load operating level for a period of time can affect us. That is the variable in the mix, Dan.

Okay. And then just as you look at the improvement both sequentially and year over year, is-- are you guys capable of assessing how much of it was due to new versus how much was due to improved utilization on existing?

Yes, most of the improvement this year, I would consider it was a -- we had a larger customer added the end of 2009. So you might look and say well that's technically not a new account in 2010, I view it as a new account. So most of the business was new customer accounts. We had two customers in the fourth quarter that had a partial period with us, so we'll see a full quarter of those revenues next year. So-- but as Doug pointed out, the mix of customers and who continues on is the real-- that's the wild card, so.

Got it. I'm just-- I mean I'm looking at almost a $2 million up tick sequentially and historically you've said even your largest customers aren't much more than $1 million a year. So I was-- I guess I was wondering did-- were they that large that started up in the fourth quarter or again, is there any improvement on some of the existing customers?

No we've had a nice -- the customers that we've added have been good sized units. So that's been real encouraging.

All right. Well I think I've probably beaten up that topic enough. Real quick, on the taxes 46%, I know that's been a historical rate. Anything you guys can do to bring that down to a more reasonable level? That does seem kind of high certainly relative to it's other multi-national companies.

Yes, we will have some improvement. We have some ISO awards that are permanent add backs right now. Those will finish their vesting at some point, and so that will tick off a couple percentage points. The other parts meals and entertainment. We have a large sales force that is spread across the US, so our T&E costs will continue to be probably a 3% increase on our base rate, so.

Okay. Briefly on SG&A. Your commentary, you were saying it was coming down, is that as a percentage of revenue or in absolute dollars?

Yes, percentage of revenue.

I can comment on that. When you look back a few years, you could you see our SG&A being in the low to mid-30s range and it crept up to the low to mid-40s. That's too high. A lot of work went into the last year to making sure that we were properly organized. We did that with the minimum negative effect to the organization. And a lot of strengthening has been done. That's all positioned to have the best possible organization that we deserve to have. And as well as dry growth, which then absorbs those costs and a cost of sales in part. So I fully expect that we can manage our way to a reducing percentage of SG&A as a percent of revenues.

Got it. And then the last thing, and I know you're not giving formal guidance, in your press release, you noted you expect that 2011 will show growth in revenue and earnings versus 2010. You're kind of setting the bar a little bit low there. I mean, I guess I'm -- especially given even what you guys filed in your compensation plan for Executives. So I guess I'm wondering why point to that when realistically, you certainly sound more bullish on your growth opportunities than that sort of commentary would lead to us believe?

I'll be happy to answer that. My style, Dan, is to under promise and over deliver. It's very difficult to achieve -- to predict specific guidance relative to revenues and earnings in a business that has large dollar projects and long sales cycles. So sitting here trying to do your best it's very difficult to give you a revenue number. However, I can tell you that we intuitively feel that we can continue to maintain the level of growth rate that I think we just achieved over the last year. And maybe that bar might be viewed low, but again, I'd rather over delight than under deliver. So we're driving for as much growth as we can achieve. And sometimes we get to the end of the year, I know in 2010, we looked at another big booking that got delayed by the customer. Nobody won it, it just got delayed. Other things came in right as the year closed.

We had a good quarter, and I can tell you we worked very hard to achieve that revenue run rate. It was, I think in direct -- could be directly attributed to the energy and level of our people, the selling and effective selling that went on to validate what we have and make those results happen. So I do point to the talents that we have in the Company are going to be what makes the difference in our growth rate. And so the focus over the last year has been to really put the strongest possible human resources at work to achieving what, I think, ended up not only satisfying customers and hopefully stockholders, but certainly I could see it on the faces of our people that they're enjoying what they're doing. As long as they keep doing that, the growth will come.

Got it. Well thank you.

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

Hi, good morning.

Hi, Graham, good morning.

Talk a little more about the opportunities you see on the Industrial boiler side. What are you hearing from your conversations with customers just in terms of when they're looking to move forward with orders there and how would the margins compare for an Industrial client versus a Utility?

Let me answer the last question first. In the past, margins have not been as high on industrial orders, but we're seeing a renewed opportunity. That market didn't really grow dramatically for Fuel Tech in the past, but now with some of these new regulations as well as latitude given to many of the smaller boiler operators, and those are primarily boilers that operate at a capacity of less than 10 million Btu per hour, they don't have specific requirements on them as do the larger boilers, so that's promoting alternative fuels such as Biomass. And all of these regulations, of course, deal with pollutants other than NOx that are being discussed, Mercury, Cadmium, Formaldehyde, Hydrochloric acid, all these-- CO, all these are under increased regulatory standards.

The opportunity we have is since all of them do require NOx control, that we're seeing the opportunity for regional area boilers to convert to Biomass, burn coal and anything other than non-waste materials. And we think that that's going to increase this market for us. In fact, we've already seen increased quotation activity. I just learned last night of three more active projects that just came up all related to Biomass. So it's an early turn in the market. We just got new EPA rules at the end of February, and our general early assessment is that, it's going to be a renewed growth area for us. In fact, we're considering an additional person in the organization just to help effectively market that segment.

Okay, great. And then I was wondering if you could comment a little bit on what you're seeing on the competitive outlook on the APC market side domestically? Has there been any change that given the turmoil over the last few years and then going forward with the new rules coming out?

Not really. We have seen some people who have been working at competitors, seek employment opportunities with it so that would suggest that certain competitors, and I'd prefer not to name them, may be having more challenge than we are. We're not seeing a real difference in the makeup of who the participants are. But as I said about China, I think we don't know who all we're going to be competing with over there a year from now.

Makes sense. I'll jump back in queue. Thank you very much.

Thank you.

Our next question comes from the line of Scott Reynolds with Stifel Nicolaus. Police proceed.

Good morning, everyone. Just have a couple quick questions. Historically, you guys used to give units for your FUEL CHEM business. I was wondering if you could give a rough number there or at least say how many units that have come offline? So for instance the, I would expect the medium size boilers when electricity demands start to increase, that utilization levels on those affect those the most. So we'd -- I'd be looking for the number of units that are installed and then potentially the number ones that are running currently.

I think the prior metric of trying to gauge our FUEL CHEM business on units wasn't as accurate as where we found the market trended. Because of the economic downturn, there were many units that were reduced in load or shut down. Did they-- did that affect our business? Absolutely. There were some units that went Commercial and didn't sustain that. We found that over time that we were beginning to achieve success on larger units. So the way I look at the business now, I tend to relate the revenues to the megawatt hours that are under FUEL CHEM management. We're certain -- we certainly have a number of installations out there far greater than what we're currently running. I don't think we prefer to actually give units today, but certainly we're operating at fewer than half of those units that we previously sold.

In some cases, equipment remains there. They pay us an availability fee. In some cases, either they've asked us or we've decided to remove that equipment. In the end, we're trying to achieve a growing revenue business. We're interested in units of all sizes. We have yet to see this market develop in any big material way outside of the United States. I think that will come in time, and it's still an under served opportunity. For the life of me, I -- if I were an owner of some of those units and I saw the ROI opportunity, it would be an easy decision. However, this requires a lot of effort to sell and market convince despite that. We don't get our revenue passed through to customers. It's often not quote "in the O&M budget" but yet the savings that can be realized particularly on the fuel side are very significant. So I think as we better understand what, quite frankly, was a new market in this decade, we're going to be able to offer to you a little better way to meter and measure the-- what are the metrical drivers of this business.

All right. Sounds good. And then for the orders that you've had in the past few months, it looks like they're all weighted to 3Q, should we expect potentially -- I'm looking for an idea on mix here, should we expect a slightly weaker second quarter and then an up third quarter?

For FUEL CHEM?

No, no, no, for the APC business, sorry.

Oh, for APC, I'm sorry, I thought we were on FUEL CHEM. I think you're going to see a much stronger second half than our current- I mean you know what our backlog is and we execute those orders over a sustained period of time. We're approximately just slightly under I think the same backlog that we had at year end. So it's probably fair to say that early Q1, Q2 of 2011 would look a little bit more like early 2010. And yet, knowing with the transport rules coming and the time frame for requirements to comply, I see second half as more robust than the first half. And I see the APC business in its entirety probably on a full-year basis, therefore, achieving the greater growth rate of the 2 business segments.

Okay. And then bookings--

We see it in the quotation activity and the timing of those projects.

Okay. And then bookings typically in APC or at least prior to 2010, were pretty back end loaded mostly to the second half of the third quarter and fourth quarter. 2010 was a little bit more steady. Is it China that's leveling that out or is it the slow growth in the US and should we expect bookings to be more second half weighted as it has been typically?

The bookings all follow the scheduled outages, and that's spring and fall. So you would expect to see some orders coming in soon for the fall outages otherwise you are scheduling next spring or spring of 2012. I think some utilities are waiting to get some clarification on what the Regs will be, so to echo Doug's comment, I think the back half of 2011 going in to 2012 is probably a robust period to look at.

Okay. And then for APC margins, now that we have the low margin business out of the way, should we see a step function in margins in the first quarter or should we expect a steady improvement through the year?

First quarter will be better, we will see improvement in the first quarter. And then looking out past I'll say June of 2011, it would flatten out but then depends on mix if we engage with some larger burner opportunities and sign some of those up with installation work than that's the dilutive effect. And you'll see that in the Press Releases when we announce those, so.

Great. Appreciate all of the color.

A little bit additional color. It's very, very hard to give you a pinpoint number because we quote projects raising in size from a few hundred thousand to many millions of dollars. But when I look at the expected level of possible wins in the first quarter, and I look at the additional strong prospects that we see for the balance of the year, I would characterize that as to say that those remaining quarters quotation activity is on the order of six times the size of the first quarter. I say this just to give you a feel that as we move through the year, that bodes well for potential increases in booking rates. But you take a $5 million project and you win it or you don't win it versus a $500,000 project that you win or don't win it. And I'm sure you can appreciate that it's very, very hard to be precise with the absolute level and timing of those bookings. But when you look at the landscape of quotation activity, the remaining three quarters is a nice ratio over the first quarter. And I think again, that evidence is the regulatory-driven nature of this market.

Thanks again.

Hope that's helpful.

Our next question comes from the line of Steven Charest with Divine Capital Markets. Please proceed.

Good morning, good quarter, everybody. You answered most of my questions on characterizing what type of customers are coming in. Regarding expectations for the regulatory driver here, can we expect that there'll be some kind of inventory build or supply or additional costs in anticipation of the July 2011 kickoff, sort of speak?

Inventories on our books?

Yes, kicking in additional costs.

We don't really carry inventories related to APC segment. We win those contracts, we procure most everything on the outside and then sell it as it's installed. We actually have a pretty good inventory of FUEL CHEM equipment. And you've seen us spend a couple million dollars a year on those systems. I don't see any particular reason to think that we need to invest significantly from where we are today in FUEL CHEM equipment inventories.

Okay. So the-- I'm just trying to reconcile these two pieces. It would appear that more orders are coming from larger projects where the gross margins are down because it's a little bit more turnkey activity in there. So going on a go-forward basis, you expect that to normalize?

That's right.

Okay, good. Thank you.

Yes, we certainly had one very large order, and I think two prior calls as we looked into the fourth quarter, we gave our view that the margins would be lower because we knew that there was a lot of installation work that was passed through at little markup. So the nice thing is it demonstrated our capability to do a large complex job, particularly a large burner job. That customer was extremely satisfied. We were just wrapping up all that work-up now, and we consider it a success. But we had to commit to some work that we wouldn't typically incur on a standard NOxOUT type job.

Our US margins on the backlog that we rolled are pushing 50%. So you should see that normalize.

Okay, good. No, that's very helpful. Thank you.

Looks like our next question is a follow up that comes from the line of John Quealy with Canaccord Genuity. Please proceed.

Hi, with regard to the APC backlog, number one, I think it's about $19 million or $20 million at the end of the year; can you talk if that will entirely be consumed during calendar year 2011? And then also just a bit more background for us, can you break out by what type of technology is in there and if you could give us relative revenue opportunities by type whether it's low NOx burner, TIFI, et cetera, just so we can help calibrate the expectations?

Yes, first to your question on timing. I would look for most of that to be worked out by June of 2011. Regarding mix, I know there's SNCR work in there. There's ULTRA work in. We don't have any large burner jobs running in the backlog, so I don't know if that's -- does that answer your question?

It does. And then if you can give us a relative revenue opportunity by type, just as we go forward and monitor these releases?

I'd have to follow up with you on that, yes. That's something we can look at, I don't have it in front of me by type on the backlog, but--

I would say typically you would see the greatest percentage worked off to be our traditional SNCR whether that's NOxOUT our HERT. We are looking at some low NOx burner over-fired activity, and as we win what's being quoted, that will fuel that. But we're-- we don't have a big low NOx burner job like Dave said. We don't really have a lot in our backlog relative to SCR type services.

There's a couple ULTRA projects in there, too.

But there are-- exactly, there are some ULTRA projects. When I look ahead in the three quarters remaining, I do see some large dollars concentrated in some potential win in the low NOx burner over-fired air. I'm seeing a growing amount of quotation activity around advanced SCR and our traditional SNCR business still ranks in there strongly and there are a few ULTRA jobs that are considered good prospects. So I would say what you could take away from that is that, that which we invested in a couple years ago on the front end low NOx burner over-fired air side as well as the back end SCR side, we're seeing quotation activity that we would not of otherwise had and that's going to be a driver for growth.

Okay. Thank you.

Kind of getting ahead of what's in the current backlog to just give you a flavor of what I think will fall into that backlog. Is that helpful?

And it looks like, ladies and gentlemen, this will conclude the Q&A portion of the call. I would now like to turn it back over to Mr. Doug Bailey for closing remarks.

Okay. Well if there were no other questions, I want to say I think they were good questions. I hope we're giving you as a reasonably good insight into our outlook. I think with the economy improving, we feel confident. We feel well positioned, and I want to say I'm particularly enthused about the quality of effort that the organization is making. That in the end makes the biggest difference.

It's an effective team. I enjoy talents I see working together, and we look forward to 2011 that should exceed 2010 in a nice way. It's early in the year, and we've got a lot of work to do, but from call to call, I think you'll get a sense of where we're heading, and I hope that this call was productive and beneficial for you. We thank you for your support. We appreciate the solid foundation of our shareholder base, and we look forward to delighting those shareholders. Thank you, everybody.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a wonderful day.