Fuel Tech Inc (FTEK) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 Fuel Tech, Inc. earnings conference call. My name is Clarissa 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. If at any time you require operator assistance, (Operator Instructions).

I would now like to turn the conference over to your host, Miss Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Please proceed.

Thank you, Clarissa. Good morning, everyone, and thank you for participating on today's conference call to discuss our third-quarter 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 Cahill, Controller.

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.

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. 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 to everyone. We closed a strong quarter in which we delivered record bookings of $53 million and record quarterly international revenues of $8 million, up 70% over the prior year. We have previously highlighted the accelerating rate of inquiries and bookings in our China-Pacific Rim operations and we are pleased to see those revenues materializing.

Additionally we booked the largest order in our Company history for $37 million in Chile. The continued development of our international markets has been critical for us while we work through a phase of slower domestic activity.

Consolidated revenue for the current quarter of $25 million was flat year over year while our nine-month revenue of $71 million increased $5 million or 8% over the prior year. Net income for the current quarter was $1.2 million or $0.05 per diluted share and $2.8 million or $0.12 per diluted share for the nine-month period.

Our adjusted EBITDA for the first nine months of 2012 was $7.4 million.

For the current quarter, our Air Pollution Control or APC segment revenue of $15 million increased $3 million or 29% over the prior year. For the first nine months, our APC segment revenue of $44 million has increased $11 million or 33% over the prior year. Our strong APC segment revenue is due to carryover domestic business resulting from the CSAPR ruling issued in July of 2011 coupled with the development of record foreign bookings and revenue for the first nine months of 2012.

We are seeing our bookings and revenue in our China-Pacific Rim APC business accelerate and it's now reporting sequential growth in our China-Pacific Rim APC bookings for each of the first three quarters in 2012 with over 225% growth in the first two quarters of this year and 130% growth in the third quarter.

Current quarter bookings of $12 million represents an increase of 184% over the prior year and a new quarterly booking record for our China-Pacific Rim operations. For the first nine months of 2012, our China-Pacific Rim order activity as already resulted in bookings of $18 million and with the $10 million of new orders announced in the month of October, we have now put $28 million year-to-date which is also a new record for us.

We expect to see this heightened level of activity continuing as we become more constructive in our market opportunities for the China-Pacific Rim regions.

Another significant contribution to our 2012 APC growth in bookings and revenue was the $37 million contract announced for a utility customer in Chile. This contract is expected to deliver between 15% to 20% of contractual revenues in 2012 with the balance being recognized over the next 18 months as we work through the installation scheduled for our technologies on six different utility units.

Our consolidated backlog at the end of June was $53 million and is comprised of $7 million in domestic backlog and $46 million in foreign backlog. As noted previously, in October we announced an additional $11 million in new APC orders, increasing our quarter and backlog amounts to $64 million. The majority of our domestic and foreign backlog that is not associated with our contract in Chile will be worked off over the next six to nine months. The remainder of our backlog, approximately $34 million which is associated with a contract in Chile, will be worked out over the next 18 months.

Our foreign revenues for the September quarter and nine months totaled $8 million and $14 million, respectively, representing an increase in foreign revenues of 69% and 19% over the prior-year periods. As discussed above, we are seeing a higher level of foreign APC activity and expect to see these trends continue for the remainder of 2012 and through 2013.

Our FUEL CHEM segment revenue for the third quarter totaled $9 million, representing a decrease of $3 million or 20% over the prior year. Year-to-date FUEL CHEM revenue was $27 million, a decrease of $6 million or 17% versus the prior year amount of $33 million. As we have noted in prior conference calls, the 2011 nine-month revenue includes a low-margin installation sale completed in the first half of 2011. Adjusting for this installation revenue, our FUEL CHEM revenue would have declined 14%.

We continue to explore new customer opportunities and are actively looking at new product applications in this segment.

Consolidated gross margin for the current quarter of 41% was down 5% from the prior year. This change is attributable to a year-over-year decline in our APC segment gross margin coupled with the higher concentration of APC revenues. Our year-to-date consolidated gross margin was 44%, down 3% from the prior year margin of 47%.

Quarterly gross margins for our APC segment were 33%, a decrease of 5% from the prior year. Year-to-date gross margins for our APC segment were 39%, a decrease of 5% from the prior year. The margin declines in the current quarter and year-to-date periods are due to a higher concentration of foreign revenue which carries a lower margin profile. We expect to see this lower APC margin through the remainder of 2012 and into 2013 as growth in our foreign revenue is expected to outpace domestic growth.

Quarterly gross margin for our FUEL CHEM segment was 54%, an increase of 1% over the prior year. Year-to-date gross margin for our FUEL CHEM segment was 53% versus 49% in the prior year. The lower gross margin in the prior year was impacted by an installation project and a charge related to the FUEL CHEM demonstration in China, both of which have been previously discussed. We expect the near-term trend in FUEL CHEM gross margins to be consistent with recent quarters and longer-term we would look for our FUEL CHEM gross margins to trend in the 48% to 52% range as previously disclosed.

Selling, general, and administrative expense was $8 million for the third quarter and $25 million for the first nine months, both of which are in line with the same prior year periods. Our gross SG&A expenditures include higher variable selling and employee costs including commissions, which are due to the increased APC revenue recognized in the year-to-date period, offset by a decrease in stock-based compensation and other miscellaneous expense line items.

As a percentage of sales, our quarterly and nine-month SG&A costs are consistent with the prior year at 32% and 35%, respectively.

Research and development expenses were $569,000 in the third quarter and $2 million for the first nine months. Through the first nine months, our research and development costs have increased $1 million over the prior year. We remain focused on developing and testing both new and enhanced technologies with near-term market applications.

Operating income for the current quarter was $2 million, down from the prior year total of $3 million. Our year-to-date operating income of $4 million was also down from the prior year amount of $7 million. These decreases in operating income are attributable to the shift in revenue mix towards our APC segment business and the associated decline in our gross margin profile and higher research and development spending. We will continue to make strategic resource investments in anticipation of order flow in both of our segments.

Due to the mix of forecasted domestic, international revenue and income levels presumed for the full year 2012, we have decreased our full year 2012 effective tax rate to 35%, which resulted in a quarterly tax provision of 24%.

Cash on hand at the end of September was $24 million and our working capital balance was $39 million. We are essentially debt-free except for a small outstanding balance on our China line of credit.

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 of $7 million. This positive operating cash flow was offset by purchases of long-term assets of $2 million and our stock repurchase program of $8 million. During the first nine months of 2012, we have purchased a total of 1,604,000 shares of common stock.

Now for some general guidance comments regarding the remainder of 2012 and 2013. We expect our full year 2012 revenues to be in line with consensus estimates. Our APC business is expected to continue growing through 2013, but at a more moderate pace. Our FUEL CHEM business is expected to be sluggish through the first half of 2013 and then pick up through a combination of new and existing customer business. We believe the range of consensus estimates for 2013 revenue represents a reasonable growth rate, given our current visibility to 2013.

Our consolidated gross margin has been declining through 2012 due to the relative growth in our APC segment revenue, coupled with the inclusion of more lower margin foreign business. We expect to see this trend continue through the fourth quarter of 2012 and into 2013 and are looking for a leveling of our APC segment gross margins in the 25% to 28% range. Our FUEL CHEM gross margins are dependent on customer mix and are expected to continue in the 48% to 52% range as previously discussed.

SG&A expenses, exclusive of research and development costs, are expected to continue at current spending levels through Q4 and will decline slightly as a percentage of revenues in 2013. Additionally, we continue to expand our [D] activities and therefore expect to maintain the spending levels noted through the first nine months.

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 on election day. I hope you have all either voted or plan to do so.

As you heard from Dave, we had a strong quarter in the Air Pollution Control or APC segment with third-quarter revenues up 29% from the same period last year. This was driven primarily by revenue recognition of an increasing number of foreign orders, predominantly from China and Chile. We have consciously expanded our international presence to achieve both growth and regulatory diversification in our APC business during a period of domestic regulatory uncertainty.

We realized record bookings of $52.3 million during the third quarter, more than double the $21.1 million recognized in the same period last year. This is primarily the result of a $36.6 million order, the largest APC contract in our Company history. This order, placed by a major utility in Chile, includes turnkey installation of Over-Fire Air systems and mill modernization for six coal-fired units and Low NOx Burners. This represents our second Low NOx Burner project in Chile and advances our combustion capabilities to the international marketplace.

Equipment deliveries are scheduled to commence during the first quarter of 2013 with project completion anticipated to occur during the third quarter of 2014.

This will offset near-term softness regarding our domestic APC business and provide added visibility for 2013 and 2014. Additionally, this project demonstrates that we can land larger combustion modification jobs, the successful completion of which will help us when similar opportunities in the future.

In China, third-quarter bookings of $11.6 million were also strong, more than double the $4.1 million that were booked in the third quarter a year ago. During the quarter, seven awards for 15 ULTRA projects were announced as well as six awards for projects utilizing our Selective Non-Catalytic Reduction or SNCR, Low NOx Burner, combustion modification and Over-Fire Air systems as well as Flue Gas Conditioning technologies.

Subsequent to the quarter end, we received $10.2 million in orders comprised of two ULTRA awards in China and a larger advanced Selective Non-Catalytic Reduction or ASCR project from a repeat customer in Taiwan. Our ASCR system is a layered technology approach that offers advantages over full-scale standalone SCR systems, including lower capital costs, enhanced fuel flexibility and reduced equipment footprint requirement. This award represents our third ASCR quarter in Pacific Rim and demonstrates our unique capabilities to integrate technologies ranging from Low NOx Burners, Over-Fire Air and hybrid SNCR, SCR into one single system that offers a competitive and capital-efficient NOx reduction solution to power plant units of all sizes.

China continues to be an active market for our technology as that country's '12 five-year plan continues to be the main driver for NOx control compliance. China has already demonstrated its willingness to spend money to reduce power plant emissions. Because there are so many existing power plants without NOx Control systems, and because China continues to lead the world in the construction of new such plants, it is likely to be the largest NOx Control market over the next decade.

We have sold each of our technologies in China with keen interest in our ULTRA system, demonstrating that the requirements of the policy align well with our portfolio of NOx reduction capabilities. Bidding activity there remains robust and we do anticipate additional bookings this year to provide continued revenue growth into the fourth quarter and into next year.

On the domestic regulatory front, the Cross State Air Pollution Rule or what we call CSAPR was vacated by the DC Circuit Court in August 2012. Since that time, EPA has appealed the ruling to the full DC Circuit Court and the outcome of that appeal is not expected until sometime in the first half of 2013.

With the CSAPR appeal pending, the Clean Air Interstate Rule or CAIR has been placed back into effect. Sources in CAIR states have already complied with NOx reduction requirements for the first phase deadline which was back in 2010.

The second phase of CAIR requires additional reductions by 2015. Both of these EPA rules were designed for states to comply with national ambient air quality standards for ozone and SO2. While the future of CSAPR is currently unclear, the continued tightening of these ambient standards will drive the need for additional reductions for NOx and other pollutants.

Domestic drivers for our APC business also include the Boiler MACT rule and a Regional Haze program. Although the Boiler MACT rule was finalized earlier this year, sources were given a no action assurance letter from EPA through December 31 of this year. Modifications to the final rule are expected next spring with an anticipated client's date of March 2014.

This stage is based on a court decision on EPA rulemaking procedures in the March 2011 date of the original Boiler MACT rule with required reductions for particulates, mercury, HCM, and a tight carbon monoxide or CO requirement, new opportunities for burner tuning and [SATR] technology will emerge due to the CO requirement and existing NOx site permits.

New opportunities for the Industrial segment continued to grow for our SCR technology and SCR services to manage catalyst performance to maximize NOx reduction.

Many states are moving to finalize their NOx compliance plans under the Regional Haze program, the Clean Air Act, particularly for sources in the Western states. A consent decree has been issued by the DC Circuit Court requiring all states to complete their state implementation plans or SIPs by November, the current month, 2012. And there have been a number of states that are moving forward to implement Regional Haze SIPs that have now been approved.

We continue to see demand for utilities and industrial units for our Low NOx Burner and Over-Fire Air technologies. We are confident that once there is better clarity on the Cross-State Air Pollution Rule, we should see an increase in domestic SNCR orders. We have trusted relationships with our customers and we continue to support their mission control planning so that, when they are ready, we can respond in a timely and cost-effective manner.

Turning to our FUEL CHEM segment, the third quarter continued to be a challenging period as low natural gas prices, lower coal consumption, and slower economic growth continues to impact our business. In the latest data provided by the EIA on US net generation from August of this year showed that coal's net generation was down 10.8% compared to August 2011 while natural gas generation was up 10% year over year. Natural gas prices do remain low with Henry Hub spot prices at $3.41 per million BTU. The EIA projects that power sector coal consumption in 2012 will be the lowest in 20 years.

These factors do place 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 to occur over the next few quarters, we continue to work with our clients to improve their fuel selection capabilities, address the challenges of slag formation and furnace [filing] and offer effective solutions to other mission challenges such as SO3 abatement and approving plant operations for existing SCR systems of which there are some 250 in the United States.

The Company's success has traditionally been rooted in its ability to innovate new products, new processes and technologies that offer intellectual property protection and, gratefully, where that if you want to build a valuable company like ours, you must continually invest in new products and proprietary capabilities.

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 current offerings. Opportunities are emerging as our customers move forward to comply with the Boiler MACT and the MACT's rules, including control of software dioxide, acid gases, and mercury. Our increase in R&D spending in the third quarter is the result of further testing of new products that we hope to bring to market in 2013, that will offer recurring revenue opportunities to reduce emissions as well as improve efficiencies.

As we look ahead to the balance of the year, we are optimistic that we will see topline growth and that our backlog will continue to be strong, providing visibility into next year. While current domestic regulations are severely challenged, there is no question that, over the next several years, our customers will face significant investment requirements and that we have many low-cost solutions to meet those compliance needs.

I am very pleased by the growth in our international market and I think we are beginning to see the positive results of our early positioning in China. To be sure, we face significant competition in that market, but we have great technology, a very motivated organization and an ability to deliver on an over 25 year reputation for excellence which should position us well for continued growth.

I will note in closing that today is a very important day in America as we choose who will lead this nation as President over the next four years. As I reflect over the economic challenges that have faced our country these last four years and how Fuel Tech has addressed the needs of our customers during these challenging times, I hope that we will have in place leadership that will make a positive future difference.

Whatever the outcome of today's election, we will continue to pursue our vision of a cleaner, more energy-efficient, sustainable environment and we will provide our customers with innovative solutions to produce clean, efficient energies. In so doing, we expect to create long-term value for our stockholders and our employees and in the communities in which we do business.

With that, I would be happy to turn the call over to the operator who will now open the line to your questions.

(Operator Instructions). John Quealy, Canaccord.

Good morning. Nice quarter. I have several questions.

First, I'm sorry -- a remedial question for me. Dave, can you talk about the APC guidance again for Q4? I missed what you were saying. I don't know if it was about 2012 and into 2013 are not, but the question boils down to should we see a step up sequentially in the APC revenue number in December? Thanks.

Yes. The answer to that is yes. We should see a step up. That is year over year. So on a sequential basis we will be about flat with Q3, might be down just a little bit, so that is on the APC side. But we will be up over the prior year.

And then just in terms of a couple of data points we saw, AEP is considering breaking into two companies there. And we have seen some improved market dynamics for coal from nat gas on the power gen side. And I know you guys talked about the next couple of quarters FUEL CHEM will be impacted negatively by spark spread.

But anecdotally can you talk about -- are you seeing your customers giving you a little bit better visibility in that sort of six-month timeframe or how are you getting that confident that six months is all we need for FUEL CHEM to come back?

Well, I think realistically the FUEL CHEM business has been challenged by, number one, reduced electricity demand; number two, economic reasons in many plants to convert to natural gas. We think that natural gas prices, compared to their historical levels, the outlook over the next several quarters is in the lower price ranges that we've seen putting pressure.

However, I think that there is some compelling thinking going on to maintain a diverse portfolio of fuels in power generation markets. It varies by utility of course, but I think we have seen more of -- I'll call it more of a bottoming out of the reduction on coal. I think in my conversations with those in our customer base, you know they are certainly making decisions as to the future of their generating units and I think a number of them -- [AEP], obviously is one who has some low-cost access to coal as a fuel, and I think they are realizing that companies like Fuel Tech can offer them low capital cost solutions to utilize coal as a primary fuel source.

So while I think there has been a significant share and we know the reasons why from coal to natural gas, I don't think coal is going to dramatically lose its long-term share. Low natural gas prices probably will play an important role in revitalization of our economy. That in turn will lead to higher electricity demand and requirement for fuels and energy sources of all kinds.

So this is a country that needs all sources of fuel, and I believe coal has a very important future and we will continue to work with customers to provide them with FUEL CHEM solutions that will address not only fouling, slagging and the Illinois Basin, Powder River Basin coal that they have seen in the past but innovative solutions to reduce emissions as well through the FUEL CHEM business model.

I do think you are seeing an absolute maturing in the Appalachian coal fields as costs are vastly different from other of the providers.

So we continue to be -- are a great believer in the future of coal use by the power generation markets and we stand ready to provide the responsible solutions to efficiently utilize that field.

And, Doug, can you give us an update on [VRD] efforts? It is good to see the financial commitment step up a little bit. Last quarter I think you talked about new products in along the lines of recurring revenue type models, vis-a-vis, FUEL CHEM. Can you give us an update of where you are from a commercialization standpoint for those products?

Sure. I can give you a good general feel. We undergo, first of all, a good conceptual theoretical evaluation of what would represent an innovative approach. And all of that has to be tested. So we may do our own internal testing and evaluation and then we go to independent laboratories, research institutes to test and make adjustments and continue to optimize the chemistry of those products.

So where we are today is we are still midstream in some of that laboratory testing. In some project areas, we have done testing at commercial units and in other important new product areas, we are still doing independent tests, prior to taking those to customer sites. So over the next several months, we plan to further validate and optimize our chemistries, both at independent test sites and at customer sites, knowing that we have products that will meet the expectations of what we are offering from customers. And then we'll bring those to market.

I can't say specifically what month or quarter, but we expect 2013 to be a fruit bearing year for our R&D efforts. In so doing, I think this Company will realize what it was founded on and its ability to uniquely take advantage of its understanding of the complex chemistries and mechanics of combustion. And innovate products that will offer us proprietary capabilities.

One of my most significant beliefs is that we will be able to merge a little bit the business models of our two segments in that whereas the [ATC] segment is largely a capital projects and single contract nonrecurring revenue business. We believe that we will be able to offer products that will address pollutants on a recurring revenue chemical feed basis. So we really are hopeful, but we will not announce those products until the rigorous testing has been completed.

Thank you. And then my last question, in terms of the pipeline, so I know you gave I think it was $62 million in backlog as we speak today or taking rolling forward the Q3 balance with the new orders that were announced. Can you folks quantify if you could pipeline potential in the next 12 months and what you see by geography? Is it one or two times backlog potential? Thanks very much.

Yes, let me try to address what we are seeing opportunity wise. The China market has been very strong for us. Especially the last couple of quarters. We see that business continuing to be strong through 2013. I don't think you will see the accelerated growth rates that we have witnessed this year. But certainly from an expectation perspective, China will continue to deliver strong revenues for us. Domestically we are looking from a bookings perspective to see growth next year. There is a good opportunity set of our customers that we are working through.

So look for some growth in bookings next year from our domestic APC business. And then, we do have opportunities be on that as well internationally that we are working through. I don't know if we have anything as large as the Chile project in the queue, but we have some other international opportunities as well.

Graham Mattison, Lazard Capital Markets.

Good morning, everyone. I apologize if I missed this, but can you just talk about how we should think about margins in China and how they compare to the international margins in say South America versus what you are seeing on the APC side in the US?

Sure, the Chile project we talked about before is carrying about a 20% margin profile. That is a large burner job that we signed up. So I would say the opportunities in that part of the world, the globe are also in that range. They are also burner type jobs.

So the China projects are carrying a low 30s on a margin profile right now. When we look out next year our expectations are to drop that just a bit, and that is due to some competition and in things, just dynamics of that marketplace. But, to date we have carried some very strong margin profile coming out of China, low 30s.

All right, great. That's helpful. And then on the FUEL CHEM side. Can you give us a sense of the coal switching with FUEL CHEM? Are you seeing is it more a case of fleets running more -- I meant utilities running the fleet of more natural gas units rather than coal to meet load or it is some of the plants you have FUEL CHEM on being phased out on the lower demand in the regions where those plans are?

Well, I -- we certainly have seen movements toward Illinois Basin, Powder River Basin coals. The Illinois Basin is seeing some renewed growth and we are seeing as I said earlier the maturing of the Central Appalachian and Northern Appalachian fields now. Sometimes you will find plants that are still under contract for some time, paying a pretty high price for Central Appalachian coal. But it is not going to play big in the future burns of most of those plants.

What we certainly have seen is reduced overall levels of loads that mitigate the problems with the FUEL CHEM systems are designed to take care of, even if they are burning an Illinois Basin or Powder River Basin coal. So to some extent those plants might shed their slag at nights or they are operating just at load levels that aren't producing the same problems that we take care of. And to certainly an extent, we have seen units retired. We have seen units converted to natural gas that reflect attrition in the business that we have.

So the FUEL CHEM business has always been made up of both forward growth as we bring new units online with our program. And some attrition as they have been shut down or switched fuels.

As I said before, I think the overall economic level that has an influence on what electrical demand is is the [seatide] for the FUEL CHEM business. Now where we're going is that we are taking our knowledge of chemistry and looking at problems other than just bowing and slagging. So, SO3 mitigation, SO2 acid gases, the mercury issues that will be before us. These are all areas where we can apply the FUEL CHEM approach and our knowledge of chemistry to address those needs whatever the fuel.

All right and the new products that you alluded to being commercial lot in coming out in 2013, will we see revenues from those in 2013 or is that more a 2014, 2015 and beyond?

I think you will see the beginning of revenues in 2013. The -- there won't be full-year revenues for new products like those. But we are going to see evidence as we bring those to customer sites to test to give us a better feel that they have the potential to meet their needs on an ongoing basis, to see the final chemical consumption levels associated with the [gluten] removals remains to be answers and that, of course, is a determinant of the actual monthly revenue at a site. And of course, the adoption rate among other customers.

So I think 2013 will be the transition year with -- I expect to see robust growth into 2014 and 2015 for those kinds of applications.

I will say this, I think our core strength is in developing these kinds of products, so we have some tremendous talent in our organization very motivated to solve these problems. It is what we do well and I will continue to reinvest our earnings probably at the 3% to 4% level of revenues as I've stated before. We are already at 3% and continue to find those kinds of opportunities to give us long-term growth.

Great. That is very helpful. Thank you very much.

Dan Mannes, Avondale.

Good morning, everyone. A couple of follow-ups. First on FUEL CHEM, I think the thing that is maybe a little bit surprising here is how well the margins have carried. Can you talk maybe a little bit about what is still running and maybe what the margins are so strong and maybe as you are able to either roll out new products or get new FUEL CHEM customers, how we should think about margins going forward?

Yes. The margins vary depending on which of the products they are using. We have two different products on our FUEL CHEM side. So that mix and concentration of those will cause your margin to vary. It is also customer-specific and so it depends on what that particular plant or customers are pulling from our FUEL CHEM side of the business. So, that is essentially it.

The guidance going forward to 48 to 52 contemplates some additional business and some shifting in the product that is being sold.

We have seen your backlog obviously shift a lot on the ATC sides towards international which is little bit lower margin, but it sounds like there's still some good opportunities. I guess the question is -- and I know I am very focused on the domestic side is, given what you are seeing in the West, when do you expect to start seeing the order flow in the SNCR side, given some of the state plans?

Well, we have some bidding activity right now on SNCR work primarily related to either permits, consent degree, admittedly CSAPR has been stayed as a driver. We think that the SNCR market, while it is one that we have developed over many, many years, it's a more maturing market.

But that doesn't mean that there aren't good applications, particularly when we find the level of NOx reductions that are required fit within our capability. We are working to certainly enhance the level of NOx reduction we can get with that technology. It is sort of an extension of life at that capability.

And I will also say this, that we think we have proven that it's a low capital approach to moderate NOx reductions. You combine that with our capabilities on burners of [fire or air systems], you know we can combine all of those to achieve additional amounts of reduction. It is not going to be the same market in every geography, in part because of what the regulations are. In part because of how new plants are being designed for example in China, large new power plants are largely being provided with SCR solutions. But we have a play in that.

Our ULTRA technology plays in that. Our ASCR offering has a play in that.

But SNCR is alive and well. I think when I look at the bidding level of activity that was taking place a few months ago, and where that is today, it has certainly softened. But it is going to return. So I expect to see SNCR to continue as an important, not the dominant but a very important part of our offerings. But we must continue to innovate other technologies to amplify on what SNCR is capable of achieving.

And then in terms of the high-level guidance for next year and thanks for providing that, when you think about the revenue for next year, in order to get to the kind of numbers that you're seeing, first on the APC side, do you need to see much of a contribution from domestic or can you get there mostly international? And two on the FUEL CHEM side, or I guess the new product aside, do you need to see much penetration on the new products? Are you able to get there mostly with the existing FUEL CHEM customers?

Yes. We do need to see contribution from domestic business --.

On APC?

I'm sorry?

On APC.

Correct. Yes. We tried -- we don't want to put too much emphasis on that. You know if you run out what we are seeing in China then of course we have got the Chile order booked up. We think the numbers are achievable domestically. So there is that.

There's also some growth on the FUEL CHEM side that we are looking for, whether it be through existing products sold to our current customers or new customers or whether it is some of the new products that Doug talked about. We think it is reasonable to expect some growth on that side as well.

And then last thing, obviously, you still have a pretty strong cash position, $24 million. You have done a couple of buybacks for the last few quarters. What is your thinking as it relates to the cash because obviously being EPS positive you don't need the cash to support R&D or operations? What is your thinking in terms of the cash position for the next couple of quarters?

I would expect that we would continue to build our cash position cash from operations. Some portion of that will, as we said, go into new product development. One can potentially anticipate that if there were an M&A opportunity that we were ready to pursue that, depending upon the structure of such transaction, cash could be an important element of that.

But as a balance sheet policy, we intend to stay strong. We announced and completed to stock buyback programs that we were satisfied with that we haven't announced further such activities. So we will just continue to see our current ratio, particularly coming from a strong cash position further strengthen our Company's ability to move forward.

And, sorry, you just opened up one last question. You mentioned M&A, are you actually -- without talking about specific deals, are you pursuing M&A opportunities or is that not a key focus right now?

That question comes up on most calls. We obviously aren't going to publicly talk about something that could be the subject of nondisclosure agreements. But every year, we are looking at opportunities and evaluating whether or not those make sense to us. So that remains an ongoing activity, the intensity of which is transaction potential-related. So we will continue to look for M&A opportunities that enhance our organic growth and increase our overall revenues.

Got it. Thanks a lot for all the color.

Stephen Charest, Devine Capital.

Good morning. Good quarter there. Just for -- and you covered this somewhat, a little bit more clarity. Quotation activity RFPs, RFQs, domestically has that been I would say, to characterize it, has that been steady? Has that slowed down? How would you call that one?

On the APC site you are saying -- the domestic activity if anything when we look at our managed pipeline of potential business, it has probably grown. However, the portion of that that we think is deferred has also grown. And that was directly related to the CSAPR stay in August inside this past quarter.

So until we get some clarity on that, there is that significant percentage of our pipeline that we know will not be converted into contract awards over the next couple of months.

I think everybody has truly probably been waiting on today's election. And who will be President. There's such strongly different ideologies by the two candidates that the choice of one over the other might shape a customer's expectations of what kind of policies are ahead particularly for coal.

So, as I said, we are hopeful that we get a good leader. One that is good for the economy in the first place. I think what's good for the economy will be good for Fuel Tech. We feel confident that with whichever party is in office that the long-term needs of a cleaner more efficient energy society will remain before us. So there's plenty of work for us to do.

However, if you look at the last four years, personally I am very disappointed at the ability to set clear regulatory guidance. Here we sit today with no real clarity as to what our customers should expect to do. They know they will have to do it and they are going to be making some pivotal decisions, relative to do they maintain or do they retire important infrastructure assets such as coal burning power plants.

We have got the capabilities to help them continue to operate those cleanly and efficiently. But we have to have an administration that is pro fossil fuel. Because we can't solve all of our needs just by alternative energies. And we can't solve all of our needs just by fossil fuels. So I'm very hopeful that we get some clear vision of setting a good energy policy and a good economic job growth creating landscape for the months ahead.

Great. Thanks for the color, Doug.

I may add, you know, I think while certain people might view that low natural gas prices could be bad for Fuel Tech because we do so much on the coal side, but low natural gas prices can revitalize our economy. And that in my opinion is good for our Company and there's plenty of work for us to do. But what we really need to do is get economic growth going again.

(Operator Instructions). And there are no further questions at this time. I would like to turn the call over to Doug Bailey for closing remarks.

Well, thank you, everybody. You know, it is interesting to sit here and talk to you, not knowing what I am going to know about midnight tonight, but I think this election is a very important day in America. We look forward to working as a company, as I said, regardless of the outcome because it is certainly going to be a close race. But we will continue to develop products, work with our customers to meet needs and, hopefully, we will see 2013 led by an individual that can restore economic growth to this country and when it does so we are going to have a lot of work to do. And if it is still difficult economic times, we are going to continue to find opportunities.

That is why we have expanded our international capabilities and it is why we are investing in new products. And so, be assured that whatever the outcome of today's election is, we are going to work hard for our customers and our shareholders and we are very confident we can continue to grow into 2013.

Thank you very much for your questions. I thought they were all good and thank you for your time today on today's call. Bye, everybody.

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