Fuel Tech Inc (FTEK) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Fuel Tech, Inc. earnings conference call. My name is (Tahishia) and I will be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct 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 for today, Ms. Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Please proceed.

Thank you very much. Good morning, everyone, and thank you for participating on today's conference call to discuss our first quarter 2011 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 that could cause actual results to differ materially from those set forth in our forward-looking statements. Factors that could cause results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call. As a reminder, this call is being broadcast over the Internet and can be accessed at our web site, www.ftek.com.

With that said, I would now like to turn the call over to Douglas Bailey. Doug, please go ahead.

Thank you, Tracy, and good morning, everyone. Thank you again for joining us on this call.

I'm pleased to report that record first quarter 2011 revenues were $22.6 million, an increase of 28% from the first quarter of 2010. This was driven by strong increases in both the air pollution control and FUEL CHEM segments. Net income for the quarter was $1.3 million or $0.05 per diluted share, compared with net income of $0.2 million or $0.01 per diluted share in the comparable prior year quarter.

Adjusted EBITDA was $4.4 million, up 50% from $2.9 million, which was reported at the first quarter of 2010. Our working capital at quarter end stood at $39 million, an increase of $2.4 million over the prior quarter end, and our balance sheet remains strong with little debt. In a few minutes, Dave Collins, our Chief Financial Officer, will discuss our operating results in greater detail.

Most of you know Fuel Tech is a fully integrated company that uses an extensive suite of technology, provides weather 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 principle business segments. First is FUEL CHEM (inaudible) driven specialty chemical business for efficiency improvements. And the second is a regulatory-driven business for air pollution control that consists of engineering and design services, a large portion of which our capital project relates.

Let's start with our FUEL CHEM segment, which achieved strong revenue gains, primarily the result of the start-up of chemical injection for a number of new customer accounts. I'm pleased with our results in this segment, especially when you consider the market conditions we faced this quarter. The economy, while showing some signs of recovery, still remains sluggish and is especially weak in the utilities sector where we have seen plants shut down, assets sold, and operating budgets continuing to remain tight.

Natural gas prices remain low, currently at a spot price of $4.10 per million BTUs, which is $0.29 lower than the 2010 average. This does put pressure on coal-fired power production as some plant operators will run cleaner gas units and not have the slagging and bowing issues that they would encounter 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 shut down for a period of time, which means our revenues per unit can be dramatically lower in some cases.

That said, our sales team is doing a great job and we're 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 these lost revenues. Given the sluggish economic environment, the good news 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 widespread US coal prices, which continues to be a significant driver for our business, as utilities are attracted to the compelling economic benefits of shifting from central and northern Appalachian coals, generally one of the fuels of higher heat content and fewer operational issues, to the lower price and lower quality PRB and Illinois Basin coals.

Given the slagging and bowing challenges caused by high levels of sodium, as typically found in PRB coals, high levels of iron and sulphur is 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 units.

Thus far this year, we've announce the receipt of two commercial FUEL CHEM (inaudible) from large coal-fired boilers at domestic electric utilities. We are pleased that we are able to proceed straight to commercial status, without the need for a demonstration, a trend that we have been experiencing. We look forward to working closely with these customers and we'll explore opportunities for additional business on both of these clients' extensive coal-fired fleets.

Now let me turn to our Air Pollution Control or APC business segment where strong quarterly revenue and operating gains were also achieved. During the first quarter, we announced contract wins of $2.7 million, which consisted of awards including the following. Our first SCR design services award in China. An award from China's largest electric utility for two ULTRA systems, and an award for an ASCR, or advanced SCR, which incorporates our combined low NOx burner, over-fire air, NOx OUT SNCR, and SCR technologies.

While we are pleased we received these orders from China, we were disappointed that the overall US volume of APC contract awards in the first quarter was lower than we had anticipated. This was due in part to customer delays, as well as the continued results of domestic regulatory uncertainty. This uncertainty surrounds the clean air transport rule, which was proposed in July 2010, and yet is set to be finalized by July of this year.

The final rule, which applies to 31 states and the District of Columbia, is expected to significantly limit upwind pollution sources to ensure that the downwind states can meet clean air requirements. It consists of an accelerated timeline, which requires further emission reductions below 2005 levels, by reducing SO2 emissions by 71%, and reducing NOx emissions by 53%. Transport rules replaces the Clean Air Interstate Rule, which was enacted under the Bush Administration.

The EPA's initial transport rule, or round one, is based on the 1997 National Ambient Air Quality Standard for particulate matter 2.5 and ozone. The EPA is looking to issue additional transport rules based on the 2008 National Ambient Air Quality Standards or the air quality standards for ozone from which the reduced nitrogen oxide requirement will come.

This second transport rule, or round two, is expected to be proposed towards the end of 2011, finalized in late-2012, with a 2014 compliance date. As we have stated many times before, this yields relatively little time for utilities to comply, particularly if you're interested in much larger SDR projects. Utilities know this. The results are in the planning phase.

(inaudible) continues to be the trading of NOx credit and whether or not the final transport rule will allow for intrastate trading of emission 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. Before extensive trading is allowed, our combustion technologies and SNCR systems are flexible, low capital cost solutions that should drive and have thrived in cap and trade environments.

We should also do well with limited trading as our combined technologies with our advanced SDR approach can approach NOx reduction levels close to conventional SDR systems with very significant capital savings. No matter the outcome, the bottom line is that prospective customers will take steps toward implementing their compliance plans in a capital constrained environment, where potential domestic labor and worldwide SDR catalyst could be in question.

We believe that lower capital costs solutions, a broad number of technologies that enable a layered approach, and our shorter lead time installations will enable Fuel Tech to benefit from this accelerated compliance schedule, as our technologies should become a preferred solution for NOx control. In addition, in order to avoid a rush of environmental constructional projects, which may lead to bottlenecks and compliance deadlines, and in order to facilitate critical timing for scheduling unit outages, utility operators have started planning and in some cases investing in emission controls. This is imperative because if they do not, they run the risk of major power shortages and price increases if demands for critical equipment and supply exceeds production.

So as we approach July, when the transport rule is anticipated to be finalized, we have seen an increase in our domestic quotation activity. This is evidenced by our APC contract announcement totalling nearly $7 million, of which over $4 million represented domestic orders, which incurred in the month of April alone. Other APC opportunities have emerged recently in the industrial market.

The boiler maximum achievable control technology, or MACT, in solid waste incinerator rules were issued March 21, 2011, through March 21, 2014, compliance date, three years. ECPA requirements potentially affect more than 1,600 plant sites and includes stringent controls for a number of pollutants. These quite complex rules have been revised since the June 2010 draft, and the now specified emission levels that are more realistic.

These new regulations create near-term opportunities for Fuel Tech, particularly on units where improved combustion is require to meet carbon monoxide emission requirements, leading to NOx control needs, and where biomass may be utilized as a fuel source that states strive to meet renewable portfolio standards. Additionally, the EPA on March 16, 2011, issued its air toxic rules, also known as Utility MACT, affecting utility (inaudible) greater than 25 megawatts and aimed at reducing the release of mercury, arsenic, and certain other toxic air pollutants from new and existing coal and oil-fired generator units. Final rule is expected by November 16, 2011, with compliance in 2014.

As part of the reform, the EPA has also proposed changes to the source performance standard governing emissions of particulate matter, SO2 and NOx. So as you can see, the pace of new US EPA regulations affecting both utility plants and industrial units has been accelerated. We have several new guidelines limiting a variety of emissions which will require additional investments in NOx control technology.

Finalizing these regulations in a timely fashion will provide the industry with the certainty needed to proceed with the market response, modernize the electric generation fleet, and allowthe lowest cost and most efficient approaches, which is exactly what Fuel Tech can provide. Similar to the domestic APC market, the APC market in China is also dependent upon new regulatory requirements.

Part of its 12th Five-Year Plan that will soon be finalized, China will tighten pollution control standards for its existing fleet of fossil fuel plants, as well as fossil plants to be built in the future. In anticipation of the finalization of this plant, China's Ministry of Environmental Protection has issued several documents describing the specific nature of the regulations to be implemented in support of reducing harmful pollutants and further defining the technologies recommend to achieve the reductions.

Most recent documents defines the regulations for NOx as applying to all thermal powered units that have a steaming rate of 65 tons per hour, or 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 standards. While existing units that were 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 standards 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 all new units must comply by January 1, 2012.

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 required emission levels. Combination of SNCR and SCR technologies in tandem is also considered as a viable technology choice.

While the current documents do not specifically comment on the use of the urea as the preferred reducing agent in the NOx control process in high population density areas, we do believe that technologies that convert urea to ammonia will be deployed in those key point regions in support of safety objectives. This practice has already been implemented in major cities such as Beijing, Guangzhou, and Shanghai. Thus far, we have contracted or completed ULTRA projects on over 13,000 megawatts of generating capacity in China, as well as installing nearly 50 commercial ULTRA systems in the US, Europe, and China.

As we've stated before, we believe our broad portfolio, low capital cost technologies will be effective in helping fossil plants address the NOx emission control policy guidelines that have been released in China thus far. In particular, our unique ability to combine technologies on a project-specific basis, ranging from low NOx burners and over-fire air to NOx reducing hybrid systems, affords us a competitive position at bidding on power plant units of all sizes.

While the administration has not come forth with the final ruling yet, we expect it to be soon, very soon, as we've all seen an increased level of activity and order flow (inaudible). This activities for combination systems require multiple technologies have increased, as well, and we are hopeful for additional orders in China in the future.

So now I'd like to turn the call over to Dave Collins, our Senior Vice President, Treasurer, and Chief Financial Officer, who will discuss for you much greater detail our financial results. Over to you, Dave.

Thank you, Doug, and good morning, everyone. We are pleased to report solid top-line and bottom-line results for the first quarter of 2011. Validated revenue for the quarter was $22.6 million, representing an increase of $5 million or 28% over the prior-year revenue of $17.6 million. Net income for the quarter was $1.3 million or $0.05 per diluted share, representing an increase of $1.1 million over the prior-year net income of $200,000.

Our adjusted EBITDA for the quarter was $4.4 million versus $2.9 million reported in 2010. This increase represents the year-over-year improvement of 50%. Our adjusted EBITDA margins for the current quarter was 22% versus 17% in the prior-year. Both of our operating segments contributed significantly to our strong performance. Our foreign revenues is up $3 million, represent an increase of 17% over the prior-year.

Now, let's talk in more depth about each of our business segments. Our FUEL CHEM segment revenue for the first quarter totaled $11.5 million, representing an increase of $2.1 million or 23% over the prior-year amount of $9.4 million. Our 2011 first quarter revenue total includes approximately $1 million of installation services at a new customer site, while our 2010 first quarter revenue total included a contingent risk-share payment of $2 million.

We have announced two new commercial FUEL CHEM programs thus far in 2011. Each of these new orders represented additions to an existing customer's fleet, and as a result, comes straight to commercial operations. Revenue generated from coal-fired units increased $2 million, or 23%, to $10.7 million from $8.7 million in the first quarter.

Quarterly revenue from non coal-fired units of $855,000 was up 22% versus the prior-year quarter, primarily due to the start-up and testing of an additional oil-fired unit in Mexico. Our air pollution control or APC segment revenue for the first quarter was $11.1 million, representing increase of $2.9 million or 35% over the prior-year amount of $8.2 million. This increase is primarily due to the timing of revenue recognition on both projects.

During the first quarter of 2011, we have announced $2.7 million in APC orders and another $6.9 million in April. Included in these amounts are five awards from China. APC interest abroad remains steady for the first quarter of 2011.

Backlog at the end of the first quarter was $14.5 million, and is comprised of $7.7 million domestically, $5.5 million in China, and $1.3 million in other countries. The minority of this backlog will be recognize the in the current year. Additionally, we expect more announcements during the June quarter, and a stronger level of awards in the latter half of the year.

Consolidated gross margin increased three percentage points to 49% from 46% in the prior year. Quarterly gross margins for our FUEL CHEM segment decreased from 55% in 2010 to 49% in 2011. Two significant factors that contributed to this change were, one, recognition of the $2 million risk-share payments in Q1 of 2010, and two, installation services of $1 million reported in Q1 of 2011.

The costs associated with the risk-share payments were recognized during 2009 when the demonstration period took place. And additionally, the installation services were reported at a lower margin, which was dilutive to the reported results. If we adjusted our gross margin for these two discreet items, our comparative gross margin for the first quarter would have been 50% in 2011 versus 43% in 2010.

Our core chemical margins continue to remain strong, and going forward, we expect the gross margin percentage of this segment to remain above 49%. Our APC segment gross margin improved 14 percentage points to 50% from 36% in the prior year. Margin increase for 2011 is attributed to a shift in overall project mix, although historical levels with this segment have trended lower, gross margins for our core products remain strong.

The APC margins for the remainder of 2011 is dependent on product mix and we would expect the reported results to average down to between 38% and 40%. SG&A for the quarter was $8 million, an increase of $500,000 or 6%, versus the first quarter of 2010. This change is comprised of increase in employee-related expenses, including incentive compensation of $860,000, costs associated with outside service providers of $470,000.

Partially offsetting these increases was decreases in stock compensation of $750,000 due to the vesting of options granted in earlier periods and a decrease of $121,000 in depreciation expense related to the disposal of a leasehold improvement. The Company continues to focus on discretionary spending, while still making the strategic investments required to develop our business globally. Quarterly research and development expenses were $402,000 and were focused on developing and testing technologies with near-term market applications in both boiler optimization and air pollution control arenas. This amount is up $256,000 from the prior-year comparable period.

As long as we continue to watch the domestic and international regulatory landscape to ensure Fuel Tech is positioned properly to meet the emissions control needs of our customers. For emissions like mercury and CO2, we continue to evaluate various technologies, to identify ones that we feel are commercially viable.

First quarter 2011 generated operating income of $2.8 million, compared to a $491,000 in the prior year. Improved results for both segments drove our results. As discussed previously on this call, our adjusted EBITDA and net income results are also reflective of this strong performance.

Over the past few years, we have made selective investments in anticipation of order flow in both of our segments. We therefore believe we are well-positioned to handle increased revenue levels in our core businesses without needing to make additional significant investments in our personnel or infrastructure. Due to the mix of forecasted domestic and international revenue and income levels presumed for the full year 2011, we have set the full year 2011 effective tax rate of 51% and will adjust quarterly as necessary.

Cash on hand at the end of the quarter was $27.9 million, and other than our $2.3 million in debt in China related to the start-up of the Beijing Fuel Tech office, we have no debt on our balance sheet. Working capital increased $2.4 million during the first quarter to $39.0 million. We have not experienced any deterioration in payment patterns from our customers, either domestically or abroad in either of our segments.

Quarterly cash used in operations was $1.9 million due to changes in working capital components. Cash used in investing activities was $841,000, primarily related to the purchase of equipment for FUEL CHEM demonstration or commercial programs. Fuel Tech's domestic and international market interest and sales activity continues at a strong pace, especially in our APC business segment.

While we are encouraged about our business prospects for 2011, and we believe we will win substantial new contracts this year, however, the timing of those awards during the year remains uncertain and we, therefore, do not feel it is prudent to provide any additional quantitative revenue earnings guidance at this time.

Now, I'd like to turn the call back to Doug.

Thank you, Dave. Thank you, Tracy. We are pleased with the quarterly results that we've achieved. I think they're indicative of the confident trend we are on, knowing where the economy has come through this past couple of years. We remain confident, encouraged by our outlook.

Regulatory delays continue to affect us, but we've all known that's the heart of the business. We try to operate effectively within that environment, and I think have proven our skill at doing do. We still remain confident for the year, particularly on a global basis, and we'd be pleased to turn the call over to our audience for any questions that you may have. I'll turn the call over back to the operator.

Thank you. (Operator Instructions). Your first question comes from the line of Rick Hoss from Roth Capital Partners. Please proceed.

Hi, good morning.

Good morning, Rick.

A few things here. First, on the APC work that benefited the quarter, is some of that going to spill into the second quarter?I know that you gave expectations for the full year, but just trying to figure out the dynamic between the first and the second quarter.

Yes. We do have some that will continue on in the second quarter. So we would look for margins to remain higher in Q2.

Okay. And then as far as magnesium hydroxide pricing goes, has it been stable? It doesn't look like there's been any degradation on your margin on the FUEL CHEM side.

That's correct. That's right.

Okay. R&D, the ramp here, is there a particular focus -- I'm sure you want to be sensitive to competition, but -- and you justtouched on it, you said really both of the segments. So is there something that you're targeting? Is it -- are you staying still within coal fired or are you looking upstream/downstream from where you are now, or anything you could share?

Sure, wile we don't disclose what is it confidential and proprietary in development, I would say broadly in the FUEL CHEM segment, we are constantly developing and looking at more tailored chemical solutions that will finally address the needs of customers. And we've seen that evolve out of the product portfolio that we have, and we continue to work on that. We want our process to be as cost-effective for our customers as possible. And continue to preserve our competitive position in that still embryonic market.

On the APC side, we've worked hard to develop layered approaches that make us competitive at the levels of NOx reductions that can be achieved by the large-scale SCR systems. We will continue to invest in making our existing systems perform in a more advanced manner. We are also looking at areas of new pollution control opportunities outside of NOx. Those efforts will continue. Nearly speaking, I would say that the Company over the last few years was under-investing in its R&D.

The number of patents and technologies that the Company has achieved over its lifetime has been extensive. And we want to ensure that the revenue growth opportunities in the future is fueled by contingent innovations, new commercial opportunities that are in development right now.

Okay. And then on the FUEL CHEM, you mentioned there's $1 million in installation. So we need to take that out, in order to get a normalized run rate, $10.5 million?

That's correct. Yes. That's right. And traditionally, we don't incur, you know, charge revenues for installation work, sothis is somewhat unusual in the quarter.

Okay. Okay. Thank you, guys.

Thanks, Rick.

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

Hi, good morning, folks. First question on APC. Just to do a little bit of math. If we ended the quarter with $14.5 million of backlog and then we've got another $6.9 million in bookings, that's the correct numbers we should be looking at today, is that right?

That's correct.

Okay. And then I'm interested in the commentary about visibility on the APC business domestically. It seems like it's a bit more constrained this quarter versus last. However, from a macro perspective, I'd argue that nothing has really changed. Can you give us some anecdotal evidence of what you're seeing from your customers? Clearly, transport rules have been out there for a while, so I'minterested about what you're drawing upon in your conclusion.

Well, you know, one of the things that encourages us that we're seeing is that there's interest in all of our technologies, our traditional SNCR systems, are being sold. We're seeing the emerging opportunities to sell our SCR services in a greater way. The low NOx burner, over-fire air business that we've invested in continues to have quotation activity. And some of those projects can be very, very large (inaudible).

Interestingly, when we look over the quotation activity for the three-quarters of the year that we're yet to be reporting, we're seeing quotation activity across all technologies, LNB, SNCR, our ULTRA systems, and hopefully potentially much larger-scale SCR projects. That's where we've worked hard to position the Company, and we're glad to see the quotation activity across the board.

Just as a follow-up to that. In terms of perhaps positioning the Company for larger SCR jobs, historically, in the past, some of the larger jobs have gone in sort of that $15 million to $20 million project award range. Is that the range that you're talking about, Doug? Or are you actually going a little bit higher than that in this example?

Well, it can vary, of course, by size of the unit. But generally speaking, it could even be lower than that range because of the capital cost effective nature of our approach. You know, we tend to look at providing a single layer of catalyst and combine that with other upstream technologies to achieve high levels of NOx reductions.

So, you know, projects that we might quote, even in the $7 million or $10 million range, can be very cost effective against those of much larger amounts. I think the reality is that we must -- that the Company demonstrate our performance as we grow our project size. In the last quarter of 2010, we talked about a large low NOx burner project of approximately $13 million.

We took it on a fairly lower margin. (inaudible) requirement, and I think demonstrated what we're capable of achieving. There are projects of that size that are higher. I think we have to certainly demonstrate our layered approach is a very viable alternative, and I think over time those SCR projects will grow in contract amount.

Okay. Then my final questions on the FUEL CHEM side of the business. Can you talk about the relative performance of units that were previously idled into coming back online. I don't know if there's a metric you can share with us or any an anecdotes that you can share with us, if customers are coming back, or, in fact, they're letting those plants sit idle as demand curves work their way to improve. And then secondarily, on the $1 million install fee incurred, should we be looking for more instances of this or perhaps a change in the go-to-market strategy on FUEL CHEM? Thanks.

I'll address the installation No, change in go-to-market strategy. We always will talk to customers and accommodate the requests that are made. You know, I would consider that a somewhat unique situation.

Yes. As to the installed base, I think it's fair to say that perhaps looking back over four years or more of contract sales, perhaps about half of those have gone dormant or discontinued and may be shut down or switched fuel and don't require our program.

Now, that being said, many of those early contracts were smaller revenue per quarter contracts than what we've been sealing recently. So there's a real range of size in gross megawatts of these units, the dollar revenue per quarter generated by these units, and so to some extent, our revenue base has become more concentrated. But as we continue to sell new units, we're seeing the medium to large units, much more receptive. And you would expect that, because we had to develop the market and gain credibility before a larger (inaudible) unit would (inaudible) the system.

But it does range by easily a factor of ten on megawatt rating. And as you can imagine, therefore, the chemical injection rate can be proportionately different. So while a number of units have gone dormant and discontinued, some of which have continued to pay an availability fee, our equipment remains there. Some of which the equipment has been removed.

But as evidenced by the year-on-year revenue growth with business, we are seeing the technology validated, the performance achieved against good competition, so we have it. And yet we've had to really continue to sell the benefits of the program in light of the environment of reduced loads, fuel switching, operational budget constraints. Even when the ROI benefit may be compelling.

So I think our team is doing a great job out there. It's been a tough economic market these last few years, but we are gaining much ground and yet this market is still under-penetrated.

Thank you.

Your next question comes from the line of Jeremy Sussman from Brean Murray. Please proceed.

Hi, good morning.

Good morning, Jeremy.

On the coal front, you mentioned switching away from central Appalachian coal to some Illinois Basin and Powder River Basin coal. I guess, first, any preference for your suite of products?And, second, are you seeing a move into one or the other, i.e., Illinois or the Powder River Basin, more prevalent than the other?

Sure. There's definitely a preference for us to see increased use of Illinois Basin and PRB coals. Those are the coals that tend to cause the slagging, falling operational problems that we're serving our customers to address.

Coal prices vary significantly; they obviously vary in BTU value. They have a very high BTU, central Appalachian, northern Appalachian coal, in the 12,000 to 13,000 BTU range, coal prices in the $75 to $80 a ton are typical, and have been. Move into the Illinois Basin areas and they're under $50 a ton. And the very thick seam, low-cost mining operations of the Powder River Basin, are $12, $13 a ton, but they're also lower BTUs.

Illinois Basin coals (inaudible) 12,000 BTU and Powder River Basin coal is under 9,000 BTUs. Remember, the electric utilities are buying BTU value and combustion characteristics of coal on an as-delivered basis. So the transportation costs play a factor, how well those coals perform in the boilers play a factor, but generally speaking,there has been a long-term trend, as you know, to procure nearly half the nation's coal from the Powder River Basin. I expect that to continue.

I don't expect it to change significant percentage points growth wise. But that represents a significant quantity in our market. Interesting, the Illinois Basin is seeing a revitalization of its output. And those are probably the very good near term opportunities when you see fuel switching. And there have been cases where units have gone and tried these coals and gone back, too. So these are dynamic markets.

And generally speaking, I think there's great cost advantages today for the PRB and Illinois Basin coals. Mining costs in the Appalachian states are not coming down. Mining methods are becoming more restrictive. So strategically, long-term, our coal consumption in domestic US markets is not necessarily as favorable to the Appalachian states as it is to western mining and large-scale cost effective and (inaudible) operation.

No. I appreciate that. And you mentioned a number of initiatives, you know, that the government, the EPA is doing in order to, you know, basically clean up the coal fleet. Is it safe to say that the transport rule will have the biggest effect on your near-term operations over the next couple of years? And if so, can you give us a sense of maybe your expected timeline of when things will be implemented based on everything that you're seeing and hearing in Washington. Thank you.

As I said before, I wish I could have a good crystal ball on what actually will come out of Washington. But generally speaking, I think we're encouraged over the -- speaking just to the domestic APC market as to its growth potential and sustained market for us over the next three years. If you think about what I reported relative to compliance deadlines, the year 2014 frequently mentioned, if you think about mid to year-end 2011, the timeframe in which rules are more clarified. I see an acceleration.

In fact, I think our APC segment will outgrow our FUEL CHEM segment in 2011 over 2010. That being said, I think it is a little bit more second-half centered, simply because of these regulatory announcement dates. So I don't believe that we're going to see a sudden reversal in thinking as to what is needed and will be mandated relative to the NOx reduction. We know what the requirements are. If anything, over the last couple of years, the ultimate compliance years have been pulled forward, even though they're not in the current year.

I also see increasing requirements on industrial units, and I will tell you that because these compliance requirements will affect a broad number of units, there will be units that will be considered not economic to install those (inaudible), in particular when you look at our installed infrastructure. We have operating units going back to the 1940s and 1950s, many of which haveno emission controls on them. If they're smaller units, they just simply may not be as economic as they could be on other units. So some of them will go by the way side. There will certainly be a certain percentage of coal-fired generation that will be shut down.

I do not think, however, for a moment that that's a necessary impediment to the growth of our business. We always believe that coal-fired electricity generation is the base load way to power our nation. I think we'll continue to get nearly half of our electricity from coal. The recent unfortunate disaster that affected the nuclear market tells me that those projects will be canceled, certainly deferred and reevaluated. And I don't believe that the present level of prices for natural gas will be sustainable. So I have a very long-term encouraged belief about coal-fired generation.

Great. Thank you very much.

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

Hey, Doug and Dave. Thanks for taking my questions. Most of them have been answered. Just wanted to start first on the APC side. You mentioned that you're a little disappointed in the order rate in the first quarter domestically, and mentioned customer delays there. I was wondering if you could provide a little bit more detail, and whether that's regulatory uncertainty creating those delays or there's another factor involved.

Well, there's certainly is the existence of orders that we expect to announce that we simply don't have the contract in hand, that there's some final negotiations occurring. Those can easily spill from one quarter into another quarter. There have been contracts that we've bid on that we have not won. There have been contracts that we've bid on that have been postponed to as much as a year or more, that will not go away, but they just move backwards in the pipeline.

So I think that all-in-all, if I were to gauge our quotation activity as a metric, it's good, it's robust, it's strong. We didn't secure as many of those orders in the first quarter. But, as you know, we reported a nice sound of orders in April. There are more to come. And I'm not too concerned.

Are you seeing some of that increased quotation activity? I mean, is that domestically directly because of the transport rule and some of the regulatory clarity I guess that we've gotten, you know, understanding that we're still waiting for some. Is that what's driving the quotation activity?

Well, I think it's both existing and unfolding regulations. There's still an existing market that requires it. But everything got thrown under review when CAIR was vacated. So what utilities lagged was what's being substituted for CAIR. They all know that the NOx limit must be met, but how will the rules change? And it's been unfortunate that there's been a couple year hiatus.

But, as you have seen, we've reported reasonably good revenue run rate levels in that timeframe. We must remember that a strong first quarter was the result of effective selling a number of months ago because we have long, long sales cycles.

In part was the continued sale of projects, for example, from the Alliance Agreement, alliance customers. They were able to get a number of units installed on a subordinated cost-effective basis, we're beginning to pursue that. But you know we usually have a six to 18-month sales cycle.

Right. Great. Well, thanks for taking my questions. Appreciate it.

Okay.

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

Thank you very much. Good morning. Just two quick ones. I think it was late last year you announced two sizable contracts. I believe it was in early fourth quarter, about $9.6 million and I believe the release indicated they would be delivered in the third quarter. I know you're not giving quarterly guidance, but just trying to get a sense of -- it soundslike 2Q would be kind of slightly up and 3Q would be much more meaningful on the APC side. Is that what you're expecting?

You know, I would maybe switch that. I might look for a stronger Q3. We do still have some run-off of the backlogs that we've booked, as reported at the end of the quarter. But if I were to file the revenue by quarter, I would probably be a little bit more conservative on Q2 and push it more to Q3.

I would agree with that.

Okay. And then any thoughts on Q4 at this juncture?

It's hard to predict. But I believe that the momentum of Q3 will continue in Q4. I think, you know, if Q1 orders or if Q2 orders are softer, than Q4 revenue recognition might be pushed out into Q1 of 2012.

In 2012? Okay. The just one other quick one. I think you mention that the gross margin guidance for APC, I think you said for the remainder of the year was 38% to 40% down versus the recent result. Is that mainly due to the mix towards China or is it a product mix?

Yes. It's all of that. It is mix in China. We are, on some of the projects, carrying lower margins on some of the China business. That's going to get the latter half of this year. So we'll continue the strong margins that you saw here in Q1. Might be through Q2 and then you'll start to see some of it trail off. Our 38% to 40% is what we still are looking for on an annual basis.

Okay.

Just a mix of jobs. So if we book some higher margin work here, then we may carry some of that.

Sure. And maybe just a quick follow-up on that. Is there anything you can do from a product, you know, design perspective or redesign to tailor suit a lower margin profile or more aggressive pricing needs in the Chinese market? Or is it, you know, that would be the expectation over the next couple years, that it would always just be a lower margin market for you?

Well, I think certainly on the APC side, local sourcing of manufactured product helps that. I think the China market, since its emerging is going to show characteristics of maybe a little nonorder (inaudible) as it relates to competitive bidding, as small companies seek to compete against others and may not take the same quality approach.

Also, I think we'll probably be aggressive at pursuing some contract opportunities that may not have the same margins as we would like to mature the business with, simply to establish a demonstrated ability to outperform others. I think those are strategic (inaudible). That was one of the reasons that large NOx burner project was done on that basis in the US. So I look to see us being competitive at our pricing, but also aggressive with our own cost metrics.

Very good. Thanks much, guys.

(Operator Instructions). Your next question comes from the line of Murray Vandervelt from Morgan Stanley. Please proceed.

Good morning, Doug.

Good morning, Murray.

Just to confirm, FUEL CHEM, I believe it was mentioned this morning about $10 million of that $11 million is recurring revenues, is it not, as opposed to APC? Isn't there a large recurring revenue stream to FUEL CHEM, assuming the plants aren't shutting down or running at lower than normal capacity?

That's correct. FUEL CHEM is typically a recurring revenue business.

Okay. If I go to China for a minute, and I heard your current comments, but what would you guess the potential market is going to be there, as opposed to this country, when the government says something is going to happen, it usually happens. I think we're a little bit more certainty in the timeline when these changes have to take place. So size of the market and then your hope as to what your penetration might be and perhaps how many bodies you have on the ground in China currently.

Well, I think that the FUEL CHEM market will emerge after the APC market in China.

I meant the APC market. I'm sorry. I didn't mean to shift gears on you.

So your question relates to APC.

And you know it may be a question I need to address a little later than in the context of this conference call, but we've looked at the NOx control market over the five years of this 12th Five Year Plan, and it really depends a little bit when you to colorize that as to how much goes to the SCR type market and how much goes to our approach, that's why clarification of these rules and preference of technologies. I would say there is a segment of the market on the very larger new units that will conform by the large SCR players.

On the other hand, I think our Company is well-positioned to provide the most cost-effective approach. I think that if I were to scale China, for example, and talk at a high level, probably given the very minimal level of environmental spending in past years that China has spent compared to what it's now committed to doing, the market opportunity is probably three times the size of the domestic US market.

Okay.

You know, for example, the clean air companies has estimated that the NOx market in the US through the end of 2013 for all companies, just for APC is about $3 billion. Now, regulatory deadlines differ, but if I were to look out through 2015, 2016 and suggest to you that there's a $7 billion to $9 billion, or $10 billion market for all players, that would not be unusual.

And the bodies you currently have?

Let me also give you a little more color, because we just spent three days reviewing our strategic planning in China. And I've made this comment before that I think we can double our activity each year. And so if I look out four, five years of what I think Fuel Tech has the potential of winning, I think that the China business in four or five years could be of the size that the Company is (inaudible).

Okay. That's terrific insight. The other -- what is your guess, generally -- let's just talk about the US now, percentage of wins or proposals that are put forth to you. Are you winning 30%, 40%, 50%? Just trying to assess how competitive the markets are today.

No. It's not a number anywhere that high.

Okay.

It gets too low, we like to think we're not as efficient. But it's not a number we quote, but it's not as high as that.

Okay. The other thing is can you --

More color if you'd like it.

Okay.

I was just going to say sometimes winning and losing is hard to define because weWe have cases where an order gets pushed out, and so it may show up as a loss in the marketplace. But, in fact, it's still work coming, it's just the delayed timeline. So the definition of wins and losses gets a little bit fuzzy.

All right. A sense of what capacity your Company is working at now? I know -- I believe certainly last year you carried more engineers, even though they weren't necessarily needed, simply in anticipation that something would be coming forward from the EPA-type people and pushing legislation through. So can you sort of give a sense of what capacity you feel you're working at now, given the staff levels you're carrying?

Sure. We did a very careful organizational review last year. There was a modest amount of trimming. And most of it was focused on increasing the talent in areas that we needed it. We have made a few selective hires, particularly in areas where we needed additional expertise, for example, the low NOx burner area business has required additional specialized expertise.

That being said, we're quite capable and prepared to engage in additional project activities. So I feel the Company is on the whole generally well-staffed to deliver, you know, $100 million run rate (Inaudible).

All right. And then one question. I heard the other day that I believe in Europe there's absolutely pretty strong regulation at the utilities there and by 2013 are going to very significant tariffs if they don't meet certain requirements, in other words cap and trade very much alive and very stringent requirements and investments need to be made in Europe in 2013. And I don't remember seeing much about your participation there. Maybe --

Oh, my apologies. It seems we've lost Mr. Vandervelt. But we also do have one other person that was left in the queue? Is that okay to take him?

I'll be happy to answer his question for the audience; however, the utility NOx control market has largely matured in Europe. A lot of that went SCR. Most of our European business is often addressed to the industrial municipal solid waste. But a growing sector for Europe is biomass. So I would characterize our European business as lower growth, primarily industrial and alternative fuels.

Thank you. And your last question comes from the line of Steven Charest from Divine Capital.

My question was regarding the European markets, so thank you for that color.

Was your question therefore answered?

Yes. I was looking for some flavor on, you know, with all of the regs coming in, do we expect your business in Europe to start to pick up as we've seen some other businesses in Europe pick up?

We've seen some modest new business in Europe compared to the past. It's been selective by country. But again, it's -- if I were to look out, I would probably suggest to you that biomass, municipal solid waste and potentially some evidence of FUEL CHEM use, but it's been primarily an APC market.

Right. Thank you.

I think that's the last question.

That was the last question, sir. I would like to turn this conference back over to Mr. Doug Bailey for any closing remarks.

Thank you, operator. Those were good questions and we look forward to interacting with many of you face-to-face at meetings and visits. I will continue to try to provide a realistic outlook. I'm delighted that the results that we've shown have met or exceeded the expectations we set forth. That will continue to be our effort. It's not an easy business to accurately forecast, but I think we will continue to give you the best outlook we can and always try to delight our shareholders.

We have our annual meeting coming up very soon. And we look forward to the second half of the year, continuing to show positive trends and, as always, we thank you for your support. Thank you for following our stock. And all shareholders who have (inaudible). Thank you, everybody. That concludes our call.

Thank you for your participation. That concludes today's conference. You may now disconnect. Have a great day.