Fuel Tech Inc (FTEK) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Fuel Tech Inc. earnings conference call. My name is Pamela and I will be your operator for today. At this time all participants are in 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 Ms. Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Please proceed.

Thank you, Pamela. Good morning, everyone, and thank you for participating on today's conference call to discuss our third 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 Kevin Doherty, Vice President of Business Development and Marketing.

As a reminder, the matters discussed in this call, except for historical information, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward-looking statements. The factors that could cause results to differ materially are included in filings with the SEC. The information contained in this call is accurate only as of the date discussed and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call. And as a reminder, this 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 Dave Collins. Dave, please go ahead.

Thank you, Tracy, and good morning, everyone. We are going to change up our presentation order this morning to cover the financial information first. Doug will then follow with a recap of our business activities, including an update on regulatory matters.

We are very pleased to present strong financial results for the current quarter for both segments of our business. Consolidated revenues for the September quarter increased by 19% to $24 million, while our 9 month revenues have increased 16% to $65 million. Net income for the current quarter increased $1.8 million to $2.7 million and our 9 month net income increased $3.7 million to $4.4 million. Diluted earnings per share for the current quarter and 9 months were $0.11 and $0.18 per share respectively representing significant increases over the prior year quarter and 9 month amounts of $0.03 per share. Our adjusted EBITDA for the first 9 months of 2011 have increased 39% to $11.6 million. We have previously discussed our ability to leverage higher revenue amounts with our established infrastructure, and that leverage model has been a key driver for our 2011 results.

Now I would like to look at each of our segments in more detail. Our FUEL CHEM segment reported revenues of $11.8 million for the current quarter and $32.7 million for the first 9 months of 2011 representing increases over the prior year of 18% and 13% respectively. These results represent a new record for the 9 month FUEL CHEM revenues. Included in our 2011 revenue was a pass-through of low-margin installation services totaling approximately $1.3 million recognized in Q1 and Q2 of this year. Additionally, FUEL CHEM revenue for the first 9 months of 2010 included a one-time risk share payment totaling approximately $2 million recognized in Q1 of 2010.

Excluding these 2 anomalies, FUEL CHEM revenues for the first 9 months of 2011 would've increased 16%. This increase does not include any revenues associated with our recent new order announcement for the addition of 3 boilers at an existing customer. For the current quarter, our FUEL CHEM revenues generated from coal units increased 21% while revenue from non-coal units decreased 17% from the prior year. For the first 9 months of 2011, our coal generated revenues have increased by $3.6 million or 14% compared with an increase of $37,000 or 2% in non-coal fired unit revenue over the prior year.

Thus far in 2011, we have announced 7 new FUEL CHEM programs, 6 commercial accounts, and 1 demonstration. Of the 7 new additions, 2 units began pumping during the first quarter. 2 units began pumping during the third quarter, and the latest 3 announced orders will begin pumping in early 2012. As of September 30th, the Company had contingent risk share payments outstanding of $91,000 relating to its one demonstration.

Quarterly gross margin for the FUEL CHEM segment was consistent at 53% for 2011 and 2010. The 9 month gross margin for FUEL CHEM was 49% in 2011 and 52% in 2010. Excluding the two previously discussed anomalies, the FUEL CHEM gross margin for the first 9 months of 2011 and 2010 would have been 50% and 48% respectively. We expect our core FUEL CHEM business to continue to generate margins in line with historical levels of 48%.

Our APC segment reported revenues of $12.2 million for the current quarter and $33 million for the first 9 months of 2011, each representing increases of 19% over the prior year. This increase is due to strong bookings during the current quarter and the timing of work progress on existing contracts. We announced bookings of $21.1 million during the current quarter and our backlog at September 30 was $22.9 million. We have announced an additional $8.3 million in new pollution control orders, which includes this morning's announcement reflecting an increasing trend in this segments order activity. Our backlog at the quarter end is comprised of domestic backlog, $14.3 million and international backlog of $8.6 million.

Our bookings for the first 9 months from our Pacific Rim operations have increased by 160% from $4.6 million in 2010 to $12 million in 2011. We expect a continued near-term increase in our domestic and international APC segment order activity as air pollution control regulations have been issued and utility operators are finalizing their compliance plans. Gross margin for the APC segment for the current quarter was 38% versus 34% in the prior year. APC gross margin for the 9 month period was 44% versus 35% in the prior year.

Contributing to the higher 2011 gross margin was a more concentrated mix of higher-margin equipment projects, specifically SNCR projects and we expect the margins in the segment to remain strong for the remainder of this year and into 2012. On a consolidated basis, gross margin in the current quarter and 9 month periods in 2011 have increased 2% and 3% respectively to 46% and 47%.

Selling general and administrative expense for the current quarter was $7.7 million and $23.6 million for the first 9 months of 2011. Our SG&A levels have remained flat over 2010 levels for both the current quarter and 9 month periods. As previously noted, we've reversed the final portion of the contingent liability associated with the advanced Combustion Technologies acquisition during the second quarter of 2011, which totaled $758,000, a similar reversal of $768,000 took place during the third quarter of 2010. We expect our SG&A spending as a percentage of revenue to remain at or below our current experience rate.

Investment in research and development activity in the current quarter was $358,000, a slight increase over the prior year level of $264,000. Our R&D spending through the first 9 months of 2011 totaled $1.1 million, which represents an increase of $500,000 over the prior year spending levels. We will continue to look for and fund development of new product opportunities within each of our segments and look to enhance our existing portfolio of products within our chosen markets.

We have decreased our expected tax rate from 48% in the prior quarters to 31% for the remainder of 2011 for a couple of reasons. First, our projection of pretax income has increased due to recent order activity, and this has reduced the permanent add back percentage because of dilution. In addition, we reported discrete items of $600,000 in the current quarter, which reduced our effective tax rate for the current quarter and annual periods. These 2 items had a $0.05 diluted share impact to the quarter and 9 month reported results. The annual projected income tax rate -- revised rate after taking into account permanent add backs and increased pretax income levels is expected to be 31%. As previously noted, any significant increase or decrease in pretax income from expected levels would cause a change in our overall rate.

Our cash balance remained strong at $29 million, and our working capital has increased $5.4 million for the first 9 months from $36.6 million at December 31 to $42 million at September 30. Quarterly operating cash flow for the first 9 months totaled $3.1 million. Cash used in investing activities of $1.7 million was related to the purchase of equipment for our FUEL CHEM demonstrations and commercial programs. Cash used in financing activities of $3 million primarily relates to our stock buyback program initiated in the current quarter.

In closing, our ability to leverage our infrastructure through good cost control and margin expansion has led to significantly improved operating income margins in the current quarter and 9 month periods of 12% and 10%, which represent increases of 5% and 7% over the prior year respectively. Each of the 2010 periods -- the quarter and 9 months periods reported a 3% operating margin. We expect to see a similar level of operating margin into 2012 as we benefit the higher revenue amounts driven in part from the cash for regulatory workflow. We finished a strong third quarter and increased bookings and backlog and look forward to finishing 2011 with record revenue figures being driven by growth in both segments. Now, I would like to turn the call over to Doug.

Thank you, Dave. Good morning, everyone. I particularly thank you for joining us on this call today. I'm delighted to be addressing you after reporting our strong quarterly results that we trust have met or exceeded your expectations. This will continue to be our effort going forward.

This is not an easy business to accurately forecast, but we will continue to give you the best outlook we can and as always, try to please our shareholders with our progress through these challenging times. First, let me begin by saying that I'm very energized by our organization and the efforts that our employees are giving to achieve what I believe will be a very nice exit to 2011 and continued growth in 2012. Obviously, we have a lot of complex planning issues in this business as our utility and industrial customers navigate increasingly stringent emissions regulations and the continuing debate that surround those promulgations. However, I am confident that we have created a nimble organization with the talent level to meet the needs of our customers. We look forward to enabling all of our existing and perspective new customers to achieve their compliance plans and energy efficiency needs.

As you heard from Dave, we had a strong quarter in the APC segment. Not only did revenues and operating margins improve, but we significantly grew our contract bookings. We announced APC contract wins of $21.1 million in the third quarter, a 240% increase from the $8.8 million announced in the third quarter of last year. Subsequent to the third quarter, we've announced $8.2 million in new APC orders. So as you can see, quotation activity remains strong, primarily the result of the issuance of the cross-state air pollution rule or what we refer to as CASPR, which was issued on July 6.

If you've been following Fuel Tech for a while, you will have heard us talk about this long-awaited action by the EPA to replace the clean air interstate rule or CAIR. CASPR requires 27 states to significantly improve air quality by reducing power plant emissions across state lines and contribute to ozone and fine particle pollution in other states. Among other requirements, CASPR focuses on NOx emission reductions beyond those required by CAIR beginning in January 2012, with a second phase starting January 2014. Several key features of CASPR include the allocation of emission requirements to individual sources directly by EPA and the trading of allowances, which are controlled by state specific emission limits. By 2014, power plants in states common to both CASPR and CAIR are expected to achieve annual SO2 emissions around 1.8 million tons lower and annual NOx emissions around 76,000 tons lower than what would have otherwise projected to have achieve at that time under CAIR.

NOx emission requirements for 2014 could become even more stringent if the EPA modifies CASPR as planned to address the 2008 national ambient air quality standards for ozone. NOx is a precursor to ozone emissions and the current 2014 NOx requirements in CASPR are based on the 1997 ambient ozone standards. So for the 27 participating states, CASPR creates 4 entirely new markets, 2 separate SO2 emissions markets and 2 NOx trading markets. For annual trading that begins January 1, 2012, and ozone season training begins May 1, 2012. Affected states will be required to meet individual emissions caps. Companies subject to CASPR can either buy credits to comply with the pollution caps or they can install pollution controls to reduce the emissions and earn credits that they can sell to other companies.

No existing care, NOx, or SO2 allowances can be used for compliance in the CASPR trading programs. Under CASPR, state emission caps are designed to mitigate the emission impact on downwind states by controlling emissions from the upwind states. If sources within a state cause that state to exceed its assurance limit, the penalties are then severe. They include a 2-for-1 reduction based on each sources contribution percentage of the state overage. In these situations, allowances acquired by an emitting source via trading will not permit it to avoid these penalties. This creates significant incentives for individual operating units to be at or below their emission allocations.

An October 6th revision to CASPR delayed the enforcement of these state-specific emission caps and requirements until 2014 to provide sources with greater timing flexibility through emission trading. According to the EPA, these revisions provide important technical adjustments that will promote the development of allowance market liquidity and smooth the transition from CAIR programs to the CASPR programs. Sources which can install technologies to reduce NOx emissions with compliance costs below credit prices can provide flexibility in their future compliance and trading strategies. Recent legislative and judicial activity on CASPR and other EPA actions is centered on both the timing and content of these rules. The District Court of the District of Columbia granted EPA's request to respond by December 1 to the numerous comments received on CASPR.

In addition, multiple sources and states have initiated proceedings to challenge the rule either directly with EPA or through several court actions. 2 proposals offered in the Senate could reinstate CAIR as an alternative to CASPR but if either such resolution passes, it would require 2/3 majority of both houses in Congress to override a very likely presidential veto. While the outcome of this activity remains unclear, CASPR implementation continues to be scheduled for January 1, 2012.

So it is our goal to work with our APC customers to understand their emission control needs in this dynamic regulatory environment and deliver a range of product solutions to serve those needs and do so in a timely and cost-effective manner. Given the tight compliance deadlines, utilities appear most interested in our SNCR technology, which could be deployed very quickly to meet these compressed schedules. Within the last 2 months, we've received more than 20 mapping and modeling orders from existing and new domestic customers that are evaluating our SNCR technology. Typically these orders are often the first step in a larger investment program. Thus far, 5 of those modeling jobs have converted into equipment orders. Those include today's announcement for 2 orders received just yesterday for SNCR projects on 2 medium combustion boiler units and an award received 2 weeks ago for an SNCR project on 3 large combustion boiler units. These awards were from existing utility customers and additional orders are anticipated from these customers. Given our level of discussions with other utility managers and the tight timeline for CASPR compliance, we do anticipate additional SNCR orders over the next several quarters.

So besides the near-term SNCR opportunities that are created by CASPR, opportunities do exist for the sale of our other APC technologies. The CASPR 2012 deadline could create short-term combustion tuning needs for utility boilers as well as SCR services to manage catalyst performance to maximize NOx reduction. Additionally, there is the potential to install an SNCR in front of an existing SCR systems to maximize reduction across all boiler loads. The CASPR 2014 requirements for significantly lower NOx emissions should create combustion tuning and new low NOx burner over fire air opportunities for Fuel Tech as well as SNCR and advanced SCR opportunities as part of our layered NOx reduction strategy.

In China as in the domestic US market, we've seen a strong pickup in APC orders. During the 9 month period, we announced $13 million in new China APC contracts versus $4.6 million in the same period last year. Similar to the domestic APC market, China has developed regulatory policies that favor Fuel Tech. On September 7, the State Council issued the twelfth 5 year comprehensive work plan for energy conservation and emission reduction, which sets forth the implementation guidelines for energy conservation and emissions reductions.

While not yet a finely detailed set of administrative orders guidelines and legislation, this plan does provide insight into the key targets and strategies to achieve a greener society in China. In particular, it not only affirms the major targets for energy intensity and carbon intensity improvements that were addressed in the twelfth 5 year plan on March 5, but it now includes slightly more stringent standards for NOx, Ox, and other pollutants. As was stated in the initial 5 year plan, the regulation for NOx applies to all thermal power units that have a rate of 65 pounds per hour, which is 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.

In addition, all units in what's called key point regions must achieve the same standards as newly constructed units. These key point regions are defined as those areas that are highly developed or highly populated and are thus sensitive to environmental overloading. Existing units approved prior to December 31, 2003, or outside the key point regions must meet a standard that is 50% as stringent. All existing coal and oil fired thermal units must comply with these new regulations by July 1, 2014, while all new units must comply by January 1, 2012.

As we have previously stated, we believe our broad portfolio of low capital cost technologies will be effective in helping these 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 a low NOx burners and over fired air to NOx reducing hybrid systems affords us with a competitive position in bidding on power plant units of all sizes.

In China we have sold 1 of each of our APC technologies. Our ULTRA technology in particular has gained very nice momentum. Thus far this year, we have won 8 awards including repeat business from satisfied customers for a total of 15 ULTRA systems. I believe that we are in a great position to capitalize on the need for safe delivery and storage of ammonia for SCR systems especially in these heavily populated key point regions. We continue to see an increased level of bid activities from power plants and industrial units and anticipate additional orders in China in the near future.

Now turning to our FUEL CHEM segment. We recorded solid revenue growth and record 9 month results, primarily result of the startup of chemical injection for new customer accounts. The third quarter is typically the strongest quarter for FUEL CHEM as was the case this quarter. This is particularly noteworthy given the challenging environment in which we operate. During the third quarter, electricity output was essentially flat primarily due to milder weather in the central industrial region and most of the East Coast. Although extremely hot weather occurred in Texas, Oklahoma, and the surrounding states, most other regions of the country were milder than a year ago, particularly in August and September.

Fuel flexibility continues to be a driver for new FUEL CHEM sales as plant operators faced with mounting pressures to generate the maximum megawatts to be sold creating fuel flexibility and driving operating and maintenance costs down. Changing from expensive Central Appalachian coal to lower cost Illinois basin coal is the most common defensive strategy that a utility might enact when faced with a shrinking return on capital. The spread between Appalachian and Illinois basin coals has been widening, and is now about $32 per short ton. For certain large buyers, this spread could even approach $50 per short ton.

It is believed that about 50 million tons maybe retired from the Central Appalachian market this year reducing that region's output yet again. This is due to response to the EPA regulations and reduced production in coal seams that are simply too thin to properly be mined. The Illinois basin production is expanding and is anticipated to potentially double by 2017. And it's expected that the decline of Appalachian and expansion of Illinois basin coals will generally balance each other for the foreseeable future.

Natural gas prices have remained low with November futures trading at $3.67 per million BTUs. These lower gas prices do place pressure on coal-fired units and some coal plants have switched or will switch to gas. However, pipeline locations versus grid connections continue to hamper these efforts. In addition, recent forecasters do show rising natural gas prices that make pipeline expansion less attractive. So the bottom line is that coal, especially the Illinois basin and Powder River basin coal should remain a dominant energy source for quite sometime, and this should certainly benefit Fuel Tech.

On another subject, during the quarter we announced a stock repurchase program authorizing the use of up to $6 million to repurchase our stock. As of September 30, approximately $3.4 million was used to repurchase 571,554 shares of our common stock. Given our financial strength, the growth opportunities that we see available to the Company and the recent valuation of our stock, we believe this is an attractive investment that reflect our confidence in our growth strategy going forward. An additional $2.6 million is still reserved for potential share repurchase through December 31, 2012.

In closing, I'd like to say that we are confident that Fuel Tech should achieve continued topline and operating income growth in 2011 and beyond. Look for the APC activity to drive most of our remaining year growth. I have great confidence that our APC business activity will be particularly robust. As customers take steps towards implementing their compliance plans in a capital constrained environment, we believe that the combination of our lower capital cost solutions, our suite of technologies that enabled a layered approach and our shorter lead time installations should ensure that Fuel Tech will benefit from this accelerated compliance schedule.

I have never been more confident that our domestic APC market is facing a very good wind to its back. I also believe that the China APC market will be a strong growth contributor for Fuel Tech. I would say that we are looking at measured growth next year that is a significant percentage gain over 2011. And I would venture to say, as I've stated before, that the China market could grow to a size equal to what Fuel Tech is today inside that fire plant.

So in combination, we are seeing improved opportunities in the domestic and China APC markets. We are seeing a bit of new activity in Europe by companies that are turning to biomass, and that does favor some application of our FUEL CHEM technology in that smaller and yet slower growing market. FUEL CHEM, which has principally been a domestic US market will continue to grow. It's regularly challenged by the pressure to retire coal-fired units or to reduce load levels, and this generates attrition that offsets our new contract wins. However, Fuel Tech is well-positioned to capitalize on our growth opportunities, and we expect to fully meet our goals for 2011 and demonstrate continued growth in 2012. With that, I'd like to turn the call over to the operator who will open the lines for your questions. Thank you very much.

(Operator Instructions) And your first question comes from the line of John Quealy of Canaccord Annuities.

Hi, good morning. It's Mark Siegel for John. First, I wanted to start off on the APC side. I think in the past given CASPR coming on -- introduction in July, you've talked about a pipeline of perhaps 50 plus boiler units where discussions were in various stages. Bearing in mind the 20 or so mapping and modeling orders so far, can you just talk a bit about how the discussions on those remaining units that you haven't gotten orders so far are progressing? And then also, given the EPA is refining some of its credit allocations, has that process slowed momentum at all or are things continuing regardless?

Well, not to be specific on the numbers, I can say that as we dollarize the level of quotation activity still in front of us on the APC utility market, it is very robust. I think our past statements regarding expected order acceleration coming in the latter half of this year is unfolding to be true. I think it has been evidenced by the level of bookings that we receive, the level of modeling jobs. We continue to quote customers for not only modeling leasing equipment, even for short-term response to these January 2012 deadlines.

And I would say that the market is both looking to the necessity to timely respond as well as pushing back and challenging the level of these rules as to their tight compliance schedules. Noting that this could have a negative effect on many utilities. Some simply face extreme difficulties in responding to that timeframe, particularly in those states where reductions are severe. Some are concerned about the impact on jobs in an economy where job creation, preservation has been paramountaly important.

I don't think it is so much necessarily because of limitations of capital. These companies can get the capital that they need, but right now you are seeing a lot of debate coming into the final year before another presidential election. I think that will create an over layer of challenge to the regulatory environment. But I would characterize that the level of activity that we are seeing now being quoted should continue for the next several quarters.

Okay. That's helpful. And then perhaps one question for Dave. The $23 million in APC backlog, is that going to be worked off over the next several quarters, perhaps the next four quarters? And can you talk a bit about the composition of that backlog, assume it is skewed toward SNCRs and how you think about the margin profile there.

Yes, it is and will be skewed. The margin profile going forward, I would look to 40% or 42%. I think last few quarters ago we were talking 38%, but I think we will see a bit of an uptick in the margin profile going forward. The quarters, it will spread over the next three to four quarters. That's right, we do have one job that installs in spring of 2013. So that will continue on for a bit, but for modeling purposes, I'd probably spread that over the next four quarters.

Okay. And then just lastly, on the FUEL CHEM side, can you talk either qualitatively or quantitatively perhaps the number of units that are offline or running at suppressed levels right now?

There are quite a few units. Probably as many as we have running today, we have sold that many or more that have currently been idled due to either converted to gas, shutdown completely, operating at reduced loads. So when you look at the legacy of many years of FUEL CHEM selling, you do see a number of these units that are either permanently off-line or simply sitting on standby.

That being said, over those same years, we began to penetrate larger units. And it is now more typical that the larger units that can enjoy greater economic benefits of fuel switching, can and do evaluate FUEL CHEM technology as evidenced by the announcement of three large coal-fired utility units that we announced November 1 for FUEL CHEM. So the number of units operating are smaller than those that we have announced, but the revenue per unit helps contribute to our overall topline growth.

As I said, we are challenged by demand levels that cause attrition to offset a large percentage of what we newly sell. That being said, we are selling more than we are seeing go to standby or fuel switching to say natural gas. So the selling growth rate exceeds our actual topline measured growth rate. That is just a fundamental challenge facing the whole industry relative to what will be the fuel strategies and operating strategies for all system units.

Nevertheless, FUEL CHEM is still a young market. It is still very under penetrated into what it could be. And I think that, as you see these long-term trends favoring Illinois basin, Powder River basin coals over the traditional Eastern coals, that only bodes well for those companies needing Fuel Tech to help solve those flagging and fouling problems that are generated from those coals. So we are seeing growth, but it is growth that we've got to earn through some very strong and focused marketing programs and selling.

Okay. Thanks very much.

And your next question comes from the line of Graham Mattison of Lazard. Please proceed.

Hi. Good morning, everyone.

Good morning, Graham.

Just to confirm if I heard you right, so your FUEL CHEM margins, you expect them to run at about 48% going forward?

That's correct.

Yes.

That's correct.

And then should we still think about it in terms of each unit being able to provide -- give a sense of what each unit can provide in terms of revenues on an annual basis?

That runs over a very wide range. It could be several million dollars or it could be several hundred thousand, simply depends on the size of the unit.

I think we used to say 1.5 million for the larger sites, 500 megawatts and up. It is hard, because sometimes the 500 megawatts don't generate that and then other times they generate far in excess of that. That's what gets difficult. So from a modeling -- I know you are trying to anticipate revenue uptick.

You've always got the attrition side that offsets whatever increases we might report. So I would say the old numbers aren't out of the question in terms of trying to anticipate what those revenue -- associated revenue numbers would be, but just know that there is all sorts of reasons why that doesn't necessarily correlate with reported results.

Got you. That makes sense. And then just a question on the tax rate. You said that it runs about 31% is what you're looking at. How long do you expect that to run out? Is that for the next four quarters, or can we think about that for more three or four years?

No, I would say next four quarters. It's all revenue generated, so are revenue focused. And as long as we have a good topline running through, then you should see a lower rate. 38% is really our target rate, but then you've got the permanent add backs and dilution of items. So I'd say next four quarters, but then depending on what revenue forecast we project, it may change the rate.

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

And your next question comes from the line of Brian Shore. Please proceed.

Good morning, Brian.

Good morning. Congratulations on a good quarter. Just a couple questions on the APC side, I think you mentioned that of the temporary -- or sort of the initial stage mapping and modeling awards, of those 20, I think you said there is 15 still remaining that could be potentially converted. Were there also some sort of temporary SNCRs or sort of -- that theoretically could become full equipment orders as well? And are those potentially on the table too?

When you say temporary, are you talking about temporary equipment?

Correct. I think there may have been one even this morning.

Well, they represent the minority of actual orders. We do provide skid mounted systems and temporary systems. We have even afforded flexibility to short-term lease such systems until such time that they can fully install their permanent systems. So we are being accommodating to those customers, but typically you would go from a modeling job to a full equipment install job is the more characteristic program.

Is there -- I guess what I'm asking is, is there a possibility that the temporary unit could be upgraded to a full equipment order, as well?

Oh, yes. Absolutely.

Okay. And can you kind of talk about the pace -- the mapping and modeling orders that have been converted to full orders, and can you kind of talk about the pace that process is taking maybe compared to the past and whether it has accelerated just given the regulatory timeframe?

Sure. I would say that -- and you could probably go back to previous calls where we were awaiting the announcement of this rule in July, that post July 6, the pace of inquiry suddenly accelerated. Then to have 20 modeling jobs come in inside one quarter is evident of that. Typically, so many days or months will pass between the placement of a modeling job and its evaluation, and therefore, the placement of a permanent equipment order. But that is going at a pretty good clip right now, I would say. Simply because of that January 1, 2012 deadline that is imposing on them.

Got it. That makes sense. And then I think just my last one. Following on the heels of the large FUEL CHEM order you got, are you guys having a lot of discussions with potential customers who might be FUEL CHEM customers because of coal switching, is that trend still continuing?

Yes. There is a lot of discussion. It's a very sophisticated, long-term selling process. And not only do we have discussions with potential new customers, but there are active discussions with existing customers to extend -- expand their program. In fact, in our year-to-date customer wins, I would say maybe 60% of those wins came from new customers, but 40% came from expansion within our existing customer base.

Now, unfortunately, that is offset by some attrition. There are simply units that are no longer in need of our solution. And that often is a percentage of our new customer wins or expansion business at a percentage level that sometimes runs over 50%. So we are seeing growth both with existing accounts and new accounts, but we are fighting the attrition that is the direct effect of what the low generation requirements of our electrical utility industry are these days.

Great. Thanks a bunch.

Yes.

(Operator Instructions) And your next question comes from the line of Stephen Charest of Divine Capital Markets. Please proceed.

Good morning. Nice quarter. Thank you. My question related to an older point you had made some time ago in terms of your capacity with the existing overhead. So with the existing SG&A, what kind of run rate on sales could you get up to without having to start to dial up bigger expenses? In my head, I think the number is something like $120 million. Is that number --?

That is the number I was going to give you.

Yes. Okay.

When you look at our current quarterly revenue run rates, we certainly can take on more. However, that doesn't mean that we aren't fully loading a few of our people. It kind of depends on the mix of type of orders. We've got special know-how in different technology areas, and so right now we are seeing an awful lot of SNCR activity, and we are seeing a little quieter period on our burner side that has been relative to the size of jobs that we did last year.

So that is expected to change. And those resources will be fully challenged, but big projects like advanced SCR require a lot of planning. We have a busy team there, even though we haven't been announcing as many of those jobs. So our activity level within different work groups isn't directly associated with a single revenue number. It just depends on the type of planning work that we are doing.

Right. Well, since you brought it up, the margins suggest to me that since CASPR came through, orders are for more complex, more detailed, maybe more long-haul type orders. Would that be a fair assessment?

I'm sorry, what was the question again please?

Yes. So since CASPR has come out, would it be fair to say that the types of orders you are getting are for more comprehensive solutions than let's say during that dry patch there, you got a lot of low NOx burner orders and that kept the lights on, but now they are coming out with demand for more of a longer-term solution, more complex, higher cost solutions?

Yes, I think there are going to be more complex, integrated hybrid solutions. We certainly did have a large program that ended in early 2011 on low NOx burner side, but on the other hand, the delivery time for a low NOx burner can't be achieved in 60 or 90 days, so we are very busy working on longer-range programs that have that level of complexity to them.

That is why we commented that what's needed to meet a January 2012 timeline versus a January 2014 might differ. So the fact that we can roll out an SNCR solution in a short timeframe is reflective of what customers are trying to achieve by early 2012. With that being said, back to the question about our organizational resources. We are working on some very large and multiple projects that deploy these other solutions. And we are glad we have them.

We would love to have a little more talent in each of those areas, but we are kind of keeping a controlled level of SG&A in tune with what we see the incoming order rate to be and responding appropriately. Generally, what we have done is we have consciously enhanced our technical skills across all areas in preparation for that kind of work. And we are going to preserve those skills even during softer times by just looking at our overall managed level of resources and trying to utilize people across projects as best we can.

All right. Thank you.

With no further questions in queue, I would like to turn the call back over to Mr. Doug Bailey for closing remarks.

Certainly. Thank you, operator. Thank you for the questions. I do always appreciate those who take the time to join us on our call. We are very pleased with this quarterly result.

I think we are doing the kind of blocking and tackling that a Company like ours needs to do to return to a nice strong level of growth, having, like other companies going into the economic slide that we saw over the last several years, I think this Company has done a good job through this time period. The fact that we can post record revenues and increasing quarter on quarter results give me confidence that we are going to show a nice return to our shareholders. I think it's a good time to own the Fuel Tech stock. I believe in it. I believe in the future.

And I am always grateful for those who take the time to carefully analyze our business outlook and so advise others who choose to be a shareholder. As I said earlier, it is our job to delight our shareholders, and I hope that we can continue to post the kind of results that we did this quarter well into the future. So thank you, everybody. Appreciate your time today. Bye for now.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And have a great day.