Fuel Tech Inc (FTEK) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 Fuel Tech Incorporated earnings conference call. My name is Crystal and I will be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Devin Sullivan, Senior Vice President of Equity Group. Please proceed, sir.

Thank you, Crystal. Good morning, everyone, and thank you for joining us for Fuel Tech's 2013 third-quarter conference call. Yesterday after the close, we issued our earnings release, a copy of which is available at Fuel Tech's website, www.ftek.com.

The speakers on this morning's call will be Doug Bailey, Chairman, President and Chief Executive Officer; and Dave Collins, Senior Vice President and Chief Financial Officer. Also on the call is Bill Cahill, Fuel Tech's Corporate Controller. After the prepared remarks we will open the call for questions.

Before turning things over to Dave, I would like to remind everyone that 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 the forward-looking statements. The 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 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, Devin, and good morning, everyone. Thank you for participating in today's call. We are pleased to report a strong quarter, principally due to increased revenue and higher margins in our APC segment. On a consolidated basis, we expect our 2013 results to deliver solid growth in both top-line revenue and net income. And through the third quarter we have delivered results that are consistent with this outlook.

Now let's take a look at our results for the quarter and year-to-date periods. Consolidated revenues for our third quarter increased $8.6 million to $33.6 million, a year-over-year increase of 35%. For the first 9 months of 2013, our consolidated revenues have increased $14.1 million to $85.1 million, a year-over-year increase of 20%. The quarterly and year-to-date consolidated revenue figures of $33.6 million and $85.1 million, respectively, represent new highs for our Company. Our growth in 2013 has been le by our APC segments and is focused primarily in foreign markets. Consistent with prior discussions, our growth in foreign APC revenues is due to our contract in Chile and our conditioned growth in China. Our foreign revenues in the current quarter increased $4.6 million, or 55%, to $12.9 million. And for the first 9 months of 2013, our foreign revenues have increased $20.8 million to $34.3 million, a year-over-year increase of 154%.

Consolidated gross margin for the second quarter was 45%, up from 41% in the prior year. For the first 9 months of 2013 our consolidated gross margin was 43%, down slightly from 44% in the prior year. While we have previously discussed a declining margin profile due to the dilutive effect of our Chile project, we had a significant offset this quarter with the US domestic revenues recognized. This higher gross margin profile of our APC segment business led to significant income recognition in the third quarter. We continue to expect our APC segment gross margins to decline in the fourth quarter to around 35%.

Our selling, general and administrative expenses for the current quarter increased $1.2 million over the prior year to $9.3 million. Our increased SG&A spending during the third quarter is primarily due to higher employee-related costs needed to support our growth and a bad debt charge in the quarter of $362,000. For the first 9 months, our SG&A expense was up $2.9 million, which, again, relates to needed investments in business and personnel costs. We also incurred approximately $600,000 in consulting fees associated with a discrete project during the second quarter. For the first 9 months of 2013, our SG&A cost as a percentage of revenue have declined 3% from 35% in 2012 to 32% in 2013.

Our research and development costs for the current quarter and year-to-date periods were down $108,000 and $220,000, respectively, from the prior year. While our current quarter expense was down due to the timing of project spending, we expect to see our full-year R&D expense approximate prior year levels as we have a number of critical projects we are supporting. Longer term, we expect to continue supporting our R&D efforts as we believe this is a critical component to our future growth. Consolidated net income for the current quarter was $3.5 million, or $0.15 per diluted share, and our adjusted EBITDA for the first 9 months of 2013 was $10.8 million.

Now let's move on to a more in depth discussion of our business segments. Our APC segment reported quarterly revenues of $23.4 million, up $8 million, or 52% from the prior year. For the first 9 months of 2013, our APC segment reported revenues of $56.6 million, up $12.6 million, or 29% from the prior year. Our backlog totaled $33.4 million at September 30 and we expect to see continued order activity, both domestically and foreign, through the remainder of 2013. We have previously discussed stronger second half revenues in our APC segment and our results for the third quarter were consistent with that.

A little bit about our geographies. Our foreign revenues continue to reflect a growing base of business. Our China Pacific-Rim business is continuing to grow and we are adding resources to support that growth as we is see a robust interest across our suite of technologies. In Chile, our project continues to progress with the last unit scheduled for installation in mid 2014. Our US domestic bookings were strong in the first half of 2013 and our APC segment revenue for the third quarter reflects this strong booking activity.

Our consolidated backlog at September 30 was $33.4 million, broken down as follows -- US domestic $7.6 million; Europe and Latin America, including Chile, $15.8 million; and China Pacific-Rim $10 million. And we expect to carry over approximately $10 million in backlog related to our Chile project. For the first 9 months of 2013 we have booked $38.8 million in new orders, $24.8 million in the US and $14 million in foreign orders, which are principally from China.

Gross margin for the APC segment increased in the third quarter from 33% in the prior year to 41% in the current year. For the first 9 months, we have seen a slight decrease in our APC segment gross margin from 39% to 37%. The current quarter APC segment gross margin was unusually high due to an acceleration of specific US domestic project revenue, which carried a higher margin profile. As a result, we recognized approximately $1.5 million of incremental gross margin in the quarter due to this acceleration. In addition, we realized about approximately $1 million of incremental gross margin in the quarter due to cost reduction initiatives. Consistent with our prior discussions, we expect to see lower APC segment gross margins in the fourth quarter of 2013 due to a decrease in our China Pacific-Rim margin profile and the dilutive effect from our Chile project, which will contribute measurable revenues through the first half of 2014. Our blended gross margin and backlog at September 30 was 31%.

Our Fuel Chem segment reported third quarter revenues of $10.1 million, which has increased $700,000 from the prior year. For the first 9 months, our Fuel Chem segment revenue was $28.5 million, up $1.5 million from the prior year. During 2013 we have seen a broad increase in revenue across our customer base, which is encouraging, and we are hopeful that we will see this trend continue with both our current and new customers. Quarterly gross margin for our Fuel Chem segment was 53%, which is also consistent with the prior year. We expect to see our gross margins range between 48% and 52% for future periods.

Operating income for the third quarter and 9 month periods totaled $5.3 million and $7.5 million, respectively, and our adjusted EBITDA for the first 9 months of 2013 totaled $10.8 million. Our effective tax rate for the third quarter of 2013 was 34% and for the full-year was 35%. Due to the mix of forecasted domestic and international revenue and income levels for the full-year, our annual effective tax rate is expected to remain at 35%. However, we do continue to note that our quarterly rate will fluctuate based on geographic income levels and permanent items relative to the level of our consolidated pre-tax income.

Cash and equivalents at September 30 totaled $23.7 million and we have a small debt balance due on our foreign line of credit totaling $1.6 million. Our working capital balance has increased $7.5 million from our prior year end balance to $46.4 million. Cash used in operating activities for the first 9 months was $616,000, due principally to our status of billings and collections on our APC projects. Our spending on property and equipment totaled $1.6 million and we advanced a small amount of debt in our China Pacific-Rim operation to fund current project needs. Due to our strong cash flow, we continued to invest in our research and development activities during the first half of this year to enhance our product portfolio.

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

Thank you, Dave. Good morning, everyone, and thank you for joining us today.

We had a very successful third quarter, highlighted by improvements in revenues, gross profit and net income. Generally speaking, our third quarter results are quite indicative of what we expect our business model to deliver with the current mix of business in today's market environment. In other words, the regulatory driven APC revenues that are now diverse in geography and project size, plus are quite variable in margin, coupled with the moderate but steady growth of our ROI driven Fuel Chem business that is fairly predictable in margin.

On a segment basis, APC revenues rose as projects progressed better than planned while gross margin improved due it a higher concentration of US domestic work. At our Fuel Chem segment, revenues rose and margins remained substantially intact. This segment is still challenged by low natural gas prices and lower capacity utilization at coal-fired power plants. However, Fuel Chem remains a trusted partner to its clients across the US and we are continuing to investigate ways to introduce new products that utilize the Fuel Chem business model and provide demonstration program opportunities.

We operate in a global market and our results for the quarter and year-to-date also reflect our success in achieving geographic diversity in our APC project portfolio. We continue to focus on expanding our presence outside of the US while pursuing domestic opportunities driven by state level [consent] decree and other mandates. Through the first 9 months of 2013, our US and foreign revenues comprised 60% and 40% of total revenues, respectively. For the same period in 2012, foreign revenues accounted for just 19% of total revenue. And we do expect our international focus to continue. Through September 30 of this year, we announced over $41.1 million of orders with approximately $2.5 million of additional orders booked subsequent to quarter-end. Of these total orders booked, 32% were from foreign clients and 68% were from the US.

China remains at the forefront of our business development efforts. And recent efforts there make us cautiously optimistic that a combination of public sentiment and political will can drive historic change with respect to that nation's air pollution control initiatives. Awareness in China pollution is certainly rising, most notably among middle-class city dwellers. Chinese news media, including official state outlets, are reporting more aggressively on the causes and effects of pollution. Just last week it was reported that China's top negotiator at the international climate talks admitted that China is faced with serious air pollution problems and promised to take measures to improve air quality during the next 5 to 10 years.

Poor air quality is now, quote, "become the norm", according to [Shishenwa], Vice Chairman of the National Development and Reform Commission, and is having a severe effect on, quote, "the mental and physical health of the Chinese people". This growing focus on air quality is complimented by a study published earlier this year stating that stationary sources around the world will spend $11 billion in 2014 for capital equipments and consumables to control NOx. According to that study, the utility industry will be the biggest purchaser, accounting for 81% of the total, followed by industrial boilers in pulp and paper, chemical and other industries. China is the leading purchaser of SCR and SNCR systems.

With respect to coal usage, a recent report by [Wit MacKenzie] predicts that rising issue in China and India may result in coal surpassing oil as the key fuel for the global economy by 2020. Global coal consumption is expected to rise by 25% by the end of the decade to $4.5 billion tons of oil equivalent -- overtaking oil at $4.4 billion tons. China and India must use more economic coal as compared to oil to build their respective economies. Half of China's power generation capacity to be built between 2012 and 2020 is still expected to be coal-fired. Coal will generate nearly half of Southeast Asia's electricity by 2035, up from less than a third now as predicted by the International Energy Agency in early October.

Interestingly, even after taking China and India out of the equation, coal generation demand in the US, Europe, and the rest of Asia, is expected to hold steady. Growing economies, abundant fuel source in coal and growing demand for higher air quality standards are intersecting at the point of opportunity for Fuel Tech.

Before we go to questions, I would like to provide you with a brief overview of our end-markets and activities by geography.

China. We announced $12.3 million of China bookings through September 30, consisting of ULTRA, SNCR, and FGC and SCR technology solutions that are being installed to comply with China's NOx reduction requirements. We recognize the tremendous needs and, therefore, opportunities in China and are actively pursuing ways to elevate our presence, accelerate our market penetration and apply our knowledge and our know-how to help China address its growing problems of air pollution. We have been adding personnel at our Beijing office, supplemented by our engineering and design capabilities here in the US.

In Latin America, our project in Chile, the largest APC contract in our Company's history, is progressing in accordance with our customer's requirements and we expect its successful completion by mid 2014. As previously discussed, this is a limited market but we are leveraging the success of our Chilean project as a showcase to demonstrate our abilities. We continue to meet with major utilities in that marketplace. This is an active bidding market and is increasingly competitive against the boiler original equipment manufacturers for additional burner combustion upgrade work. These OEMs are creating an aggressive pricing environment and we are being cautious in our approach.

In Mexico, we are hosting a technology symposium to help develop a more informed understanding of our extensive portfolio and capabilities.

In Europe, we recently focused on activities in the UK where there are larger opportunities than we have previously seen. Opportunities that are being created as planned conversions from coal-fired plants to biomass are in jeopardy due to funding short falls. And in Poland we have been bidding on $2 million to $3 million sized contracts -- not particularly big by any means but larger than we have historically bid.

Here in the US, the federal regulatory landscape is still certainly in flux. We are pursuing projects largely driven by state and localized consent decrees and other mandates such as the Regional Haze Rule. These projects continue to be quite lumpy in size and have long sales cycles. Opportunities are coming from new permits, particularly in industrial space, where we see growing demand for our SCR offerings and a variety of retrofits and upgrades. Natural gas prices continue to rival coal cogeneration, resulting in lower capacity utilization of coal [generating] assets -- something you're all aware of.

R&D, our program remains on track and we expect to continue our commitment of up to 3% of annual revenue towards our endeavors in this area. We have recently introduced our [XCAM] solution to the marketplace. XCAM is our Extractive Continuous Ammonia Monitoring System. This is an engineered process designed to quickly and accurately measure ammonia concentration in SNCR and SCR applications. It is easy to integrate into existing SNCR or SCR control and helps enhance system performance. While still too early to determine the impact of XCAM on our revenue, we are nonetheless excited about the possibilities it offers. The target market is the existing base of all SNCR and SCR installations and not just those that have previously been installed by Fuel Tech.

We are focused on developing SO2, mercury, HCL solutions, along with advanced versions of our existing APC offerings. Some new technologies have been field tested but it is still too early to determine any potential impact on our revenues. Our efforts also include the pursuit of intellectual property licensing opportunities and the advancement of our own IP portfolio. Although aspects of our end-markets remain challenging, the opportunities they offer are substantial. We continue to explore multiple avenues to serve our expanding client base and enhance our Company's performance.

With that, I would now like to ask the operator to please open the floor for questions. Thank you.

(Operator Instructions)

John Quealy with Canaccord Genuity.

Good morning, guys. A couple of questions. First, on the numbers -- I think you were talking about Chile. Is it $10 million of backlog at this point?

No, Chile is currently sitting at about $15 million. We called out the $10 million that would roll into next year, 2014, in Chile.

Got you. And, Dave, do you think that's even throughout Q1 and Q2? Or how does that sort of ramp down in 2014?

I would model it evenly throughout the first two quarters.

Okay. And then can you talk a little bit more -- you talked about I think $1 million of cost savings in the gross margin line. Can you talk about where that came from? Is that recurring?

Yes. It is spread across a number of projects. One is the Chile project. We're through two of the units now -- finished the installation. And so when you look back at project estimates, we were able to revise those. We are also gaining some knowledge and know-how based on the first couple of units, which we will leverage throughout the remaining projects. So that was a portion of it. We also were able to combine some projects here in the US on a buying perspective as well as do some engineering enhancements to take some costs out. So it is across a number of projects but delivered some results in the quarter.

Okay. And then can you talk about the pipeline of opportunity? We've got backlog into that sort of $30 million-ish range and it was for the past 5 or 6 quarters into that $40 million range. Can you talk about the pipeline of potential projects? Do you think we grow backlog back into the $40 millions? Or do we bounce around in the $30 millions here for the next little bit?

Sure, John. We work an extensive pipeline. Many of these programs are active and pending, and we're doing our best to win them. Some are a little further out in time -- harder to estimate. But if I just look at the active and pending portfolio that we're working with, you see a list of projects that are over twice your $30 million number. They vary in size. They vary across our technologies. As we said earlier, we are seeing increased interest in our SCR offerings. Therefore, some of our larger projects are trending in that direction. But we also have some highly large SNCR project opportunities.

As I've said for many quarters, this business is increasingly lumpier. When you look at our bookings over the last several years, you see an extreme amount of variability by quarter. As I've also stated, it is a long sales cycle. So very difficult to predict on a quarter-by-quarter what we will book. We face competition of course. And they face us as competition. So I believe we're still seeing a rising tide market, but it is not driven by a clear federal regulatory driver. When and if that comes, I think it will only provide the clarity and the enhancement to organize a larger portfolio of projects that will come our way. But in the meantime, we're still actively pursuing a long list of opportunities.

Okay. And then lastly, Doug, you talked about China and India -- in particular about the macro growth of coal there -- can you talk about your investments perhaps in operating expenses or perhaps in partnerships with organizations to try to expand the footprint? Obviously you have done a great job in China but as we go to other areas, what else do you need to do to the operating platform to be able to capture that? Thanks.

Sure. Good questions. We principally focused our infrastructure build in China. We have not placed an infrastructure in India. We don't think that market is as near term as the China market is. But we think it will be there. With respect to China, here is where we have expanded the number of personnel the most in our Company. And we are certainly looking very strategically as to how we can leverage our position as a foreign supplier to that market but with an all Chinese populated local presence. And therefore, partnering opportunities are very much in our consideration and have been and will continue to be.

So look for the China market to really, I think, transform both in terms of committed national level effort to achieve compliance with standards that have already been articulated, but also look for growing competition. So when the markets grow and competition increases, one naturally must look for ways to enhance your competitive position. So partnering opportunities are certainly in our mind there. But at the moment, it is a free-standing wholly-owned enterprise that we operate today.

Great. Thank you.

Steve Shaw with Sidoti & Company.

Hi, Dave. Did you break out the revenue type -- the Chilean project in the quarter?

I did not break out the revenue in the quarter. It is going to be around $5 million. I don't have that in front of me. I can get that for you. If you hold on for a second.

Okay. And then secondly, you mentioned that some of the domestic APC orders were accelerated. What was driving that? Was that regulations or something else?

No, just timing. We signed these contracts back in Q1 and they were set to install prior to year-end this year. And it was just timing at the plant sites and work progress on equipment builds. So nothing specific to that. We knew they would run before the end of this year. We just saw more of it in Q3 than what we had expected.

Okay. All right, thank you.

Chile was $5.4 million in the quarter.

All right. Thanks.

And the [domestic] projects were one where we achieved some cost efficiencies and enjoyed a better-than-average margin for projects of that nature.

Dan Mannes with Avondale.

I'm actually going to talk about Fuel Chem real quick. Can you talk a little bit about maybe usage rates by customer, number one. And number two, what you are seeing in terms of new customer acquisitions that accounts for I guess some modest improvement year-over-year? It certainly looks like that segment has bottomed and maybe is getting a little better.

Yes, Dan. I think if you look at our existing customer base, we're pleased to see year-on-year increase from 2012 to 2013 across a number of accounts. We do see, as you know, attrition. They could be in some cases the loss of a customer due to how that unit is today being operated. Or it could be a reduction in revenue based on outage schedules or other considerations. But generally speaking, in a challenged environment, we have seen good growth across our customer base and some generation is improving.

So we have a number of new projects that we have proposed. We have not yet won. So new customer acquisition remains a concerted effort. But the market makes that sales cycle continue to be long. But nevertheless, we have the technology and it is going to come to bear. I think Fuel Tech has the gold standard for fuel treatment to offer to this marketplace.

Okay. So if I can just clarify, the year-over-year improvement you're seeing is primarily driven by better usage on existing customers, not from new?

Yes.

Okay. And then do you believe -- is the improvement then driven by higher utilization rates or more efficiency? Have you kind of pulled off maybe underutilized equipment? Can you talk a little bit about maybe what is driving that higher usage other than maybe a little better output by some clients.

I think generally, Dan, you could attribute it to a higher level of generation activity.

Perfect. And then on the new business side, you really haven't added much yet but the prospect is certainly there?

On the fuel, yes, the prospect is there. But it has been a hard-fought war to win the new business and we will continue that war.

Got it. And then, Dave, in your prepared comments I think you mentioned some bad debt. Can you talk about the location of the bad debt and what type of customer it was?

Yes. I don't want to give too much, but it was outside the US. So it was a foreign customer. It was one -- so we have had a long-standing relationship with them and felt it was in our best interest mutually to agree to the settlement.

Agree to the settlement -- so is it bad debt or is it a revision on account, meaning was it sort of a revision to a contract?

It was a bad debt. So it was clearing up business that we had conducted in the past. So going forward, we have a good relationship with them.

It is not a lost account.

It is not a lost account, no. Right.

Okay. I just -- when I categorize bad debt, it usually means someone is unable to pay. In this case it sounds like there was a contractual agreement why you guys agreed for them not to pay, which sounds different.

That's correct.

There was a contractual adjustment based on a multi-year effort with that customer to achieve a certain operating result. And we provided an adjustment in accordance with that. But the opportunity is to grow that business.

Okay. And then lastly, on working capital --

No question about solvency of the account or anything like that.

Okay. Sorry. Maybe it is just a nuance and I guess the way I would define bad debt. But be that as it may, it is a fairly small number. And then lastly on working capital, it looks like it has stayed at a bit of a higher number and obviously at a higher revenue run rate. Is that primarily in China or are you kind of adjusting to maybe a different payment regime there then what you're used to here in the states perhaps?

A lot of it is in the US and it is all project oriented. As we've talked about the increase in our APC segment revenues, most of those are all percentage of completion. They run over a long period of time. It is just on build up. A lot of it is un-billed so it is a combination of work in process as well as payment status.

Okay. Great. Thanks for the color.

Thank you, Dan.

Steven Charest with Divine Capital Markets.

If I could turn this back to China real quickly, the third [plenum] meeting is over and there has been a lot of lip service paid to the smog issues and then some. Could you characterize the results from your end as leading to increased quotation or do you have any color on what you see as a result of that?

Well I think it is a good question. I think change often occurs when population demands it. We experienced that in this country. China is experiencing that now. The rank and file of human beings in China is, today, subjected to an environmental poor level of air quality that is unacceptable. You probably all saw where the city of Harbin, the city of 11 million people, had to completely shut down schools, businesses. You couldn't see beyond 60 feet. During the day, cars had driven with headlights on -- just completely unacceptable. I think that the national government of China is taking this very seriously. Compliance is an important issue to enforce. And you're seeing a situation where the economic output of the country has far outpaced its ability to comply with the air pollution control measures needed in that infrastructure to offer a lower polluted environment. You are talking about particularly in EM- 2.5 levels approaching 1,000, where under 20 is considered healthy.

So I think awareness [about] the individual resident of a city to high level China officials is such that they're taking this far more seriously because it is not getting better. That means I think there is a big work program for many companies, us included, to help that country address this serious need. You have all seen the pictures over there. It is not good. But that is what we're there to do. So that is why we're putting a lot of effort into thinking about our strategic penetration in the market. Someone asked about partnering before and certainly partnering is in our mind to increase our opportunity in what would be a large marketplace over the next several years to come. Quite frankly, I see the China market is where our greatest growth will be derived. That's a position I have had for a number of years.

Got it. Thank you.

Lucas Pipes with Brean Capital.

First along, I think, Doug, you mentioned new products along the Fuel Chem business plan. What stage of development are these -- is this potential business line and how quickly do you think we could see revenues from there?

Sure. One of the things we -- or two aspects that we're trying to create for the Company -- one is a greater mix of recurring revenues that give us a more of a flywheel than you can count on from one-time capital projects. And if you look inside the APC market, there are a number of needs. They're not necessarily current needs, but evolving needs, to offer Fuel Chem type business model solutions to meet regulatory requirements -- for example, mercury emissions control, SO2, acid gases. I think the real telling period for our opportunities will be in the 2015, 2016 time frame. But you have to undertake the development efforts for those products to not only be in place but to have the drivers associated with them. We're working on some unique innovative solutions that are not easy. These require extensive fuel testing. They don't always give us the results that we're looking for the first time. We've revised our chemistry. We go back in and we try again. So I would say it is early to predict what our organic R&D efforts will give us in the next few quarters. But we continue to look for ways to provide cost competitive solutions to alternative means, to provide multi-pollutant reduction abilities that we would call an APC business but is not a capital project.

The mercury near toxic standards rules that are in place that require compliance in the 2015, 2016 time frame are a big driver, opportunity for us. And there we're pursuing both organic development and licensing opportunity possibilities to provide an approach that differentiates Fuel Tech from others in this marketplace. So stay tuned on all of this. It has probably been the biggest percentage of our active spend but it is also a longer time frame in development. We're also looking at enhancing the capabilities of our SNCR offering. As you all know, SNCR is a moderate NOx reduction technology --low capital cost. It has a moderate operating cost. We have trial going, as I speak, to prove out the capability that enhancing our NOx reduction capabilities that might give renewed product life cycle to what has been a proven but older technology -- that which we have achieved at very, very high market penetration rate and are highly known for. If we can extend that capability, our SNCR solutions alone would be more competitive. And then you combine that in a layered manner with combustion modifications and single layers of catalysts, they're -- that could offer advanced SCR capabilities -- very competitive with SCR. They don't meet every boiler application but there are quite a number that would benefit from that. So we're in active development on that as well.

That's helpful. Thank you. And then just going forward, as I think you alluded to a greater percentage of your APC's revenue is coming from international markets. Should we -- when we model this out, essentially assume a lower margin on these projects going forward and then the proportion shifting towards greater international sales? Is that the right way to think about that? Or would you say our margins can overall still stay flat?

Yes, it is a great question. I would agree with your analysis. You know the wild card is how many US projects you book in that mix. And we saw it this quarter. The margin profiles can vary quite a bit so depending what technologies are selling through. But generally on a trending basis, I would agree with what your -- with your comments.

That's helpful.

I think I alluded to that in my prepared remarks because in the APC business project size, the number of competitive bidders, the particular technology application that you're selling, can determine your margin. So we can see margins from the low 20%'s to the high 50%'s for APC projects. When I look at the mix of revenue that we enjoyed in the third quarter, a large project, such as we have in Chile, carries a lower margin. Some of the domestic projects that we completed in the quarter reflect our strong competitive profile. And we also had some good cost reductions around them. So margins on those projects actually exceeded 50%. So when you look at the blend, and I think about the landscape of opportunities that we are bidding on today, the average of all of that was probably indicative of what one could model.

But again, I will caution you, these bookings are lumpy in size. And so you don't know whether a $15 million project that you're going after will be a 25% margin or a 50% margin. It depends on the geographic landscape and the competitive bidding environment what technologies you're selling. But having a broader technology portfolio positions us to win more. Committing ourselves to the international markets gives us what I would like to call regulatory diversification. So here in the US where the regulatory involve is small, we have drivers in other countries that enable us to make bids and successfully complete those projects that we win.

Thank you.

Walt Liptak with Global Hunter Securities.

Hi, thanks. Good morning, guys, and nice quarter.

Thank you, Walt.

I wanted -- you talked a lot about China and I apologize for making the conversation go on longer but you mentioned that you are looking for something to happen at the national level. And so what data point is it that are you are looking for? Obviously there is a lot of anecdotal that suggests that they need to do something. Is there one thing that we can look for?

Well I think much greater policing of compliance. It is not good enough to install a system that is designed to control pollution and then not operate it. Much better enforcement and policing at the provincial level. There can be a lot of independent direction set at the provincial level and I believe that people will be held accountable who operate facilities that are not in compliance with the regulatory mandates. I believe we could see possibly certain technologies mandated to certain industries. I just think you can't live in a situation that has got -- that has become this bad without the population demanding a government response. And I think the elected officials -- chosen officials, I should say -- are going to hold people accountable and themselves accountable to change and reverse course on a situation that is becoming very, very bad.

I sort of predict that the compliance on the NOx market is going to follow a pattern in the SO2 issues that China faced. When they enacted regulations in what would have been the 10th five-year plan, they didn't meet those goals in five years. But they did meet them by the 11th five-year plan. I think you're seeing the same phenomenon occur in NOx. I don't know that they're going to meet their goals as stated in the 5-year plan. But over the course of 5 to 10 years, they've got the capital. They've got the wherewithal and I think they are going to have the outcry of people to require that these regulations be complied with.

Right -- that political [well]. One of the other questions was on China order activity and if you have seen better quote activity. I'm not sure if I heard the answer to that.

Yes, we are seeing an uptick in the quote activity. It is continuing to be strong so --

Okay.

The key fundamentals of that marketplace seem to be intact.

Okay. And you mentioned that China -- the competitiveness you expect to go up. Are you seeing that to show up in margins on projects now?

We haven't to date, which has been interesting. Our margin in the current quarter coming out of China was about 30%. Our backlog margin is sitting at about 35%. And we have trended over the past two years in that mid-30% range. It can vary by project. But we have been real pleased with our margin profile in China to date.

Okay. Great. And then just the last one is just the China market opportunity. Have you quantified that at all -- added up the number of coal-fired electric plants and if they all went through a compliance, what they would look like?

We have quantified certain segments that we are interested in addressing. We have done a lot of strategic planning over the course of the last year in a number of geographies. And so, for example, trying to quantify -- I'll just use one example -- the market size that we believe exists for SNCR. Yes, we have tried to do that. Our ULTRA technology, we tried to do that. But we don't offer every technology equally competitively as to what China requires. But we've got a feeling for market size.

Okay.

And it is not just for the utility industry either.

Okay. Fair enough. Thanks.

Peter Brown.

Could you please tell me how many facilities of your own you have in China and how many full-time sales people you have in China?

We have one facility in Beijing. We have a handful of in-house sales people and then we're supported through a rep network. It is a little bit different in China but we have outside folks that help support our sales efforts.

And how much time do those people from your home office visit China?

I'm sorry. How much time do we spend in China from home office?

Yes.

I am there on a quarterly basis. We have our Executive Vice President of Worldwide Operations in China currently. He is there for a two week stay. I would guess he is there every other month. So there is -- and then we have --

More than that.

Yes, there is a consistent stream of engineers from the US traveling to China to support specific projects and installations.

We have a large number of Americans who travel there but we have 32 Chinese national people working as full-time employees currently in Beijing.

(inaudible) Are you -- is the head person there a Chinese-American or an American or a Chinese person?

He is Chinese.

And lastly, have you ever considered, whether in China or even in North America or elsewhere, of doing some type of acquisition just to diversify your portfolio?

Yes, we're probably more actively looking in the developed countries, primarily the US. We have not been active in the China M&A market. Everything we've done to date has been internally grown.

And --

We don't rule that possibility out; however, as our business base grows.

And has anybody ever shown any interest in like acquiring you?

Not that I'm aware of.

Okay. That's good. Well good luck. It is nice to see a turn in the Company. And hopefully when the Chilean contract ends, you can maintain this rate of growth.

Thank you. That's our goal.

(Operator Instructions)

Tom Herrenberg from [Carl] and (inaudible) Incorporation.

Good morning, fellas. Congratulations on an outstanding quarter. Can you give us an update on the stock repurchase program? Did you repurchase any shares in Q3? And where do you stand on that?

So we had two different programs that we have run through both of those. So we're not active on any stock repurchase programs and there is no money set aside for those at the current time.

Okay. But your last program ended in 2012 then, is that correct?

That's correct.

Okay. Thank you.

William Bremer with Maxim Group.

The APC segment -- can you give us a little color on the North American activities there? I know your margins are based upon mix. Just going to get a sense on underlying pricing of the current projects that you're seeing right now -- better than it was 6 months ago or a year ago? Where does pricing stand right now?

I don't think there is a significant difference in our pricing policy by technology. We have seen sometimes larger projects that have more increasingly competitive bid environments. And if those are attractive to us, we may sharpen our pencil a bit. Quite frankly, we were the successful bidder of the Chilean project and it has shown to be, not only a significant contributor to our financial results but, through good management, we have achieved a better margin. And yet a lot of our projects can be sold at traditional margins because our reputation precedes us as the right choice. So we are -- you do see margin variation by technology.

Right. Anything needed in terms of your portfolio?

Well I think there are some in-licensing opportunities that would give us faster growth than that which we could otherwise achieve by trying to organically grow those solutions. We are always looking for opportunities where smaller companies may have potentially good technology -- intellectual property surrounding it -- but do not have the distribution and marketing and, in particular, the reputation and financial strength that Fuel Tech offers to a customer base that is pretty conservative and is thinking. So we have a number of projects that are active in that area. Now those don't always end in a successful license or successful negotiation. But we're trying to combine those kind of opportunities with our internal R&D program to accelerate having a more diverse product portfolio.

Thanks, Doug. I appreciate it.

With no other questions in the queue, we will now call the back over to management for closing remarks.

Well thank you, again, everybody, for your participation on today's call and your individual and collective interest in Fuel Tech. We remain excited, optimistic about our future. And we certainly look forward to keeping you fully apprised of our progress on updated calls. Thank you, everybody. Have a good day.

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