Fuel Tech Inc (FTEK) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Fuel Tech earnings conference call. My name is Darcella 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).

I would now like to turn the conference over to your host for today, Mr. Devin Sullivan, Senior Vice President of The Equity Group. Please proceed, sir.

Thank you. Good morning, everyone. Thank you for participating on today's conference call to discuss Fuel Tech's fourth-quarter and full-year financial results.

As Darcella mentioned, my name is Devin Sullivan of The Equity Group and our firm has been recently retained by Fuel Tech to provide Investor Relations services.

On the call this morning are Doug Bailey, Chairman, President, and Chief Executive Officer; Dave Collins, Senior Vice President 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 forward-looking statements.

Factors that could cause results to differ materially are included in Fuel Tech's 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 takes undertakes no obligation to update any information discussed in this call and as a reminder the 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, Devin, and good morning, everyone. Thank you for participating in today's call. Let me briefly touch on the independents matter before we talk through the numbers.

We did issue a press release discussing this matter on March 1 and have provided full disclosure of this in our 10-K. Of this independents matter, which involved the inadvertent use of the use of the McGladrey and [some people] bookkeeping service in China delayed until today our ability to report fourth-quarter and year-end results and has also delayed the filing of our Form 10-K. We filed for an extension of time to April 1 for filing our 10-K and expect to meet that extended due date.

While it is an unfortunate and costly diversion from our normal year-end close process, we are thankful they have reached an agreeable path forward and are progressing our year end reporting process.

Now on to a discussion of the fourth-quarter and year-end results. Consolidated revenues for the fourth quarter were $26.6 million, down 5% from $28 million in the same period last year. Consolidated revenues for the full year of 2012 were a record $97.6 million, up 4% from $93.7 million in 2011. Foreign revenues for the fourth quarter were $13.7 million, up 122% from $6.2 million in the same period last year. And foreign revenues for the full year were $27.2 million, up 55% from $17.6 million in 2011. Foreign revenues represented 51% of current quarter revenues and 28% of four-year revenues.

Consolidated gross margin for the fourth quarter was 35.6%, down from 47.2% in 2011. Consolidated gross margin for the full year was 41.7%, down from 46.8% in 2011. This change is attributable to a year-over-year decline in our APC segment gross margin due to the impact of lower margin foreign sales, coupled with a decrease in our FUEL CHEM business.

Our selling, general and administrative expense was down on a dollar basis and as a percentage of sales for both the current quarter and full year while our research and development costs increased on a current quarter and full-year basis as we continued to focus on our new product development initiatives.

Consolidated net income for the current quarter was breakeven, down from $1.7 million or $0.07 per share in 2011. Consolidated net income for the full year was $2.8 million or $0.12 per diluted share, down from $6.1 million or $0.25 per diluted share in 2011.

Included in our 2012 fourth-quarter and full-year results were after-tax charges totaling $647,000 and $1.4 million, or $0.03 and $0.06 per share respectively. These charges include asset reserves and warranty works that are outside the range of what we normally see and a higher tax rate impacted by discrete items reported in Q4.

Now let's move on to the individual segments. The APC segment reported quarterly revenues of $18.5 million, up $500,000 from the same percent last year. Full-year 2012 revenue in this segment was a record $62.4 million, which represented an increase of $11.5 million or 23% over 2011. APC bookings for the full year were $72.8 million up 20% from $60.2 million in 2011. Our 2012 bookings were comprised of $37.3 million of Latin America, $26.7 million in China Pacific Rim, $7.7 million in US domestic and $1.1 million in Europe Western Asia.

Our year-end backlog was $46.7 million, an increase of $15.9 million from the prior year, and 2012 backlog was comprised of $[29.8] million in Latin America; $13 million in China Pacific Rim; $2.8 million in US domestic; and $1.1 million in Europe Western Asia.

Our consolidated gross margin for our year-end backlog was 22%. Thus far in 2013 we have recorded bookings of $7.6 million, comprised of both US domestic and China Pacific Rim orders. Our foreign revenues have grown significantly in 2012 and we expect to see more growth in 2013 coming from our China Pacific Rim and Latin America operations. Our China Pacific Rim revenue grew 50% and 31% in the current quarter and full-year periods respectively. Our bookings in China Pacific Rim of $26.7 million in 2012 grew $14.2 million or 105% from 2011. We expect to see our business in China continue to grow although at a more moderate pace in 2013.

Our Latin America revenues will continue to show significant growth through 2013 and into the first half of 2014, as we work through our combustion contract in Chile.

Gross margin for the APC segment declined in both the fourth quarter and full year due to a higher concentration of lower margin quarter revenues. As a result, quarterly gross margins for our APC segment were 28.8%, down from 43.6% in the prior year, and full-year 2012 gross margins were 35.7% compared to 44.1% last year.

As we look ahead to 2013, we expect to see a continued over gross margin profile in the APC segment in the 30% range, and then we will look to see this increase as we replace our forward revenues with US domestic and higher margin business.

Our FUEL CHEM segment reported quarterly gross revenues of $8.1 million, a decline of $1.9 million from the prior year. Full-year 2012 revenue in this segment was $35.2 million, a decline of $7.5 million from the prior year. We attributed the decline in FUEL CHEM revenues to the persistence of low natural gas prices and lower load profiles of coal-fired generating units. While we are pursuing new opportunities in both the new and existing customers, we expect to see a soft FUEL CHEM market for at least the first half of 2013.

Quarterly gross margin for our FUEL CHEM segment was 51%, a decline from 54% in the prior year. Year-to-date gross margins for our FUEL CHEM segment was 52% versus 50% in the prior year. Previously discussed, we expect to see our gross margins continue in the 48% to 52% range through 2013.

Selling, general, and administrative costs as a percentage of revenue for the current quarter declined 6% to 29% from 35% in the prior year. Year-to-date SG&A in 2012 declined 3% to 33% from 36% in the prior year. On a dollar basis, our SG&A costs were down $2.1 million in the current period and $765,000 for the full year.

This reduction is due in part to lower incentive plan accruals and stock compensation expense. We expect to see our SG&A costs on a dollar basis remain consistent with 2012 levels and as a percentage of sales declines to around 30%.

Research and development expenses were $819,000 in the fourth quarter and $2.9 million for the full year of 2012. These amounts represent approximately double the R&D expense in the fourth quarter of last year and the full year of 2011, respectively. We continue to invest in focus research and development activities to bring new opportunities to our customers in order to meet the needs of a changing regulatory and operational environment.

Operating income for the fourth quarter was $917,000, down from the prior year total of $3 million. Our 2012 operating income of $5.2 million was down from the prior year amount of $9.6 million. These decreases in operating income are associated with lower gross margins and higher research and development costs. Due to the mix of forecasted, domestic and international revenue and income levels for the full year 2013, the effective tax rate is expected to range between 38.5% and 43%. Our rate will change based on geographic income levels and permanent items relative to the level of our consolidated pretax income.

We are also expecting a lower Q1 2013 income tax rate due to the booking of a discrete item related to the extension of the research and development credit that will be booked in the first quarter of 2013 due to the signing of the tax law.

Cash and cash equivalents at December 31, 2012, were $24.5 million or $1.07 per diluted share. Our working capital balance was $38.9 million. We are debt-free. We continue to generate strong cash flows from our business model due to the relatively small investment and fixed income structure cost.

Year-to-date cash generated by operating activities were $8.7 million. Because of our strong cash flow we were able to return $7.9 million to our shareholders through our stock buyback program and have funded continued research and development activities. We will continue to monitor our capital needs in the business and we will further develop as we further develop our business opportunities.

Now I would like to turn the call over to Doug.

Thank you, Dave, and good morning, everyone. Thank you for joining us today. I will add a few thoughts to what Dave said beginning with the year as a whole and then moving to our APC and FUEL CHEM business segment. After that I'll spend a few minutes discussing our markets and our approaches to them.

2012 was a good year for Fuel Tech. We did report record revenues, the highest annual bookings in our history, significant geographic expansion and a 50% increase in APC backlog to $46.7 million. The year was not without its challenges however. Our domestic APC business struggled in the wake of regulatory gridlock while FUEL CHEM continued to be impacted by lower energy demand and declining coal consumption.

We remain profitable but at a lower level than 2011 while investing in future opportunities. Despite all of this our balance sheet remains strong, allowing us to return $7.8 million through our share repurchase program, and investing $2.9 million in new product development.

We are pleased with the year-over-year sales growth for APC especially given the sluggish domestic market. Last year, we experienced a surge in domestic orders for our Selective Non-Catalytic Reduction systems or SNCR technology that were placed to meet the requirements of the then Cross-State Air Pollution Rule. This regulation mandated greater reductions in domestic NOx emissions beginning January 1, 2012.

After that rule was vacated in December 2011, any source of immediate pressure system supply disappeared. As a result, during 2012, many facilities delayed their purchasing decisions in order to consider how to best comply with current EPA regulations. This resulted in a more modest level of domestic sales, driven primarily by state consent decrees and existing regulations, including AIR, the Clean Air Interstate rule, MATS, or the Mercury and Air Toxic Standards and the regional [Haze Rule].

This dynamic regulatory environment certainly impacted our US APC operations. In doing so, however, we demonstrated the agility and capability of our people as well as the success of our international sales and marketing activities. We also increasingly communicated the breadth of our technologies, the depth of our engineering capabilities, and return on investment that our solutions-driven approach delivers to our customers.

Now in 2013, we are seeing a pickup in bid and order activity. Some of these potential projects are larger and more complex, which I expect will equate to some quarterly lumpiness in bookings. However, this improving environment speaks to increasing certainty from utilities with respect to their long-term planning process. We believe they will be well-positioned to provide utilities with cost-effective solutions that extend plant operating life, meet stringent emissions control standards, and allow them to continue to serve the energy demands of their ratepayers.

For example, we are aware of two large utilities that have recently negotiated settlements with EPA and other great regulatory authorities that resulted in these customers shutting down certain existing units and installing SNCR units on remaining generating units. The adoption of this new paradigm was a practical response to a complex matter. It allowed the utilities to continue operating and avoid more expensive technology that would otherwise not have allowed them to do so.

In 2012, total bookings were $72.8 million, nearly 90% of which were generated in Latin America, China, and Europe. Our work in Latin America reflects the $36.6 million order placed by a major utility in Chile, return key installations of Over-Fire Air systems and mill modernization for six coal-fired units coupled with low NOx burners. This is the largest APC contracts in our history.

Moreover, it was an important demonstration of our ability to win and execute larger-scale projects as well as penetrate new international markets. The equipment deliveries in Chile commenced in our current first quarter and the project is scheduled to complete in the third quarter of 2014.

In China, we booked projects valued at $26.5 million in 2012. For all of 2012 we received orders from China for, one, projects utilizing our ULTRA technology which uses a proprietary urea conversion process to generate ammonia for SCR systems, and this is ideal for heavily populated areas where safety is of paramount concern. Two, a warrants for projects utilizing our SNCR systems, and three, awards for projects utilizing our ASCR, Advanced Selective Catalytic Reduction system, which is a hybrid technology. It combines proven abilities of our SCR with lower capital costs and fuel flexibility features.

China remains a market of significant interest and opportunity for Fuel Tech. The rapid development of that nation's economy and culture continues.

Unfortunately, these advancements are coming at the very visible expense of its environment. Air quality, water purity, and the general health of China's people are deteriorating. And public anger is building. In January, the World Health Organization labeled China's air quality as unhealthy. While just last week 2,800 dead pigs were fished from the Shanghai River, which is the source of that city's drinking water. For the first time, China is in danger of affecting a generation to afflictions brought on by environmental toxins.

As part of its response, Chinese authorities have targeted six industries for emissions control. Coal-fired power generation, steel, petrochemicals, cement, non-ferrous metals, and chemical plants. Facilities operating in these sectors in 47 cities with air pollution problems are subjected to these emissions standards.

As of March 1, all new applications to build thermal power plants and steel mills have to comply while coal-fired plants have until July 1, 2014, to upgrade their systems.

Fuel Tech is well-positioned to address this large still untapped market as evidenced by our announcement in January of this year of our first award for an SNCR system on a cement [fill] in China. The woman delivery schedule for the second quarter. Fuel Tech has SNCR systems operating successfully on other cement applications for more than a decade in Europe and the Pacific Rim and we are hopeful that we will win additional opportunities in China's cement market.

We also received three other Chinese awards in 2013, two for a new utility customer to install ULTRA systems for six medium sized coal-fired power plants being retrofitted with NOx technology.

The challenges of doing business in China are well-known and the difficulty of enforcing government mandated emissions caps is another story altogether. Still, for the first time we believe that a combination of mounting public pressure, international insistence, and a growing sense of self-preservation by Chinese authorities may finally be tilting the playing field in favor of enforcing tighter emission standards.

Our FUEL CHEM business continued to operate in a truly challenged environment driven by low natural gas prices, decreased energy demand and slower economic growth. While revenues declined in both the fourth quarter and full year, gross margins remained over 50% for both periods. In 2012, domestic coal consumption, the primary fuel source for our customers, fell 11.3% to 889.3 million short tons reflecting market share gains by natural gas and changes in energy demand.

In that same timeframe, US natural gas consumption increased to 25.5 million cubic feet from 24.4 million in 2011. This commendation of factors led many of our customers to operate units below their capacity and/or switch fuel sources. As long as these macro challenges persist, and until we introduce new product offerings, FUEL CHEM will see slower growth.

However, an improving economy suggests that energy demand will rise creating a scenario that reflects favorably on FUEL CHEM's future performance. As this unfolds, we will continue to deliver value to FUEL CHEM customers by allowing them the flexibility to modify their fuel selection, improve the boiler efficiencies through the removal and prevention of slag and by offering additional emissions control systems.

So, all of these developments address an overarching theme for Fuel Tech. That being, how are we positioning the Company to compete in and prosper from an evolving global market. To that end, we have looked inward and asked a series of questions, the answers to which will help define Fuel Tech for the next decade and beyond.

We believe there are three distinct ways to further our growth.

One, renew our current portfolio of products and services and better address changing market demand and enhance segment growth and profitability; two, introduce new technologies whether internally or externally developed; three, penetrate global markets. A major theme for us is to develop products and technology that can provide recurring revenues and enable our customers to avoid high capital costs. We believe that opportunities exist globally for engineered solutions that leverage our FUEL CHEM business model, not only to address energy efficiency needs, but also pollutant removal needs in a changing regulatory landscape.

We believed that a company's best opportunity to address mature product lines that stimulate growth comes from [buy] investing in new solutions.

So in 2012, we committed $2.9 million to research and development or approximately 3% of annual revenue. This level of commitment will continue to grow in 2013. We have a number of new products in various stages of laboratory and commercial testing for our APC and FUEL CHEM customers. We expect the first wave of these solutions to be introduced to the market by the end of this year with significant operating contributions realized in 2014.

Just last week, we completed a new and expanded chemistry laboratory to further advance these development efforts.

As I discussed earlier, we are continuing to expand our geographic reach in response to rising global energy demand and environmental concerns. An associated factor relates to the disparity in coal usage in the US and abroad. While coal usage in the US is down, the US Energy Information Administration recently released data showing that US coal exports hit a record 126 million short tons in 2012. That is a 17% increase over the previous year. Oversea shipments surpassed the previous high mark set in 1981 by 12%.

This delta created opportunities for both our business segments. Although the APC opportunities may be more apparent, we are exploring the possibility of exporting FUEL CHEM's technology beyond our borders, the markets in which we currently do business like Latin America, China, and Europe and areas where we have yet to establish presence. We are very early in this process.

However, we believe in the logic of introducing the benefits of FUEL CHEM to countries whose primary fuel source is coal. So while not without its challenges, our accomplishments in 2012 instill in each of us great conference for 2013 and beyond. We significantly expanded our international market presence, maintained a solid financial position and we remained diligently focused on developing and introducing new product. We allow our customers to operate in a cleaner more efficient manner.

We view 2013 as an opportunity to leverage the human intellectual and capital assets that we have built over these last 25 years. As our end markets evolve we, too, must change and grow. We are up to that challenge and we are excited about the opportunities that lie ahead.

With that, operator, you may please open the floor to questions.

(Operator Instructions). John Quealy, Canaccord.

It's Chip Moore for John. Was wondering if you could give us a little more color on the rolloff of existing backlog in 2013. And then you alluded to it sounded like some potentially lumpier orders in the pipe line. Could you just talk about potential timing and margin profile there?

The roll up of -- you talking about the backlog as of year-end, the rollup of that?

Yes the $54 million or so in backlog now. I guess you see that rolling off.

$29 million of that is sitting in Chile. That is going to run over the next call it six quarters. Our last installation for that project is in 2014, Q2 of 2014. So I would -- and that portion of the backlog carries a 20 margin profile on it. So you can run that over the next six quarters. The rest of the backlog I would look to see pulled through by the end of Q3.

If I may comment on that, Dave noted the Chile project is the biggest part of our backlog and as we previously said, there is a low margin on that project, but it was strategically important for us to win. It is on six units and the actual project work on site depends on the outage schedule.

So the first outage is coming up in April. Other units have their outages scheduled in the second and third quarter of this year. And then in the first and second quarter of 2014 the remaining two units have their outages scheduled.

So, following our revenue recognition accounting policies you'll see a rather steady recognition of that total contract amount at fairly modest margins. And that will be in contrast to the more difficult marches that we see domestically. So that will carry with us all the way through well into the middle of 2014.

That's helpful. And then it sounded like you referenced some orders, there is some potential larger projects in the pipeline. Just maybe you could talk about those.

Well, I sure can. We don't specifically talk about contracts that we have not yet won, but we do anticipate additional wins for our traditional SNCR capabilities relatively near term. And as I noted in my prepared remarks, we are voting on some relatively large projects that utilize, for example, our Selective Catalytic Reduction technologies.

So these projects have a very long sales cycle. Very complex bidding process and decision process. And so thereby if we were to win those, they represent typically higher contract amounts than we might see for the kind of bread and butter SNCR contracts that you saw us collecting in 2011. And yet, when we look back at some of the large projects that we have one, they have been straight at Fuel Tech's ability to take on work of that complexity and scope.

So, thereby, it is very hard to predict exactly what our bookings might be because they could be highly influenced by one single large contract.

Right. That's helpful. And then, lastly, the strategic growth front, cash flow is obviously good. Could you talk about M&A and new product developments where we stand there? Thanks.

Sure. On new product development where we focus much of our effort, we manage a portfolio of projects really not only relating to renewing and extending the capabilities of our more mature processes, but really importantly developing through chemistry new opportunities aimed at pollutant removal, but using our FUEL CHEM business model. I do anticipate that over the years ahead that you will see a little bit of merging of those two business segments in terms of their business characteristics.

Traditionally, our APC segment is a capital projects portfolio of activities that we win and execute, but don't carry with it typically recurring revenues and they are aimed at meeting regulatory requirement.

Our FUEL CHEM business model is one of we don't sell the capital equipment, we own it and we sell the revenue stream of chemicals. At its infancy, as you can imagine, the range of products that FUEL CHEM offered was more narrow. We have expanded that somewhat. But now we are moving beyond slagging and fouling issues by looking at opportunities to remove SO2, hydrogen chloride or other acid gases, issues related to mercury.

So now it is a more of a multi-pollutant recurring revenue FUEL CHEM type application. Those require development, but the chemistry mechanics to deliver those solutions booked through the last couple of years we have steadily worked towards demonstrating our capabilities in that area. We have done significant field testing and we are hopeful that before this year is over you'll see (technical difficulty) effort offered to the marketplace.

Great. Thanks a lot.

Dan Mannes, Avondale.

Good morning. Couple of quick follow-up questions. First for Doug. You talked a lot about China and I certainly appreciate the color. Can you maybe talk a little bit about if there are any specific regulations you are tracking that are already in place that line up well with your current product mix? Or are you more talking about the generalized trend over an extended period of time relating to emissions control benefits that will benefit you? Is there something sort of discrete and specific you are pointing to or is it sort of more of a broad-based move?

I would say I was not trying to address anticipated new regulations, in as much as I think the current environment over there is the general lack of enforcement of regulations that are in place or quite honestly the growth of the economy has outstripped the country's ability to maintain control of the concomitant emissions that have affected China. We have all seen the reports of air quality, such as in Beijing. It has just reached completely unhealthy hazardous levels.

And I think what you are seeing is a rising cry of the public demand of the national government to enforce the regulations. I think that bodes well for what we are able to do.

Many of the projects over there related to new power plants have applied selective catalyst reduction systems, large-scale capital projects that you know we don't participate in -- we have been successful in selling many ULTRA systems that from [baruria to pneumonia] support those systems. But I think we are now beginning to see more interest in some of our other capabilities.

Generally, I think you are going to see a strong growing willingness to adopt more engineered solutions that address what is, I think, a growing crisis in that country. There will be many other companies helping to contribute to that beyond [field connect]. So we are very unique in our early position as a US company over there with a good demonstrated track record. We have reliable credible solutions. So that is really the point I was trying to make.

And then switching gears real quick, you mentioned large lumpy orders, but then you also talked about maybe some of the consent decrees we have seen in the Southwest US. Are those two things connected? Because my understanding is the consent decrees were more traditional SNCR or are you -- were those two discrete items or were you tying those two things together?

Well, some of those SNCR projects are larger. More than $10 million. And so, yes, we are aware of Southwest US needs that they have already successfully settled with the EPA and plan to retire units and put SNCR on their other units. Those are some of the, I believe, near-term contract wins that we have opportunity with. And I am talking about relatively near term, the decisions would be taken in the next quarter.

So that market is active. And while we don't have a national rule like CSAPR to drive NOx control, we still have care. We have the regional haze rule that you are talking about here and these consent decrees, sometimes these are plant permits of requirements that are the driver. But they still show that we have an active SNCR market, but it's more lumpy.

What you saw at the end of 2011 was a sudden surge of orders to meet our January 1, 2012, compliance date that was cancelled. So we executed a lot of those projects in 2012. We turned our attention to the international markets as the US market was unsettled. We won significant business over there and that does come at lower margin for a couple of reasons. But you'll see us execute those projects in 2013 while we replenish the sales pipeline with more traditional domestic projects.

And again, I think this was your comment to a prior question. It sounded like you did think you're maybe closer to your ASCR or SER type solution. Is that a domestic opportunity or international or can you maybe give us a little more visibility on where that demand might be coming from?

Sure. It is domestic. And these are -- if we were to win projects like this, this would potentially set even further record for contract size. So there's a lot in the planning stage. We are assembling resources in our Catalyst Technology Center that we maintain in Durham, and report to our APC salesforce. So I expect that to result in contract win.

I would say more of our large contract win opportunities are in the SER technology area, [ban state], the combustion area. We are executing a large combustion project in Chile. We previously executed a large one in the US, but we think the future is more aimed at the SDR side of our technology portfolio.

Okay. One last question on FUEL CHEM. Obviously it has been under some pressure given what we have seen in terms of cold usage and the low price of gas. There is also a decent amount of seasonality in that business. I mean, as we move the calendar over to Q1 do you expect things to maybe get a little bit better sequentially or have you seen your customer count and the usage per customer decline enough that maybe the seasonality doesn't help you out this year the way it did last year?

Yes. I think you have seen the drop in FUEL CHEM. So from a year-over-year basis I don't think you'll see a lot of variation from prior year levels. The question is whether we do have some new customer opportunities, either existing fleets or new fleets and if we can get some of those online, that will give us a lift. But I don't think you'll see further attrition.

So you are at the right level, but again if you look at Q4 versus Q1, I think there is almost a $2.5 million revenue delta. Is that just seasonality or was there more customer attrition over the course of 2012?

A little bit of both. But there is seasonality involved.

Great. Thanks.

Steve Shaw, Sidoti & Company.

Can you provide a little more color on what you might see or expect from the macro environment whether it is nat gas prices or anything else, what you see in the first quarter and what you might expect going forward for the rest of the year?

Missed a couple of words. You said with respect to natural gas prices?

Yes or any other factor in the macroeconomics environment in 2013.

I think if you limit the question to the short-term of the first quarter you can extend that a little bit. I think we are going to see low natural gas prices for a while. I don't seem to have a better crystal ball than many experts, and you often hear it said in the years ahead that that situation may not be the same.

That being said, I think we have discovered large sources of natural gas supply, particularly coming from shale gas. And so I think that is beneficial to the US economy. I think it will help drive renewed manufacturing in industries such as petrochemical. I think you are going to see (technical difficulty) considerations as to what your fuel strategies will be.

We certainly cannot and will not in a huge wave just convert to natural gas. You can't be dependent upon that for baseload generation. So I think you are going to see strategies that balance the use of natural gas and coal.

Now the coal industry is not going to sit idle by the side. They have many things to bring to the table here and I think you are going to see increasing awareness of opportunities to blend coal that take advantages of bearing heterogeneous coal quality from different coalfields as well as changing prices in those coal markets, to bring the price of that fuel down and, importantly, to enable them to utilize that fuel in such a way that can help avoid some of the large capital expenditure requirements that is a pressure on the coal-fired generation utility market.

That is where Fuel Tech stands to help. We are known to the low capital solutions provider. We can provide a lot of expertise to our customers as to how to maintain the use of coal and cleanly burn it and whereas, of course, [aiming] with our own product development to provide further capabilities in that area.

But in the short term, I for one, believe that natural gas prices will remain relatively low as compared to historical levels.

[George Gaspar], private investor.

You may have covered this, but could you give us an update on what your strategy might be on your stock repurchase program and if there is any chance that you would accelerate or expand the program?

Let me just touch real quickly on that. We manage our capital base and we need to carry a certain amount of capital for bonding purposes on our project. So just a comment in general.

We do manage that pretty closely and if you look at the cash balance and wonder what we are doing with that, just understand there is a need for our business to support our business with our capital projects work, so --.

That being said, George, and thank you for the question. When we from time to time have seen disparities in what we think the future value of the Company is and what the market seems to suggest, we have taken advantage of that. You don't always have a perfect crystal ball. It has only been three times that I remember in our history when we have done that. Once was almost 10 years ago. And we did it, twice, in two programs -- announced $6 million. We do not have any present program in place because we have completed those two.

And then a question on your research development. Mentioning your Durham operation as to your technology focus. If you could explain that, if that in fact is true. How do you see the possibility of expanding your R&D program and trying to broaden your spectrum of chemical development?

Sure. In Durham, our group there is totally focused on our catalyst technologies. Our R&D efforts are centralized in the Warren Bill area and so we have a new product development team that manages projects that cross all technologies. Our PhD's, our scientist, our engineers who work on those projects, is a more centralized activity. We have a steering committee. We have an executive management review committee that meets regularly on those projects and go/no go decisions get made as we see promising results.

So it's a program that we have strategically said we are going to commit certain percentage level of our revenues toward with a balanced view between short-term and long-term product launch. I think having had this program in place and rigorously followed over the last two years now, we are going to begin to see the fruits of that effort.

A lot of our R&D dollars I can say, George, goes into field testing. That might be at an external laboratory or on our own, it's early work, and then it might move to a customer site for demonstration. And so we evaluate test results that are in real environments before finalizing the product attributes and structure.

So, we are encouraged by what we're doing. As I said earlier, much of that work is aimed at building a more recurring revenue stream for Fuel Tech. That gives us a better flywheel, I call it, to the business versus what you see when you win, execute and then have to go find new capital projects.

Right. Okay, and --

I would say most of our R&D activity is being built as pollutant removal which is where while it may sound like a FUEL CHEM business model, it is really helping customers meet air pollution control needs.

I see. I know you have got a very high level of chemical analysis and expansion in your field. Have you ever thought there's a lot of new strains coming out of liquefied natural gas and natural gas liquids? And it seems like there's more movement toward the use of certain chemical strains in the Pentane 5, 6 range for oil sands work in Canada.

Is there anything that you see in your broad opportunity sale that could move you in the direction of something like that?

Personally, I have looked a little bit at some of the issues related to the oil sands. There's no particular program active at Fuel Tech today to address opportunities like that. But I can tell you that the bench strength of chemical analysis that we have built is certainly aimed at taking on new more complex problems. Certainly, I can also tell you that each and every project is carefully scrubbed with respect to near-term as well as longer-term and bigger market opportunities. So it is still a market-driven process.

Yes. I see. Thank you.

Lucas Pipes, Brean Capital.

This is actually [Derek Hernandez] for Lucas Pipes. I am his associate here at Brean Capital. And a number of my questions have been answered already, but I wanted to touch on your understanding is that gas prices will remain around historically low levels. And I wondered how that might affect your FUEL CHEM margins in terms of what kind of projects you are finding (multiple speakers).

Maybe Dave and I might both answer that. I'll start. Personally I don't believe it is going to affect our margins. We, as we have stated before, obviously when a unit may switch from coal to natural gas our FUEL CHEM program would be retired at that unit. We have seen that and spoken to the attrition that the fuel switching has occurred.

But we have also seen in a major issue with respect to overall electrical load demand, so as units operate at lower load levels, they don't have the same tendency to have large significant ongoing fouling and slagging problem. So that, too, has affected our FUEL CHEM revenues. But that doesn't have a lot to do with natural gas.

I think we have the opportunity to provide new additional products that utilize the FUEL CHEM business model that address multiple needs inside of the boiler. And I also think that we will be in the long term addressing opportunities that the coal industry can bring back and offer to the use in this industry, relative to greater awareness of how fuel blending, more so than is being done today, couple with our type solutions where we are the glue that provides a level of chemistry between the characteristics of coal from this field and coal from that field to provide a very capital position as well as cost-efficient in operation cost approach to maintaining pollutant emissions.

So, when you look at an industry that basing billions and billions of dollars potential capital investment and does not want to retire assets that have significant infrastructure value at a sudden disruptive period and all of a sudden natural gas prices are low, and I don't think anybody believes that decades from now that we will be seeing the same situation. We will be there to enable them to smartly consume coal or other fuels and cleanly and efficiently burn those. (multiple speakers) a lot of our R&D effort is aimed at, Derek.

Precisely, precisely. And lastly if I might touch on, you mentioned various coalfields obviously being sourced and many blends being tested right now by utilities in this volatile time. Could you give us maybe a little bit of color on which of these fields are coming up more often in your conversations and how you may be reacting to this on your end?

Sure. Well, I think people are generally aware that the Central Appalachian, Northern Appalachian coalfields are maturing and are higher cost. However they have a transportation advantage to geographic markets where a lot of people in this country live. The Powder River Basin grew to where it was supplying over half of the coal's usage for electricity generation. So when you are the biggest market share field contributor and you see natural gas taking a share of that market, you are going to see demand lower.

So, prices are now a little lower out there. They face the longer transportation haul and, therefore, we are delivering PRB coal in far-reaching locations. They still have quality characteristics and mining cost characteristics that make it an advantageous fuel.

The Illinois Basin field is the one that's been seeing some recent growth. It has some of the full quality characteristics that our customers have turned to Fuel Tech to help alleviate. So if you combine the FOB mine price attributes, the coal quality attributes and the transportation cost attributes and look for lending strategies and couple that with low capital cost of a sensible chemistry, in-furnace injection programs that we offer, you can optimize your overall cost between the cost of the fuel and the operating and maintenance cost of the plant.

That is where we see the market headed.

I see, I see, that's (multiple speakers)

Having grown up in the coal industry that there's three things that are really driving the coal markets. It is the cost of mining the coal, the quality of the coal, and it is the transportation cost. Those three legs of the stool will persist forever.

So we have heterogeneous coalfields and, yet, those are tremendous assets to this country. The United States must recognize the value of this resource base because we know where it is, it is plentiful, and we have the growing international appetite for that product. Where they don't have the same fuel alternatives that we have in this country.

So that is going to translate into long-term infrastructure shifts that will enable us to buy new markets for the coal. That means new markets for Fuel Tech and smarter engineered solutions to burn those in a cleaner manner. I think you'll see the market share of coal reversed. I don't think it is going to go back over 50% anytime soon. But you will see a balance between natural gas and coal.

And there is a reason for that. This country and every country needs every possible energy source it can economically develop. And there are economic trade-offs between them. So alternative energy has a role, natural gas has a role, oil, coal, nuclear, they all have defined roles. And so as I look ahead, I am hopeful that this country will develop a balanced energy and environmental policy that takes advantage of all those resources.

Very, very good. Thank you so much for your clarity there. And all the best.

Thank you. Good questions today.

There are no further questions at this time. I will now turn the call back over to Mr. Bailey.

Thank you, operator. Well, you know, the financial results of the quarter were not our best quarter, but the financial success of the year given the market environment that we were in I thinks speaks well for what this Company is capable of doing. I am just as encouraged as I ever have been about our potential. Maybe partially because I have a little bit of an inside view of what I think our organization can deliver.

So it is an exciting company, working diligently at identifying some new product opportunity. I think you are going to see Fuel Tech reemerge as the growth company taking advantage of looking for its ability to provide solutions that address these customer needs and do what we really are good at is understanding complex combustion processes, the chemistry, chemical kinetics, and mechanics of figuring out how to deliver a solution, where it's needed in order to perform a useful function. That is what we do.

And so, we are encouraged. 2013 will have its lumps and as well as successes and I do believe that we will, again, post a record year and we are going to continue to invest for the long term and we thank you for the kind of questions you asked today to help us convey to you the sense of our understanding of that opportunity.

Thank you very much for today's call. Bye for now.

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