Fuel Tech Inc (FTEK) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter Fuel Tech, Inc. earning conference call. My name is Kirsten, I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Thank you very much. Good morning, everyone, and thank you for participating on today's conference call to discuss our second-quarter 2012 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 Bill Collins, Controller.

As a reminder, the matters discussed in this conference call, except for historical information, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward-looking statements. The factors that could cause results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed, and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information 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 thrilled with our recent international APC orders coming from both China and Chile. And as a result, are looking for improved revenue performance in Q3 and Q4 of this year. Through the end of July, we have announced $60 million in new APC orders, including $16 million in China and $37 million in Chile. These orders will contribute significantly to our third- and fourth-quarter results. Offsetting this optimism is a sluggish US domestic FUEL CHEM market and remaining regulatory uncertainty in our US domestic APC markets. We remain bullish on our domestic APC opportunities while we await regulatory clarity. Additionally, we are waiting for natural gas pricing and electric demand in the second half of this year to provide a stimulus for our domestic FUEL CHEM activity. I will provide some general guidance during my comments with this, in understanding the impact the trends have on our overall business.

Consolidated revenue for the June quarter and six months was $21 million and $46 million, respectively, representing year-over-year increases of 10% and 11%. Net income was break-even for the quarter at $1.6 million or $0.07 per diluted share for the six months. Our adjusted EBITDA for the six months was $4.6 million. Our revenue growth in the current quarter and six months is due to strong APC segment revenue, which has delivered a 38% increase over the prior year for the first six months. Our Air Pollution Control, or APC segment revenue for the second quarter was $13 million, representing an increase of $3 million or 33% over the prior year. For the first six months, the APC segment revenue was $29 million, representing an increase of $8 million or 38% over the prior year. These increases resulted from order activity reported in the second half of 2011, driven by the Cross-State Air Pollution Rule, or CSAPR. Our consolidated backlog at the end of June was $20 million, and is compromised of $8 million in domestic backlog and $12 million in foreign backlog. As noted previously, in July we announced an additional $47 million in new APC orders, increasing our backlog to $67 million, a record level for the Company. The majority of our quarter-end backlog figure of $20 million will be recognized during this year, while the large Chile order will be recognized through mid-2014 as we execute through this process.

Our foreign revenues for the June quarter and six months totaled $3 million and $5 million, respectively, representing decreases in foreign revenues of 16% and 20% from the prior-year periods. While our foreign revenues were slow in the first half of 2012, this trend will reverse in the second half of the year as a result of our recent bookings. In addition to the large order in Chile we discussed, we have gained significant momentum in China, as noted by our year-to-date bookings of $16 million. This represents an 18% increase over the entire 2011 booking total of $13 million, and we expect to see additional China orders prior to year-end. This activity provides visibility to the growing market potential in our strategy in China as the country is making significant investments in air pollution control technologies.

Our FUEL CHEM segment revenue for the second quarter totaled $8 million, representing a decrease of $1 million, or 14% over the prior year. Year-to-date, FUEL CHEM revenue was $18 million, a decrease of $3 million or 16% versus the prior-year amount of $21 million. As we have noted in prior conference calls, the 2011 six-month revenue includes $1 million of low-margin installation work completed in the first quarter of 2011. Adjusting for this installation revenue, our FUEL CHEM revenue would have climbed 12%. We continue to explore new customer opportunities and are actively looking at new product applications in this segment. Six-month revenues generated from coal-fired units decreased $3 million or 15% to $16 million, while our revenue from non coal-fired units of $1.2 million declined 32%. Consolidated gross margin for the current quarter of 43% was down 2% from the prior year. This change resulted from a year-over-year decline in our APC segment gross margin and a higher concentration of APC revenues. Our year-to-date consolidated gross margin was 46%, down slightly from the prior year margin of 47%. Quarterly gross margins for our FUEL CHEM segment were 51%, an increase of 8% over the prior-year. Year-to-date gross margin for our FUEL CHEM was 52% versus 46% in the comparable period of 2011. The lower 2011 gross margins were due to lower margin installation work recognized and costs associated with the FUEL CHEM demonstration in China that negatively impacted the margin during the second quarter of 2011. Both of which we have previously discussed. Throughout the rest of 2012, we expect our FUEL CHEM gross margins to trend with recent quarters. Our second-quarter APC segment gross margin of 38% declined 8% over the prior year. Margin decline was due to a higher concentration of international work and more specifically, to a contract and warranty charges totaling approximately $450,000 in the current quarter.

We expect to see APC gross margins trending downward for the remainder of 2012 as growth in our lower-margin international business continues to outpace domestic growth. SG&A expenses, exclusive of R&D expenditures, were $8 million for the current quarter and $17 million for the year, which were both in line with the same period last year. Our SG&A expenditures include higher variable selling and employee costs, including commissions, which are due to increased APC revenue recognized in the year-to-date period, offset by a decrease in stock rates compensation. As a percentage of sales, our SG&A costs are lower than the prior-year at 37% of sales, compared to 38% in 2011.

Research & Development expenses were $1 million in the second quarter and $1.5 million for the year, which is up from $300,000 and $700,000 from the respective prior year periods. We are focused on developing and testing both new and enhanced technologies with near-term market applications. We are pursuing chemical solutions for recently issued and pending regulations that will assist in diversifying our product portfolio with recurring revenues. Operating income for the second quarter of 2012 was $200,000, down from the prior year amount of $900,000. Our year-to-date operating income of $2.7 million was also down from the prior year amount of $2.8 million. The decreases in operating income are attributable to the shift in revenue mix towards our APC segment business and the decline in our higher margin FUEL CHEM revenue. We have continued to make strategic resource investments in anticipation of order flow in both of our segments, and we believe we are well-positioned to handle increased revenue levels in our core businesses without needing to make significant additional investment in personnel or infrastructure.

Due to the mix of forecasted domestic and international revenue and income levels presumed for the full year of 2012, we have set the full-year effective tax rate at 38.5% and will adjust quarterly as necessary. Cash-on-hand at the end of the second quarter was $25 million, and we are debt-free except for a small piece of startup debt in China of just over $1 million. Working capital was $38.5 million at the end of the second quarter. We continue to generate strong cash flow from our business model due to the relatively small investment in fixed infrastructure costs. Year-to-date cash generated by operating activities was $5.3 million. This positive cash flow is offset by purchases of equipment and patents of $1.7 million, and our stock repurchase program of $7.2 million. To date we have purchased a total of 2.2 million shares of common stock for a total cash outlay of $11 million.

Now for some general guidance comments regarding the remainder of 2012. For the third and fourth quarter we are expecting to see significant APC revenue growth over the prior-year quarters, given our recent APC bookings. Our lead time for delivery of orders in China is relatively short compared with other markets, product lines, often three months or less. We therefore expect a good portion of the recently announced orders in China to be recognized fully before year-end. Our Chile job is scheduled to run through mid-2014, and through year-end we expect to see 15% to 20% of the overall project recognized as revenues. We expect to see the recent trend in our US domestic FUEL CHEM business to continue through year-end. And while we are pursuing new opportunities in this market, factors influencing the choice of fuels and operating characteristics will likely influence this business through the end of 2012. Lastly, we are pursuing opportunities in the US domestic APC market which could contribute to our third- and fourth-quarter growth. However, we remain cautious in this market given the delays and cash burden.

Our FUEL CHEM margin profile should remain consistent with prior periods at 48% to 50%. Our APC margins are expected to trend down due to the concentration of revenue coming from international sources and a large burner job we announced in Chile. We have generally guided toward a 20% margin profile for burner jobs and 40% to 45% delivery of our core technologies. Our China margins have been in the 25% to 35% range. And we expect to see them continue at this level for the remainder of 2012. We are looking to see a blended 35% to 38% gross margin delivered in our APC segment for 2012.

SG&A expense, exclusive of Research & Development costs, is a fixed component and as previously discussed, we saw this percentage increase in the current quarter due to the lower revenue base. As we look out to the full year we expect to see our SG&A spending decline to 33% to 35% range on a full-year basis, which is consistent with prior guidance. Additionally, we continue to expand R&D activities and, therefore, would expect to see the spending levels noted in the first half of the year to continue. Now I would like to turn the call over to Doug.

Thank you, Dave. Good morning, everyone, and thank you for joining us on this call this morning. As you heard from Dave, we had a strong quarter in the air pollution control or APC segment, with second-quarter revenues up 33% from the same period last year. This was driven by revenue recognition of our record year-end backlog that occurred as a result of the higher contract bookings, predominantly SNCR orders, which were placed in the second half of the year to meet the requirements of the Cross-State Air Pollution Rule, or CSAPR.

CSAPR was scheduled to go into effect January 1 of this year. However, just days before it was to be implemented, the US Board of Appeals for the District of Columbia Circuit Court issued a judicial stay of the rule after industry groups, states and others argued that the EPA improperly set state budgets for power plant emissions of NOx and SO2, and failed to provide adequate opportunity for notice of comment. Oral arguments were heard on the case in April. And while a decision has been expected by many for some time, the court is expected to issue its decision within the coming week, if not sooner. A 2013 implementation date is perhaps the best-case scenario for the EPA and other performance of CSAPR. [The DC Circuit] invalidates the EPA's disposition of a federal implementation plan, or invalidates the emission budgets set by the EPA. The compliance deadlines might not take effect until 2014 or possibly later.

The [Deputy] assistant administrator for the EPA Office of Air and Radiation has publicly said she does not anticipate a lengthy delay. She maintains that CSAPR will pass legal muster because the agency fixed the problems that caused its predecessor, the Clean Air Interstate Rule, or CAIR, to be rejected. Either way, clarity on CSAPR is needed so plant operators can assemble their compliance plans to meet the increasing, tightening regulatory demands. While CSAPR is in limbo, CAIR, which includes an allowance cap and trade program, is still in effect. While most states have already complied with the NOx reduction requirements of CAIR, CAIR allowance prices remain depressed due to the eventual switch over to CSAPR, and these allowances exist to meet the current compliance needs of CAIR.

Domestic growth drivers for our APC business include the Boiler MACT Rule and the Regional Haze Rule. The new proposal was published on December 23, 2011, with April 2012 for the final rule. Sources were given a no-action assurance letter from EPA through December 31, 2012, so the final rule has been likely pushed back until after the election. Compliance date will be anywhere from March 2014 to April 2016, which has to do with a court decision on EPA rule-making procedures. With required reductions for particulates, mercury, HCl, and a tight carbon monoxide or CO requirement, new opportunities for burner tuning and SNCR technology will open up due to the [GO] requirement in existing NOx [site purpose]. Many new opportunities from the industrial segment continue to grow for our SCR technology and SCR services to manage catalyst performance to maximize NOx reductions.

Many states are moving to finalize their NOx compliance plans under the Regional Haze program of the Clean Air Act, particularly for sources in western states outside the CSAPR region. [This decree] issued by the DC Circuit Court has been issued requiring all states to complete their state implementation plan by November 2012. We continue to see demand from utilities and industrial units for our Low NOx Burner and Over-Fire Air technologies. We are confident that once there is better clarity on CSAPR, we will see a continued uptick in our SNCR orders and our ASCR activity, or Advanced Selective Catalytic Reduction, as we have demonstrated in the third and fourth quarters of 2011. In the meantime, we have close and professional relationships with our customers, and we continue to work with them on their emission control alternatives so that we are ready to respond quickly and in a timely and cost-effective manner once this regulatory clarity is established.

Turning to China, our level of bidding activity is at its highest level, and we anticipate additional future orders to come from this activity. Thus far this year, we have surpassed all of last year's [bolade E] bookings and announced the following new orders from China. 17 ULTRA systems, 4 SNCR systems, 1 NOx OUT SCR system, 2 Flue Gas Conditioning applications, and combustion modifications in our Over-Fire Air systems. We are pleased to see not only our continued penetration on the ULTRA side, but also the diversity of orders, including Flue Gas Conditioning, which represents our first commercial application. Flue Gas Conditioning, or FGC technology, has been proven on over 500 electrostatic precipitators world-wide and is a cost-effective means of complying with particulate emissions and opacity regulations. Global demand for this technology is likely to be stronger in China, India, eastern Europe, Russia, South America and South Africa, where the use of high-ash coal is prevalent. We hope to benefit from additional FGC orders, but actual demand will be dependent upon several factors, including regulatory requirements and the level of capital spent on alternative technologies.

Just three weeks ago, we were awarded the largest air pollution control contract in our Company history. This $36.6 million order placed by E.CL S.A., a major utility in Chile, includes turnkey installation of Low NOx Burners, or LNB, and Over-Fire Air systems, and mill modernization for six coal-fired units. This represents our second LNB project in Chile and demonstrates our global reach in combustion capability. Equipment deliveries are scheduled to commence during the first quarter of 2013, with project completion occurring during the third quarter of 2014. We have consciously expanded our international presence to achieve both growth and regulatory diversification in our air pollution control business.

We have strategically focused on key geographic markets and are thrilled to be announcing an order of this magnitude. This order puts our backlog at a current record level of $67.5 million, which should help alleviate near-term concerns regarding our domestic APC business and provide visibility for 2013 and 2014. Additionally, this project win demonstrates that we can win these larger combustion modification jobs and go head-to-head with major competitors. Successful completion of this project could also help us to compete and win similar large combustion modification opportunities in the United States.

Turning to our FUEL CHEM segment, the second quarter of 2012 was a challenging period as we continued to be impacted by low natural gas prices and lower coal consumption. The latest data provided by the EIA show a year-over-year increase in May of 40% in natural gas consumption, and a decrease of 14% in coal consumption. Natural gas prices remain low with the Henry Hub spot price at $3.20 per million BTU, down from $5 a year ago. These factors placed pressure on our coal-fired customer plants and caused a number of them to operate below expectations, shut down, or switch from burning coal to natural gas. While we expect similar challenges in the second half of this year, we continue to work with our clients to improve their fuel selection capabilities, address the challenges of slag formation and furnace fouling, and offer effective solutions to other emissions challenges such as SO3 abatement and improving plant operations for existing SCR systems, of which there are 250 located in the United States.

We are continually looking to enhance our product offerings. Just recently we published a technical paper in conjunction with Santee Cooper, which showed further documentation that our Targeted In-Furnace Injections, or TIFI technologies, prevent chloride corrosion in the stainless steel reheat tubes for high chloride coals, such as Illinois Basin coal that is burned. By keeping the tubes clean and free of slag, the chlorine present in flue gas that is released from coal is not able to corrode the furnace's boiler tubes. This is an additional selling point for stainless steel tubes that are typically used in [border region sites]. This is an additional selling point for our TIFI technology and could prove to open up new opportunities for FUEL CHEM at a time when market challenges do exist. It is important to note that while many of our customers may still not be running their coal-burning assets at full load, they do retain their FUEL CHEM platform solutions to aid them in their plant operations when full demand returns.

To take advantage of the opportunities before us, we continue to capitalize on our reputation for engineering excellence, strong sales in field support network, and trusted customer relationships, by growing our capabilities and product offerings. To that end, our new product development team continues to leverage and enhance our core technologies, as well as focus on new products to enhance and expand our product offerings. Opportunities are emerging as our customers move forward to comply with the Boiler MACT and Mercury and Air Toxics Standards rules, including control of sulfur dioxide, acid gases, and mercury.

Our increase in R&D spending this quarter is the result of further testing necessary to validate our technology before testing it at a customer site. We are hopeful that this technology, which we believe is best addressed with a TIFI-type of solution service model, will prove the results [entirely]. So we will have a new product to take to market by early next year, offering a recurring revenue opportunity to reduce emissions as well as improve efficiencies.

Additionally, we will continue to evaluate non-organic business development possibilities that we believe can aid in the execution of our overall strategy, add critical mass demonstrates accretive earnings potential to create shareholder value. We will work to ensure that our current business remains strong. We remain sharply focused and committed to implementing our strategy. Our goal is to accomplish this in both our US and international markets by, one, delivering superior products and performance to meet the changing regulatory and operational dynamics of our customers' businesses. Two, executing on new product innovation and diversification initiatives. Three, leveraging our technological leadership, market position, and global presence to continue to deliver value to our customers, partners and stockholders. And finally, capitalizing on the significant opportunities that should emerge in the US and China as a result of air emission regulatory environments. With that, I would like now to turn the call over to the operator, who will open the line for your questions. Thank you.

Thank you.

(Operator Instructions)

Questions will be taken in the order received. Please stand by for your first question.

John Quealy, Canaccord.

Hi, good morning, everyone, and congratulations on all that order flow. That is pretty strong. So, if I can just ask for a little bit of homework help here on the guidance. You gave a lot of detail, but I am just trying to sum it up here. In the back half of the year, at least $20 million of existing backlog gets converted for APC, plus we are talking about the China deals that were announced on a quick-turn basis. So, is it fair to think $30 million in the back half for APC, just looking on your comments versus last year?

That is fair, John. And it might be a little bit stronger than that.

And then, in terms of the mix of the gross margin, so, China at 25% to 30%, Chile you talked about on the burner side being lower, and the SCR-SNCR stuff on the higher side. But to get to your full-year guidance, we are going to walk down margin to that 30-ish percentage rate by Q4, even maybe a little bit less than that. Is that fair to make your math work?

Yes, that is right. Yes.

Okay. And then, bigger picture stuff. First on FUEL CHEM. Are we pretty much -- for all the units that are out there that are on the margin for gas or coal, based on your customer list, have they all switched? So my point is, is this the worst we are going to get from a FUEL CHEM run rate? Or how do you characterize FUEL CHEM at this point, given the macro gas dynamic in coal?

That is a good question, John. We have been in this environment for quite some time. We have actually seen attrition impair what we have actually achieved on the growth side. So, while the FUEL CHEM business has grown, it has been offset by those plants that have reduced their load activity, shut down, switched to natural gas. And that has gone on for a period of time.

We have tremendous appreciation by the customer base that we have that are operating their plants today, as to what the FUEL CHEM program is doing for us. So, it would be my belief that we have seen more of a plateau bottom, with more growth to come as loads increase and as our new product offerings utilizing tips and technology are offered in the marketplace. I think it is a fair comment to believe that the softening has already been experienced.

Okay. And then final two questions. First on China, you folks have wrung up an impressive array, all the way back three or four years ago, and just recently. Can you comment -- if you said it already, I apologize. But what is the addressable pipeline there, Doug, if you could, in China, in terms of what you think you are targeting?

Well, as you have seen us achieve really very good success with our ULTRA product, there's still many of those opportunities ahead of us. It depends upon the region. It depends upon the age and plant, by plant. Many of these plants are adopting full-blown SCR technology which we are not a provider of. However, we have been able to provide additional products and services that address that end of the market. And I do believe that in the months and years ahead, our advanced SCR solutions will see some market acceptance, particularly because it has low capital cost.

The SNCR market is not as strong for us in China. And it just has to do with the preference of SCR over SNCR with respect to where starting conditions are, on [emissions equipment need to get to]. But we are, as you know, selling all of our technologies over there, but in particular, our strongest play is ULTRA.

And my last question. So, can you talk about M&A and strategy for a minute? If we are talking about a bottoming in the FUEL CHEM business, or something approaching bottoming, it is $15 million to $20 million of cash flow or EBITDA. Can you talk about what you and the Board might be considering in this environment for strategic growth or M&A in the next 1.5 years, once we get CSAPR cleared up, et cetera? Thanks, guys.

Sure. As it relates to the FUEL CHEM business, we are rather unique in what we are capable of doing. So, there's much more opportunity on the organic product development side for our chemical-based solutions. There are other companies that do inject chemicals into boilers or pre-treat it on the fuel. We believe that we have not only existing superior capabilities, but we believe we have an incredibly powerful technological know-how to further our product offerings organically on that side.

The marketplace is soft for others who are addressing that as it relates to future coal and natural gas pricing. But I don't necessarily believe that there are large M&A opportunities in FUEL CHEM. That is a little different in the air pollution control markets. And I would say that is an international landscape that we have to look at. For example, China is largely an APC market for us. There very well could emerge attractive candidates over there. There are certainly candidates domestically in the United States.

But broadly speaking, I would ask you to look at us strategically as our core capability -- whether we are injecting magnesium hydroxide or other formulations of chemicals in FUEL CHEM, or urea or ammonia, we have a unique ability to deliver precisely metered droplet slurries across streamline, and control exactly where they go and exactly how long they last. That enables us to convert the chemistry by way of very sophisticated modeling techniques. So, our foundation technology is one that, while we use the word TIFI for FUEL CHEM, we are really good at targeting chemical solutions in boiler applications.

That being said, what I believe we have the opportunity to do strategically is, to not only continue to grow our ability to execute larger and larger capital projects, at the same time, through product development and licensing or acquisitions of related solutions, begin to offer [referring] revenue products and services that meet regulatory requirements. That would be a big change for us. And it is all based on the foundation of our technology that crosses both business segments.

Thank you.

Dan Mannes, Avondale.

Thank you, and good morning. A couple of quick follow-up questions. First on FUEL CHEM. Can you talk maybe about the pace of usage? Obviously, we saw a significant decline in coal burn, particularly in April and May. Things improved a little bit in June. And now you sort of have July in your rearview mirror. Have you seen any improvement in FUEL CHEM usage, given at least some stabilization of coal burn? Or are the trends you saw maybe in the early part of Q2 still continuing?

Yes, this is Dave. I think the trends are continuing, barring a shift in pricing and utilization. So, no, we are seeing a similar trend continue.

So, this doesn't look like a seasonal pattern, whereby in shoulder periods, Q2,4 maybe you see a decline. This looks like until we see maybe a major change in the coal market, this looks like a reasonable place to be?

I think longer term it is hard to predict where the coal market will be. Certainly there are some dynamics in the marketplace today. But whether and how long those stay with us, that is a tough question.

Okay. And then real quick --

I think it would be fair, Dan -- this is Doug -- to assume that soft natural -- low natural gas prices are going to be here for a while. We certainly recognize that. And we are doing our planning and development activities with that assumption in mind. That being said, I don't believe that is a long-term kind of a situation, years from now. I have always had confidence that the domestic coal industry is one that offers the lowest cost per BTU delivered. And I think we stand ready to provide solutions that make it very effective to meet the regulatory requirements on a low-capital-cost basis. Low-capital-cost solution is the core part of our strategy. We think that will be very receptive to the domestic utility industry that chooses to operate their plants utilizing low-cost coal.

Got it. And real quick, and Doug, I think I heard at the end of your comments -- and I was hoping to get you to expand on this -- are you fairly close to rolling out, it sounds like a new product on the FUEL CHEM side that might give you some emissions controls, as well? Or did I mishear you?

You did not mishear us. We have been undergoing new product development activities more intensely over the last two years. As I said previously, intend to increase R&D spending closer to the 3% to 4% of revenues level. We are beginning to see the fruits of that work. We do very controlled testing. We are going to validate the pilot scale and free commercial scale, the very results that we see in our development stage activities. And we are addressing SO2, hydrogen chloride, mercury, and the suite of regulatory needs around those types of pollutants.

In doing so, by using a TIFI model, we utilize technology that we are very good at delivering. We think it is a very good alternative to the kind of application of [sorbent] technologies that create many problems, for example. So, as I said earlier, I think we are probably going to validate results that would enable us to introduce our first new product sometime by early [May].

And would this be a fairly common injected chemical like the magnesium hydroxide that you use in TIFI, or is this something radically new and unique?

I can't comment on the chemicals that we are developing because they are proprietary. They differ from magnesium hydroxide, but they are specifically designed to leverage our FUEL CHEM technology, the no-capital approach to providing a solution that -- as a continuous feed. So, I think we are well-poised to really build a bridge, if you will, between our FUEL CHEM and our APC segments in the thinking that we have got a common technology know-how to meet regulatory emissions needs, and not just an ROI solution for controlling (inaudible).

We need to get you to think about FUEL CHEM as not just a [fouling] flag technology. It was introduced to address that problem; it has been successfully applied to solve that problem. We are certainly seeing an environment, as the entire domestic utility industry is, in softening electricity demand at lower loads in which those problems are not as prevalent. But it has given us the opportunity to develop some alternative solutions that simply didn't exist a year ago.

Got it. And then, real quick, and this is a follow-up I guess a little bit on John's question. When you discussed inorganic growth, particularly as it relates to the APC segment, how do you think through the opportunities on inorganic growth vis-a-vis the buyback, which you have been fairly aggressive on, number one? And number two, any specific areas that you would be looking at expanding to, whether it is geographic or -- or in terms of product mix or pollutant you would like to work on? If you can just give us any color on your thinking on the inorganic side, and then how it matches up with buyback activity going forward.

First of all, I think, Dan, that our buyback program stands on its own. We do generate excess cash flow. We set the levels of those buybacks to take advantage of opportunities in the marketplace, and to utilize a discretionary amount of our cash. As we look at acquisition opportunities, given that we still have significant cash reserves and a debt-free balance sheet, we see opportunities that enable us to consider acquisitions of a range of buys.

To directly answer your question, I think we look to expand our strength in certain geographic markets, and to exit certain customer relationships that may only be those that you can serve by having a closer geographic relationship. There certainly are other products and technical applications that we can evaluate on a case-by-case basis to determine if they enhance our portfolio. So, there certainly is a technology evaluation. But it has to fit our overall strategy.

Okay.

[One that we] consider that we're really good at. So, I would broadly say that as we grow our business internationally, we are looking to strengthen our [political market]. Not only does that give us larger opportunity, more growth, but it also gives us regulatory diversifications. We see the world continually legislating increasingly more strengthened emissions rules. But they vary by timeframe, country by country. (inaudible) And even in the case of the US, which is a more mature market, [litigated as they] are continuing to evolve. The long-term landscape for emission controls is a very, very long (inaudible).

Great, thanks for all the color.

Graham Mattison, Lazard Capital.

Good morning, everyone. Just a follow-up question on the FUEL CHEM. You mentioned the customer attrition during the quarter. Is any of that -- I just need a little more color. Is that just people switching away from burning coal, or is it a situation where they are finding other solutions to deal with their slagging problems, or are they just not running enough to incur -- to make it work to -- running fuel again?

Yes, hi, Graham, this is Dave. A little bit of all of that. There are some that are running gas plants and using that to generate the power demands. There are some that struggle with pricing and demand. So, they are able to run the plants at a lower capacity. So, it is a little bit of everything that you mentioned.

Great. And then on the expanding the use of the TIFI technology, how soon -- to sort of follow up on Dan's question -- how soon would you expect that you would be generating revenue from that? You mentioned that you said that you are going to have a product out soon. Is that just a demo, and do you need a couple of years for that? Or will that be generating revenue in the near-term? And then, if you can give a sense of how that revenue compares to the existing FUEL CHEM revenue on a per-boiler basis?

Well, it is a little premature to be specific in answering your questions in as much as we haven't completed all of our product testing. But we are very encouraged by what we see. And I can tell you that once we are satisfied that we are delivering the results at a commercial scale level, product rollout is the relatively short time horizon. We think we have got customer relationships that will be very attracted to this type of approach. And so, while I don't think we, in management, have a budgetary number in our mind yet for 2013 or 2014, as we get closer to the end of the year, and we assess what kind of performance we think (inaudible). I believe it is going to provide significant growth, not only because it is utilizing the approach we are taking, but it is solving a real significant need around SO2, acid gases and mercury.

And of course, without getting into the details of the regulation, every category of pollutants might have a slightly different compliance timeline. So, the actual revenue growth rate will be in response to when plants comply with those deadlines. But they are relatively near-term. So, I think we feel pleased with what we started two years ago, that we are going to be well-positioned to meet those (inaudible). A number of technologies are undergoing evaluation in each category of pollutants. And I think you are going to begin to see awareness of alternatives in the upcoming year, and a preference being indicated that are prospective for plants.

Okay, great. Thank you very much.

Steven Charest, Devine Capital.

Thank you, a good quarter. A quick question on SG&A. In the past you had mentioned that scaling back SG&A expenses had a lot of leverage built into it, and there was a point I think you had referenced some time ago that, given SG&A spend, you could support roughly double sales. I think this was somewhere around mid-year last year. Could you refresh that estimate?

Steve, this is Dave. I recall a discussion of carrying $115 million or so in revenue. That still is a place we could get to. I think we could do a bit more than that without significant investments in SG&A. So, I don't know if that answers your question.

Yes.

We have been able to keep our spending pretty flat. And as we look out for the remainder of the year, you should see those percentages drop throughout the remainder of 2012.

I think if you step back and think about it, as we experienced in the third and fourth quarter of 2011, we saw a tremendous surge in our order rate. And we have staff with engineers, project managers, steel support people, (inaudible) capabilities to execute those projects as they come in. Very difficult to anticipate a [traditional] stay. Yet, the six months that have passed, in my view, is a relatively short horizon with respect to seeing the potential for a return of a stronger domestic market. As you can see what we have been able to achieve on the national front. So, when you think about two quarters, when we plan our human resources feed into our organizational planning, we are really thinking out 1 year, 1.5 years, and particularly thinking about what kinds of activities that we want to have onboard and [confident] with.

So, for example, as we do more Low NOx Burner or Over-Fire Air combustion work, we will be adding combustion (inaudible). As we demonstrated large, new initiatives like our ASCR, and we anticipate additional projects in that category, we need that expertise. We always stand ready, because our tradition is rooted in it, for responding to the needs of our customers (inaudible). We all await the ruling on CSAPR. It could be such that all these regulations are clarified, and implementation begins in 2013, and we are going to see a similar activity period like we saw in the second half of 2011. And that is on top of our growing international business. So, when you see all that cyclical activity, you have to kind of [load level] through it, and make a [superior] human resources (inaudible).

Right.

So, as a result, you might see a little variation in SG&A, the first set of revenues. But I would keep my eye on the total level of spending. That is [the solid level].

All right, thank you.

Lucas Pipes, Brean Murray, Carret & Company.

Hello, gentlemen. This is [Derek Hernandez] for Lucas Pipes this morning. Hi, I was just wondering -- so far, just to clarify, there hasn't been any meaningful response from your clients with regards to CSAPR or upcoming regulations? That's all kind of being held on the back burner?

Your question was about immediate response? I wasn't quite sure -- ?

Sorry, meaningful.

Oh, meaningful.

I don't think so. Many of the utilities are still looking for the clarification before they put their spending plans in place. We have had discussions with numerous utilities. There are still, as we have mentioned before, Regional Haze drivers, state Consent Decree drivers. So, we are still seeing some demand on that side of the business. But the driver behind CSAPR, I think, at this point, utilities are waiting to see what the regulations are and what the time frames are to comply, before they take their [permanent appointment].

Of course, there is good activity growing in the industrial marketplace because of what it has to do to respond to (inaudible). But generally speaking, the domestic electric utility is [a way for clarification] and hopefully imminent. On top of that, practically speaking, we are only months away from the presidential election. I think a lot of people are probably thinking -- what will be the policymaking attitude, the continued Democratic versus possible Republican administration. So, while the courts aren't thinking that necessarily, they are looking at the legitimacy of the rulings, and how it should be implemented. I think it is fair to hope and expect that we are going to see that judicial clarification before the general election.

Okay, excellent. And then, I was just wondering as well about the Chilean project. Do you currently have any expected range for your margins, like, are they to be in line with general international projects, or a little bit closer to what you guys get in the US?

Yes. That job is a burner job. We have been installing six burners. And typically our burner margins have been in the 20% to 25% range. So, from the guidance, if you are asking for a modeling perspective, I would tell you to use probably 20% for that.

Okay, thanks.

Also, something just to know about big projects of that magnitude. And that project is, what, about three times the size of our similar last-largest project. Inside a project of that scope are engineering services that Fuel Tech typically provides. And at our standard margin, well above 40%. Also inside the scope of work in a project of that magnitude is the purchase of equipment and material, which has a mark-up on it that is more moderate.

That being said, we don't incur personnel expense other than just arranging sort of the pyramid activity. The installation work provided by contractors, (inaudible) [recycling] by Fuel Tech. So, depending upon the line item in the budget, the actual percent margin can vary. In a competitive bid situation, that is the same for a number of other potential bidders. And the end-point is what the competitive marketplace requires.

All right, thank you very much.

[Tom Clark], private investor.

Yes, thank you. That was an impressive quarter, congratulations on all those orders. I know you mentioned about Research & Development. That is a key item in ongoing growth of a company. But could you just expand a little bit more on how you see R&D developing? And your patents and proprietary expertise, and how that is protected?

Sure. First of all, the Company's success has been traditionally rooted in its ability to innovate new processes, products that are -- that offer intellectual property protection. You can see that in our FUEL CHEM business, where we have relatively little competition, and we have the strength of those patents to last us a number of years into the future. In our SNCR area, many of those patents have matured. So, some of the things we do are to renew and invent enhancements to the technology that we have that are seeing patent expirations, or new competition. Some of what we are doing is to develop completely new chemical solutions that have never been thought of before.

I am a great believer that if you want to build a valuable company that is rooted in technology, you have to invest in this kind of development activity. I think that the Company had gotten a little away from that. We re-energized that, and we organized it around a new product development team that's got diversified skills. Largely taking all of our opportunities and putting them into essentially a project management program, which gets reviewed regularly by executive management and the technical staff of the Company. They get prioritized, and there is a view both for what can be achieved and probability of technical success, and what is most needed by the marketplace.

It is the marketing side that drives our priorities. And we've got customers who have for some time been asking us to help them with pollutants other than NOx. We used to be primarily a NOx control company. We are changing. We are going to be a multi-pollutant, clean, efficient energy solution provider founded on the ability to analyze complex combustion environments, all the complex chemical reactions questions that enable us to apply that technology. Build everything on our strong modeling abilities, both using [complication with] dynamics, chemical kinetic models, and provide a tailored, precise solution. And doing that very efficiently and very rapidly. That is our strength. That's what we are really good at.

And so, look for us to roll out solutions as these regulations require customers who purchase them, and look for that to be attractive solutions that meet or exceed the regulatory requirement. But do so at lower capital costs than what others might otherwise require, or much lower operating problems and costs than others often entail. That is what I think we are good at.

Fine, thank you, sir. As an investor, I am encouraged by your comments. Thank you very much.

Thank you. You have no further questions queued at this time.

(Operator Instructions)

We have no questions queuing, therefore, I would like to turn the call back over to Doug Bailey for closing remarks.

Sure. Thank you, operator. Thanks, everybody. I appreciate all your questions. As we look ahead to the balance of the year, we are very optimistic of what kind of year we are going to have that will be an increase over last year. Certainly there is a lot of uncertainty in a year like this. But I think we have got an excellent organization that is finding tremendous opportunity. And I think that is evident by what we have delivered in our backlog, in our development program that we have discussed with you this morning.

It is a great company. It is a great stock to own. We thank you for the investment interest you have shown, and we appreciate all your questions this morning. Thank you very much. Bye for now.

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