Fuel Tech Inc (FTEK) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Fuel Tech 2017 Fourth Quarter and Year-end Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Devin Sullivan, Senior Vice President of The Equity Group. Thank you. Please go ahead.

Thank you, Brenda. Good morning, everyone, and thank you for joining us today for Fuel Tech's 2017 Fourth Quarter and Year-end Financial Results Conference Call. Yesterday, after the close, we issued a copy of the release, which is available at the company's website, www.ftek.com.

The speakers on today's call will be Vince Arnone, Chairman, President and Chief Executive Officer; and Jim Pach, the company's Principal Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors.

Before turning things over to Vince, I'd like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 as amended, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and reflect Fuel Tech's current expectations regarding future growth results of operations, cash flows, performance and business prospects and opportunities as well as assumptions made by, and information currently available to, our company's management.

Fuel Tech has tried to identify forward-looking statements by using words such as anticipate, believe, plan, expect, estimate, intend, will and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to Fuel Tech and are subject to various risks, uncertainties and other factors, including, but not limited to, those discussed in Fuel Tech's Annual Report on Form 10-K in Item 1A under the caption Risk Factors and subsequent filings under the Securities Exchange Act of 1934 as amended. This could cause Fuel Tech's actual results -- actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any forward-looking statements contained herein to reflect future events, developments or changed circumstances or for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the company's filings with the SEC.

With that said, I'd now like to turn the call over to Vince Arnone, Chairman, President and CEO of Fuel Tech. Vince, please go ahead.

Thank you, Devin.

Good morning, and thank you, everyone, for joining us on the call today. I am here today with Jim Pach, our Principal Financial Officer and Controller. Jim joined me on last quarter's call as our acting Principal Financial Officer, and since then has been formally named as Fuel Tech's Principal Financial Officer. Earlier this year, Dave Collins resigned from his role as Chief Financial Officer and Treasurer due to health reasons and will continue to assist Fuel Tech in a part-time role. I would like to thank Dave for his many contributions during his almost 8 years of participation with the Fuel Tech team as CFO.

Today, we have 2 subject areas that we will be addressing. First, we will discuss our financial performance for the second half of 2017, a period during which we met and, in some instances, exceeded the guidance that we provided earlier in the year. We were very pleased to deliver much-improved financial performance during the second half of the year, which included the generation of operating profit from continuing operations in the fourth quarter, which was our first profitable quarter in more than 3 years.

Second, we will address our outlook for 2018, which we believe will demonstrate continued improvement from the year just ended, with a focus on sustainable profitability, the generation of positive cash flow and exploring new market opportunities for our company.

Let's start with a discussion of our performance in the second half of 2017 relative to the first half of 2017. For the second half of 2017, revenues increased by 48% to $26.9 million, in line with our projections of an approximate 50% rise in revenues from the $18.2 million we reported for the first half of the year. SG&A declined 11.7% to $9.9 million, below our target range of $10 million to $11 million for the second half of 2017. This decline reflects the favorable impact of the organizational restructuring and cost reductions that we commenced in early 2016.

We projected a significantly narrowed operating loss from continuing operations for the second half of the year, along with slightly positive adjusted EBITDA when compared to an operating loss and an adjusted EBITDA loss of $7.4 million and $4.1 million, respectively, in the first half of 2017. We exceeded these targets and reported second half operating income from continuing operations of $314,000 and adjusted EBITDA of $568,000.

Now let's focus specifically on the performance for the fourth quarter. Revenues rose almost 40% to $13.4 million from $9.6 million in last year's fourth quarter, which reflected the timing of project execution on existing APC projects and the conversion of new orders that we announced during the first half of 2017. SG&A declined 16.5% or nearly $1 million to $4.9 million. For all of 2017, SG&A declined by 18.1% or $4.7 million from 2016.

We reported operating income from continuing operations of $448,000, the first time we have reported operating profit in any quarter since Q3 of 2014. Net income from continuing operations for Q4 was $470,000 or $0.02 per diluted share compared to a net loss from continuing operations of $8.5 million or $0.36 per diluted share in Q4 of 2016. And lastly, we reported positive adjusted EBITDA of $559,000.

In 2017, we announced $36 million of new orders and ended the year with a backlog of $22.1 million, which is an increase of $14.1 million from backlog of $8 million at December 31, 2016. And thus far in 2018, we have announced new orders totaling $4.3 million. At December 31, 2017, we had a cash balance of $14.4 million, which was an increase of $1.8 million from June 30, 2017, and in line with our projection of a stable to slightly higher comparative cash balance. Shareholders' equity was $34.3 million or $1.44 per share, and the company had 0 long-term debt.

Our company's primary goal over these past 3 years has been to engage in a structured program to return to the generation of positive cash flow and operating profit, and I'm so very proud of the entire Fuel Tech team for their contributions in achieving this milestone. This has been a long journey for all of us, and we also know that our journey is not over. With that said, it is very satisfying to be able to share these results with our investors, and we will continue our efforts to create long-term shareholder value.

Now let's review our business segment performance in more detail. As a general statement for both our APC and FUEL CHEM business segments on a global basis, our operating landscape has not changed dramatically over the past 2 to 3 years. The technologies embodied within our base businesses still have relevance in all markets that we do business, and we intend to continue to capture our share of the market in order to ensure our revenue run rate that generates profitability.

In the Air Pollution Control segment domestically, we continue to pursue opportunities focused on ULTRA and SCRs for industrial applications, and we expect orders for these technology applications to represent the majority of our contract bookings in 2018. SNCR technology remains applicable for units requiring compliance with the latest round of CASPR, Regional Haze and state-specific requirements for Reasonably Available Control Technology, also known as RACT.

ESP upgrades are driven primarily by maintenance requirements and in some cases, increased particulate loading from dry sorbent injection systems installed to help units meet MATS and Boiler MACT requirements. While we do not expect significant impact from specific regulatory drivers for the remainder of this year, I would like to comment on a couple of items that will likely impact our future.

On the Clean Power Plan, the Supreme Court of the United States stayed this regulation in February 2016. In 2017, an Executive Order pulled the Clean Power Plan back for EPA revaluation, and then later in the year, EPA rescinded the Clean Power Plan. 49 gigawatts of coal was projected to retire if the Clean Power Plan was enacted. However, natural gas pricing is still expected to limit the recovery of coal unit capacity factors in this country. EPA has given advanced notice of proposed rulemaking, asking for comments as it seeks to replace the old Clean Power Plan. Comments were due at the end of February, and these comments are being reviewed now.

In November 2017, EPA issued area designations for the 2015 Ozone National Ambient Air Quality Standards, also known as NAAQS. NOx and VOC emissions are precursors to increases in ground-level ozone levels, and the new standard of 70 parts per billion, down from the 2008 level of 75 parts per billion, is expected to impact utility and industrial sources. The remainder of the area designations are to come in 2018, and states and sources will work on compliance plans starting later in the year.

The EPA is still considering the future of the existing MATS standards even though it has been in effect since 2015. The previous EPA did not consider cost appropriately in the early stages of rule development, which opens the door to reconsideration. It is likely that the existing rule will stay.

At a high level, these examples reveal that while there is still regulatory uncertainty in the near term, there have been some improvements over the past several months. We are very pleased with the $36 million in contract awards in 2017, which has provided us with a backlog of greater than $22 million at the end of 2017. Project bidding remains active, and industrial project activity is encouraging.

We will continue to capitalize on the increasing deployment of natural gas-fired turbines being used where SCR technology is required as best available control technology, which creates opportunities for our SCR and ULTRA technologies in the industrial segment. We also continue to establish strategic business relationships with multinational industrial end users and to partner with companies that require our technology portfolio to complete a broader bid package.

In China, we generated almost $7 million dollars in new contracts in 2017, which is an improvement in activity when compared to 2016, and we expect similar performance in 2018.

Regarding the market in China. Decreasing power demand due to a slowdown in economic growth is reducing the number of new plant builds, which has been the mainstay of Fuel Tech's historical ULTRA system sales. The implementation of super low emissions targets, first introduced in 2016 for utility units, is likely to be completed within the next 12 to -- excuse me, the next 12 to 24 months as most plants are currently in the process of implementing or planning to implement technologies to meet these targets.

Based on our current analysis, SNCR implementation on utility boilers will continue for at least the next 2 years, and while the market is competitive, we believe that we will win our share of the work. With compliance work for utility units gradually coming to an end in China, the compliance focus is now shifting to industrial units, which includes municipal solid waste, process industries and the petrochemical industry. We intend to market our technology to world-class Chinese industrial companies that appreciate value-added technology solutions.

Additionally, we are watching a trend towards the elimination of aqueous ammonia as the reagents we use with SCR system applications to reduce NOx. Currently, we estimate that approximately 80% of the 2,000 plus power generation units that have SCR installations for NOx reduction use aqueous ammonia as the reagent for the SCR as opposed to using a safe urea-to-ammonia conversion technology, like our ULTRA process, to avoid the hazardous transport and storage of ammonia on site.

We currently have an installed base of greater than 225 ULTRA systems in China. And if the elimination of the storage and transport of aqueous ammonia becomes accepted practice or a regulated requirement, we would expect to benefit from this market change.

Now over to Europe. The European Union's Industrial Emissions Directive continues to drive compliance behavior, although BREF, which is known as the best available reference technology guidelines, were issued in August 2017 with a compliance time line through 2020. These guidelines further reduce target NOx emissions from current levels, and they also include the regulation of mercury for the first time. As a result, plants in EU countries with heavy reliance on coal-fired generation, such as Poland and the Czech Republic, will need to upgrade their current DeNOx systems. Neighboring countries in the Balkans and Turkey are also planning to follow the BREF guidelines.

In 2017, our European office was awarded almost $5 million in contracts covering our SCR and ULTRA technologies and also utilizing our expertise in ammonia reagent delivery systems. Already in 2018, we have announced almost $4 million in new contracts in Europe, which is an excellent start to the year. Additionally, through the use of strategic partners with local presence and project execution capability, we continue to strengthen business ties with local entities in Turkey, Poland and the Czech Republic to take advantage of project opportunities when they arise in these geographies.

We continue to pursue opportunities associated with our various licensing agreements. In India, we continue to monitor the long-term prospects of our exclusive licensing agreement for our SNCR technology with ISGEC Heavy Engineering Ltd., one of India's leading engineering and construction companies, although required emissions compliance time frames continue to be delayed. The Indian government has backed off of the aggressive compliance targets originally set for the power generation industry due to the high associated cost of compliance. They are now operating under a phased approach prioritizing particulate matter technologies first, then SOx and finally, NOx control.

We will push to demonstrate our low capital cost through gas conditioning solution as a means to address particulate issues as we believe that many units will seek to avoid costly Electrostatic Precipitator Rebuilds to meet compliance targets. Also, we are closely watching the development of demand for urea-to-ammonia conversion systems like our ULTRA system in this market.

For our FUEL CHEM business segment, while our global revenues declined by $3.7 million to $17.4 million in 2017 from the prior year, this result actually exceeded our expectations, and we maintained gross margins at 50% for the year. Despite modest signs of renewed life in the coal industry, demand for our product in our traditional power generation market continues to decline due to fuel switching from coal to less expensive natural gas and to the expanding use of renewables. In response, we continue to pursue a variety of avenues that leverage our FUEL CHEM technology solutions.

In the U.S., we continue to introduce this technology to utilities to assist them in adapting to the new operating paradigm marked by reduced load profiles that affect the manner in which boilers operate. Additionally, we are also continuing to support operators that utilize coal blending as a cost reduction strategy as in many instances, blending can cause unwanted slagging and fouling in the boiler, and our program can assist in these cases. Further, we are seeing opportunities for biomass-fired units in the industrial sector, and we are currently applying our technology successfully on one application.

In Europe, we are offering FUEL CHEM to the operators of biomass-fired units and municipal solid waste units, both of which are known to have severe and costly slagging and fouling issues. We are currently providing our program on 1 biomass-fired unit and 1 municipal solid waste unit at this time, both in Italy, and the results from both clients are favorable. We are watching these results -- of these 2 accounts closely, and we'll look to use the favorable references to expand our application base.

On a worldwide basis, we have expanded our industrial reach into the pulp and paper industry where FUEL CHEM, more specifically our proprietary RECOVERY CHEM technology, can address the issues of slagging and fouling in black liquor recovery boilers.

In the third quarter of 2016, we had announced the signing of an exclusive agreement under which Fuel Tech had licensed its proprietary RECOVERY CHEM technology to Amazon Papyrus Chemicals Group, a leading supplier of specialty chemicals to the pulp and paper industry in Asia. Amazon currently manufactures and sells a variety of industry-specific chemicals to greater than 350 pulp and paper units on their continent.

We have solidified our source of chemical supply in the region and identified several target candidates for a demonstration. We are currently approximately 30 days into a 120-day demonstration of our technology with 1 of these target customers, and we look to utilize the success of this technology demonstration as a springboard towards accelerating business activity thereafter.

As mentioned on prior calls, we have been exploring opportunities that would allow us to address new market verticals via product line expansion. One area that is very intriguing to us is water and wastewater treatment. Earlier this month, I am pleased to say that we announced an exclusive license agreement with NanO2 LLC to market and sell NanO2's dissolved gas technology. This agreement, which is for a term equal to the life of the underlying patent, provides exclusive rights for Fuel Tech to market their technology in specified end markets throughout North America with provisions to extend exclusivity to other territories and applications.

Throughout our history, Fuel Tech has endeavored to meet the evolving demands of industrial and utility clients by providing science-based low capital expenditure, emissions control and fuel efficiency solutions that deliver significant return on investment through process improvement. These same principles are evident in the technology agreement with NanO2. This agreement reflects our ongoing corporate evolution and signals the expansion of our mission to include environmental solutions focused on water. We believe that NanO2 offers a potentially impactful technology in the areas of water and wastewater treatment and will allow us to help address the world's growing water challenges in a sustainable, responsible and cost-effective manner.

NanO2 solution utilizes proprietary nozzle technology that introduces supersaturated oxygen solutions and other gas water combinations to target process applications or environmental issues. This infusion process has a variety of applications in the water and waste water industries, including remediation, treatment, biological activity and wastewater odor management. The technology is proven and reduces energy consumption, installation costs and operating costs, all while improving treatment performance.

We will initially focus on the pulp and paper, oil and gas, utility, steel and cement markets using our internal sales resources and leveraging the excellent brand name and client relationships that we have developed over the past 30 years in our history. Although we do not expect this agreement to have a material impact in our results in 2018, we are very optimistic about the potential long-term benefits that this license provides.

I had closed our third quarter conference call by saying that growth and improved profitability remain our goals. In our view, the fourth quarter of 2017 represented an important first step in this regard, and we are optimistic about our future performance. For 2018, we expect to report higher total revenues, driven primarily by our APC business. We also expect to operate profitably and generate positive cash flow. This outlook is based on the expected favorable impact of our cost reduction initiatives on 2018 financial performance, the improved APC backlog that we are rolling into 2018 and finally, on our visibility to business development activities on a global basis.

We remain focused on a path of continued improvement, both in our financial results and in our objective to move into new markets. We look forward to keeping you apprised of our progress as we move throughout the year.

And now I would like to turn the conversation over to Jim for his comments. Go ahead, Jim. Thanks.

Thanks, Vince, and good morning, everyone.

Revenue for the fourth quarter of 2017 totaled $13.4 million, reflecting a $4.5 million revenue increase for APC, offset by $700,000 of revenue decline at FUEL CHEM as compared to the fourth quarter of 2016. APC backlog to revenue conversion was strong through the fourth quarter as a result of the $36 million of new APC orders announced to date. We expect this conversion to continue into 2018.

Our gross margin percentage was 42% for the fourth quarter as compared to a gross margin of 19.3% in last year's fourth quarter. The difference is primarily attributable to activity in last year's fourth quarter, which included charges totaling $0.8 million comprised of $0.6 million related to a subcontractor dispute and a noncash excess and obsolete inventory reserve of $0.2 million.

Further, the fluctuation in gross margin quarter-over-quarter is due to project and geography mix as well as the favorable impact of a customer change order of $700,000, which was finalized in the fourth quarter of 2017. APC gross margin was $3.8 million or 39.9% as compared to $0.3 million or 6.5% in the fourth quarter of 2016 due to the impact of the previously mentioned charges totaling $0.8 million. Exclusive of these charges, APC gross margin in the fourth quarter of 2016 would have been $1.1 million or 23%.

FUEL CHEM's segment gross margin was 47.3% as compared to 33.4% for the same period last year. Gross margin in the 2016 fourth quarter included the impact of a noncash excess and obsolete inventory reserve of $0.6 million. Excluding this impact, gross margin for the fourth quarter of 2016 would have been 46%. For 2018, we are targeting a blended gross margin of between 35% and 40%.

For the fourth quarter of 2017, our selling, general and administrative expenses declined to $4.9 million from $5.9 million in the comparative prior year quarter. As planned, we have removed more than $19 million of cost, excluding onetime charges, over the past 3 years. For 2018, we expect to see an overall reduction in SG&A spending levels from the fiscal year 2017 spending levels as a result of organizational actions taken in both 2016 and 2017.

R&D expenses for the fourth quarter of 2017 and '16 totaled $0.3 million for both periods. For full year 2017, R&D expenses were $1.1 million compared to $1.8 million for the prior year 2016, with the decline also attributable to organizational actions taken in both 2016 and 2017.

We are continuing to support new product developments and exploring ways to diversify our products and markets through our R&D efforts. To that end, we expect R&D spending in 2018 will increase slightly from our 2017 spending levels as a result of these initiatives, including our recently announced entry into the water and wastewater treatment market.

We reported operating income of $0.4 million in the fourth quarter or our first such profit since the third quarter of 2014. Net cash provided by continuing operations was $2.1 million for the fourth quarter as compared to the $3.8 million of cash used for the 9 months ended September 30, 2017. This was a result of timing of collections of accounts receivable as evidenced by the decline in total accounts receivable from $21.3 million at September 30, 2017 to $19.7 million at December 31, 2017 and an overall reduction -- overall improvement in operating results as previously mentioned.

Adjusted EBITDA for the 3 months ended December 31, 2017 was 0.6 million, our second consecutive quarter of positive adjusted EBITDA.

As of December 31, 2017, we have net operating losses in several geographies in which we currently do business, which will allow us to offset future taxable income to reduce our overall income tax exposure. To that end, we have $13.3 million to offset future U.S. taxable income, $3.8 million to offset future taxable income in Italy and $3.6 million to offset future taxable income in China. As a result, we expect that our income tax expense for 2018 will be at or near 0, similar to 2017.

Our balance sheet at December 31, 2017 remained debt-free, and we had cash and cash equivalents of $14.4 million, including restricted cash of $6 million. Cash at December 31 rose by $2.2 million from September 30 due again to the timing of accounts receivable collections and improvement in operating results, as previously mentioned.

Our working capital balance at December 31 was $18 million, which will continue to support our ongoing operating needs of the business. Working capital does not include $5 million of restricted cash that was a reclassified on the balance sheet to long term during the second quarter as a result of our 2-year renewal of our cash secured U.S. domestic credit facility. The company remains hopeful for continued improved operating performance on a consistent basis, that we may be able to renegotiate our domestic credit facility to remove the cash securitization restriction on our operating cash availability.

With respect to valuation, our book value per share was $1.44, our tangible book value per share was $1.35 and our working capital per share was $0.76 at December 31, 2017. In addition, we have $0.51 per share in deferred tax assets, which have been fully reserved and are not included in any of the per share amounts quoted above.

With that, I would like to turn the call back over to Vince.

Thank you, Jim. Operator, we are now ready to open the line for calls and questions.

(Operator Instructions) Our first question comes from the line of Peter Enderlin with MAZ Partners.

Congratulations on all the good things that are happening. A lot to absorb from everything that you've said.

Your quarterly revenues troughed in the first quarter of last year, and those were down about 50% from a year earlier. Now you rebounded close to 60% from that trough. So what kind of sense can you give us, a sense about the shape of the recovery going forward? I mean, obviously, it depends a lot on what kind of conversion of orders you get to revenues and also obviously, what kind of revenues you get. But for example, the APC segment is more than double off the bottom, and you have a strong backlog now. So just in broad terms, how do we look at the revenue picture going forward?

Yes. Thanks for the question, Pete, and it's a good question. It's won on a quarter-by-quarter basis, that's always been a little bit challenging for us, obviously, to answer. And you raised the primary point, and that is the timing of conversion on the APC projects that is sometimes a little bit difficult to go ahead and project, because at any given point in time, depending on the status of customer delivery requirements, call it overall of the orders that we are currently executing on, that will impact it when those revenues are going to fall in terms of which quarter they will fall into.

The primary driver, obviously, that we look at is the backlog that we carry over from quarter-to-quarter. We have $22 million in backlog that we're carrying into 2018. Generally speaking, I'd say that of that $22 million, it's all going to be recognized in 2018, at least to the great extent, but it's going to roll over each of the 4 quarters in a manner that we just can't predict, okay? I hate to be -- to not be as direct in answering your question, but we think revenues are going to increase on a full year basis for 2018.

Again, just based on that backlog number that we do have rolling into 2018 and on the FUEL CHEM business, we think we've reached a stable level of activity for our FUEL CHEM business. So without being specific in terms of how things are going to shake out quarter-to-quarter, we're just generally -- we're seeing a little bit of a better revenue trend as we roll into '18 than we did into '17, and we feel confident about that. Did that help a little bit, Pete?

Yes. On the other part of the equation, which is the ability to generate new orders, you have a broad, deep base of technology, which could be sort of boiled down to fluid dynamic modeling and a lot of sophisticated engineering involved in that. Does that -- would that allow you to take a more integrated sales approach in existing markets? And maybe even leverage into new markets?

In other words, you've got all these different pieces: NOx reduction and SNCR, ESP, ULTRA. And even in FUEL CHEM, you have a lot of technology. So is it sort of, what, a possible package approach to utilities, industrial companies, other industries, saying, trust us to manage your emissions, your efficiency, the equipment life on an overall basis? Or is that too grandiose an approach? In other words, sort of a mix and match to them whatever they need, you guys can provide. Is that overdoing...

Yes, it's -- yes, we -- Pete, excellent question. As we look to develop our portfolio over this past, call it, decade, that's really the objective that we had looked to have in mind relative to how we were approaching our primary customer base, relative to being able to be a total solutions provider to those entities. In concept, it sounds excellent, but in actual reality and in actual application, it really works out more so whereby the end customer is searching for, call it, a technology-by-technology application approach as they look to go ahead and meet whatever regulatory requirements they're looking to meet on an ongoing basis. They didn't...

And is it true that -- I was going to say, is it true that you would be dealing with different constituencies within that customer organization, too, right?

In some cases, that is true. Now interestingly enough, there is one customer that we're executing a project on now that actually has looked to purchase both some NOx control equipment and a FUEL CHEM application as well, at the same time. It's been rare when that's happened, but it can happen in reality, but it's been rare.

Now Pete, if you don't mind, I'm going to add one additional comment, which is relative to -- you alluded to a broad technology base, if you will, and you mentioned CFD modeling, specifically for our technology applications. When we look to look at water treatment technologies, we were looking at technologies that we'd be able to be, call it value added towards, as we would look to bring that technology into market. And we think we will be able to use some of our internal technological expertise and modeling techniques and apply that to water treatment applications. So I think there will be some nice leverage there as we look to investigate the water treatment marketplace.

Okay. One more on that, then I'll get back in line. And that is for that NanO2 technology, would there be any significant recurring revenue stream associated with that over a period of time? Or is it going to be pretty much of capital equipment sales?

At this point in time, Pete, initially, it will be more of a capital equipment sale at the outset. As we do our discovery in markets, our objective as a company is to be able to generate more recurrent revenues, obviously. So to the extent we can find ways to utilize that technology in a recurring revenue manner, we will look to do so, but the initial approach we see being more of a capital equipment technology sale.

(Operator Instructions) Our next question comes from the line of [George Gaspar], who is a private investor.

Just a little bit more on the NanO2 technology application going forward, and I know this is very early on because you just made the agreement. But do you see this having some direct application in the treatment of oil drill water or let's say the residue of water that then is injected into formations for storage purposes? Is there any possibility of some application in that area, because it's such a huge market?

[George], the oil and gas market is one of the areas that we're going to be investigating initially as our first step. Again, without having more knowledge on our end internally right now, I -- George, I agree with you. It is a large market opportunity. It is our expectation that we'll be able to take the NanO2 technology and apply it to some extent in that marketplace, but without knowing the specifics today. But it is an area that we are going to be doing our discovery within. And as we learn more about a variety of different possible end markets, we'll be able to share a lot more on upcoming future conference calls.

Okay. And then just a little bit further on this whole general area. It seems like there's some concern on a federal basis of the continuation of ammonia being used in the production process of water-led areas, and that would be such as the brewing industry and the soda processing area. And there appears to be some replacements for ammonia starting to take place. Is there some way that you could introduce yourselves into that area from a standpoint of trying to create an alternate application away from ammonia?

Ammonia is, obviously, is a great concern, as you note, and it's an issue that we'll look to investigate. The food and beverage market place is actually one that we don't have exclusivity for under our agreement with NanO2 today, but if something arose in the future whereby we thought we might be able to bring something additive to that marketplace, so be it, we'll look to investigate. But ammonia, on a larger scale across all industries, is a concern, and it's something that we'll look to investigate in the future.

Okay, all right. And one question on China. Your description of the marketplace, an opportunity for you to be broadened. This situation where power generation is -- it looks like it's going more nuclear, but there's been a slowdown in potentially what the Chinese want to do now in terms of the applications in that area. Like you mentioned trying to broaden your penetration more into the industrial area and other areas. Is that where you will do your primary emphasis in China, is to get away from the existing areas that you're in now?

Yes. I think that, George, we're looking to capitalize on our ability to -- really, to continue to sell our technologies in the China market. And really, the market that has really been untouched, if you will, from a pollution control regulatory perspective has been that industrial marketplace. There's been a great deal of work done on the power generation side over this past decade since we actually opened up our office in Beijing back in 2007. And it's just our landscape of opportunity within that area is just shrinking, simple as that, in terms of our ability to continue to win work there. So the industrial market is very, very large there, obviously. And we think that our future business opportunities are more likely to lie there than back on the power generation side.

Right, okay. And just one last comment on your discussion on India, this exclusive licensing agreement that you have put together. It would seem like that could be a very, very significant opportunity. The India market is definitely behind schedule in terms of approaching some of the things that you could be involved in. I would hope that you really try to push that one.

We've been pushing it actually very, very hard over this past 1.5 years, probably close to 2 years now, George. And unfortunately, we continue to push, but there's only so much we can do, obviously. The market is in delay relative to how they're looking to try to meet regulatory requirements. We've had to deal with some radical changes in timing on possible technology demonstrations and all because of, call it, just the lack of funding for that type of work out in that marketplace. And so it's something where we continue to watch, and we still think there's opportunity there. But the timing is such an unknown for us that we really don't rely on anything of, call it, financial substance to have impact on our forecast as we look at the business today, because we just don't know when it's going to kick in yet, George. But we are watching it closely.

Okay, all right. And just in summation, it's fantastic the progress that you have made in the last 1.5 years in the company on setting the base to really move forward now. And with the fact that the company is in decent, reasonably good financial condition, we would expect that Fuel Tech can really start to escalate and pick up momentum going right straight through the year 2018.

Thank you, George.

And our next question is a follow-up from Peter Enderlin with MAZ Partners.

Your gross margin in the APC segment was very healthy and well above recent levels of around 30% or low 30s. Can you give us a little better sense of what contributed to that strong showing?

Yes. Thanks for the question, Pete. I would start by saying, as I mentioned in my comments, in the fourth quarter, we had a $700,000 change order that was executed for the customer, which given the project was at or near completion, that just drops right down to the gross margin line. So that's one comment. The second comment is it's really, year-over-year, it's a mix of products between our technologies as well as geography as well.

Yes, we do have -- Pete, we have some timing impacts from quarter-to-quarter depending on, as we discussed, as Jim noted, project mix has an impact, whether it's just equipment supply only or if it's a turnkey installation that we're doing work for the customer on. And on occasion, if it is turnkey work, there are change orders on occasion that, in some cases, might drop in one quarter versus another quarter in terms of their financial impact. So it varies, but it was nice to see the uptick in gross margin in Q4.

Yes. On the cost reduction, $19 million for the year. How much more would be realized approximately in 2018? And will there be any further run rate reductions? Or will it just be the play out of ones you've already made?

Yes, right now, Pete, I would say it's going to be the play out or the, call it, the full year year-on-year impact of what we've done already. And to answer your question, yes, we would expect to see a full year decline in 2018 versus 2017 in SG&A just due to the realization of the, call it, the full impact of the work we've done.

And can you quantify that a little more, the increment?

Well, I'll give you an example. Q4 was around $4.9 million in SG&A, okay? The full year for SG&A was around $21 million in 2017. We should expect a run rate in 2018, that's going to be a little bit less than that $4.9 million that we realized in Q4 without being specific. But on an overall basis, again, it'll be less than the $4.9 million, again, without being specific at this point in time. Full year year-on-year, it'll be a reduction.

That gives us a good idea. I have a sort of a semantic question. In your press release, and looking at the sort of long-term strategy of the company, you talk about new verticals and potential growth markets. Is there a difference? I mean, is one sort of like closer to home and it's new industries or markets in existing technologies? And when you refer to potential growth markets, is that all the really new stuff using your core base of technology, but with things like the NanO2 and so on, and maybe others? Is there sort of a semantic difference when you say that in the press release?

I think you actually just described it pretty well. So the growth market side is what we're looking to do on the water treatment side, obviously, and that works. That's what we're targeting for, for the future of the company. As we've been saying over this past year, year to 2 years, we can't specifically sit here and rely on our base business segments to continue to provide us with revenue run rates long in the future. That's just not realistic. And so we finally had to take some steps to put ourselves into a position to get involved and active in some of our other market opportunities, and that's exactly what we're looking to do on the water side. That doesn't mean that we still don't believe we have good revenue run rate opportunities for both APC and FUEL CHEM on a global basis because we do. We do.

Well, would there be some other new potential growth opportunities? I mean, we've had some discussion about the petrochemical industry, of oil production and all that. I mean, are there several specific identifiable ones that you guys have in mind, even if you can't talk about them yet?

As it relates to the water application specifically?

Well, no, no. Not water, but...

Or just in general?

More generally than that. Just totally new things using your core technologies.

Pete, I would say not something radically new as we sit here right now from that perspective using our core technologies.

Right, well, and certainly water is a big enough potential by itself.

It is, and that's where we're going to be devoting a lot of our time, obviously.

Right. One last one and that is, what about the possibility of a stock repurchase with the stock below book, although not much at this point? Or would you want to wait until you have more sustained profitability?

I think your second comment is spot on, Pete. We've gone through, obviously, quite a lot of work to get where we are today. We still have a cash securitization requirement with our banking friends. And we want to see performance in 2018 going into 2019 whereby we're consistently generating positive cash flow, and we're taking steps to move into some new market areas. Once we get to that point in time, Pete, I think we'll have a better landscape of opportunity to do a variety of different things.

That concludes today's question-and-answer session. I'd like to turn the floor back to management for closing comments.

Thank you, operator.

I'd like to thank all of our investors in Fuel Tech today for their patience. We have been on a little bit of a long road here as we've returned back to profitability. I'm very pleased to be able to discuss profitability with our shareholders, and we look forward to continuous improvements here in 2018, and thanks for joining us on the call today.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.