Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Fuel-Tech Inc. Earnings Conference Call. My name is Carissa, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Miss Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Please proceed.

Thank you. Good morning, everyone, and thank you for participating on today's conference call to discuss our fourth quarter and annual 2011 results. Joining me on the call this morning is Doug Bailey, Chairman, President and Chief Executive Officer; Dave Collins, Senior Vice President and Treasurer; and Bill Cahill, Assistant Controller. As a reminder, the matters discussed in this call, except for historical information, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward-looking statements. The factors that could cause results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed, and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information 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. That said, I would now like to turn the call over to Dave Collins. Dave, please go ahead.

Thanks, Tracy, and good morning, everyone. I am pleased to walk you through the first look at a year in which we exceeded financial goals that we had set for ourselves, and in doing so, established several new financial records for our company. Our growth was across both segments and delivered record revenues and strong EBITDA results for our company. We are rolling over $30 million in APC backlog at year end, which will provide us with an excellent start for the new year. Consolidated revenues for the full year totaled $94 million, a new record for Fuel Tech, and $28 million for the current quarter. These results represent year-over-year growth of 15% for the full year and 12% for the current quarter. Our Air Pollution Control, or APC, segment delivered revenue growth rates of 25% for the full year and 37% for the current quarter. Our FUEL CHEM segment delivered full year revenue of $43 million, which is also a new record. We are proud to deliver these results, despite difficult economic and regulatory environments. Our 2011 domestic revenue of $76 million grew 10% over the prior year, while our international revenue of $18 million grew 38% over the prior year. The catalyst for our increase in international revenue is our China Pacific Rim business, where demand is continuing to develop for our suite of Air Pollution Control technologies. Our international revenue figure is also a new record for the company. On a consolidated basis, gross margin increased to 47% for both the full year and fourth quarter, representing increases of 4% and 6% over the prior-year periods, respectfully. Our gross margin improvement is largely due to the project mix in our APC segment, with higher margin project work contributing to a larger percentage of revenue in 2011. Our…

Thank you, Dave, for that report, and good morning, everyone. Thank you for joining us all on the call. I'm delighted to be addressing you after reporting our strong fourth quarter results. As you heard from Dave, there were many records that were achieved in the fourth quarter and during the year, which include records in backlog, APC announced bookings and annual revenues and operating income. These results demonstrate the strength and agility of our company, and we are quite proud of these accomplishments. Our performance and success is based upon our employees continued dedication to solving our customers' most critical problems with timely, cost-effective solutions and consistently deliver engineering excellent and meet our guarantees. We had a very strong quarter in the APC segment. Not only did revenues and operating margins improve, but we significantly grew our contract bookings. We announced APC contract wins of $25 million in the fourth quarter, 160% increase from the $9.6 million announced in fourth quarter of last year. This was driven primarily by a strong surge in domestic SNCR orders that were placed to meet the requirements of the Cross State Air Pollution Rule, or CSAPR. As a replacement for the Clean Air Interstate Rule, or CAIR, the EPA issued CSAPR in July 2011. CSAPR included more stringent NOx regulations affecting 27 states with compliance for the first phase on January 1, 2012 and additional reductions required in the second phase by 2014. As you all know, stay on CSAPR was subsequently ordered by the D.C. Circuit Court on December 30, 2011. This was based on litigation filed by a number of states and companies operating combustion sources. CAIR was placed back into effect pending the resolution of the CSAPR stay, which is expected later this year. The primary driver of CSAPR is…

[Operator Instructions] And your first question comes from the line of John Quealy of Canaccord Genuity.

It's Mark Sigal for John. My first question, wanted to just touch on the backlog. So $30.8 million exiting the year, about another $4.7 million in Q1. Clearly, things are at record level. Is there anything in the backlog or in the Q1 order flow, any work that's contingent on formalization of CSAPR here?

No.

No.

No, it's all firm orders booked in the prior year. And is not at all contingent upon further regulatory debate of CSAPR.

Okay. And then in the past, you talked about given sort of the acceleration in APC bookings, you've talked about qualitatively, and some quantitatively, about some of the discussions you've been having. I think you've thrown out the number in the past, something representing up to 60 boilers or so. Can you just help us think about the discussions you're having now? Obviously, you booked significant order flows since that time mid-summer when you talked about those 60 units. So perhaps an update on where that number stands?

Let me -- why don't I address that, just real quickly, Doug. We -- that was, Mark, from the Canaccord conference discussion. We did have a robust list, continue to have that. With the stay of CSAPR, some of those discussions have been pushed off. There still is an active ongoing list of prospects that we're working with. It spans SNCR burner jobs in different ways to reduce the NOx. But I will tell you that for the time being, it's slowed in the discussions and in decision making, just pending the final resolutions of what the courts say on CSAPR.

Okay. And then just turning to SG&A, so clearly a step-up in the quarter. You've been around that $7.5 million or $8 million prior to this. Can you just talk about what drove, call it, the incremental $1.8 million in expense? And specifically, if you can talk about some of the professional fees or some of the miscellaneous stuff that looks to have accelerated a bit in Q4?

Yes. The Q4, we did have some true-ups in our incentive plan accruals. Our incentive plans are EBITDA based. There is a component of revenue as well, but we had much stronger EBITDA results than revenue results this last year. And so as a result, we had some true-ups in Q4 on our incentive plans. On the professional fee side, we do have some ongoing spending. I can't foresee it extending past Q2, but that's hard to say how long those will go. They are -- they're not permanent spending, and so when we look out the full year, we are modeling down the 33% on a full year basis, but you may see some higher spending in Q1.

Okay. So perhaps looking ahead to '12, towards the middle or the back half of the year, you would expect that SG&A expense to moderate a bit?

Right.

Okay, got you...

To put it in perspective a little bit, the number of personnel that we had in our company at the end of 2011 was identical to the number we had at 2009. There's been significant strengthening in the talent of our organization, significant effort to develop the right kind of incentive plans that drive top line growth, and I think those are working well. So the reward system is there. It's in our compensation expense, and yet, the benefit to that is to push us to a revenue level that will begin to drive nice operating leverage. That being said, there are some strategic investments that we choose to make that are in currently incurred SG&A costs, whether they're to address short-term opportunities or long-term needs. And for that reason, our eye is on managing the percent reduction over time of the SG&A as a percent of revenue. And I think we're well on a -- nice way to achieve that.

Okay, and then just my last question. FUEL CHEM clearly looks to still be battling some headwinds that you pointed out in the prepared remarks. Can you give us a sense of what percentage of your commercial units were online in the quarter? And then also, looks like the margin profile continues to be very favorable despite some of the softness on the top line in that segment. Is that just simply a function of reduced cost share expense, or is there anything fundamentally going on with perhaps a step-up in margins there?

We addressed the margin question. That's just mix related, it's customer-mix related. Not all customers are at the same level, and that depends on volumes and pricing that's negotiated. So it's just mix related. Regarding your question about how many were online and what percentage. Through the fourth quarter, there were a couple of accounts that were off. A couple of them weren't even running their coal plants, and so there was a decline in the number of units that were online. When I look at Q1, some folks are taking an outage. They're moving up their outage schedules just because demand is a bit weak, and that's due to warm weather condition as well as the natural gas fundamentals that we talked about before.

Yes, fundamentally, when electrical generating load requirements are down, that does have an effect on the current need for the FUEL CHEM program. So outages can be taken or load levels reduced to where it might impact us in the short term. Our ability to return and serve those customers when those outages end is still there. And I think we have to also remember that FUEL CHEM is still a largely new market. We don't have a lot of competition. It obviously places greater need when load levels are higher. So we just have to look through the short-term aberrations that these market factors play while continuing to provide additional benefits that the programs offer.

And your next question comes from the line of Lucas Pipes of Brean Murray.

My first question is also in regards to the FUEL CHEM segment, and, I mean, the fuel switching from Central Appalachia to other regions. Could you maybe quantify a little bit what the impact is and the opportunity of fuel switching going forward?

Quantify the impact?

Yes, in terms of revenues, if that's possible.

Well, I don't know that we can reduce that to a number. We obviously apply the FUEL CHEM program to address the needs of coals that are -- create more problems, such as PRB and Illinois Basin coals. So every plant that chooses to convert to those coals is a candidate depending upon how it's operating in that unit. Generally speaking, I think you can -- you should continue to expect that the region of Northern and Central Appalachian coal supply will continue to contract in this country, whereas Illinois Basin and Western coal will continue to steadily expand.

That's helpful...

With that being said, you could have a PRB-burning coal plant that's not operating at such a full load level to create all the same problems that we can provide solutions to. So I think electricity generation levels, as they're returning with stronger economic output, also provide favorable backwind to that marketplace.

Okay, and then just in terms of -- to go back to the APC segment. What other regulations are driving your business right now as given that CSAPR is currently in the courts? Could you walk us through maybe some of the state regulations that are still driving business?

Sure. Well, for example, one of the regulations that the utility industry has some clarity in is currently allocating capital dollars is for what's called the, utility Mercury and Air Toxics Standards rule. This affects units above 25 megawatts, so there's about 1,100 coal-fired plants and about 300 oil-fired plants in the domestic U.S. marketplace that need to comply with that rule. And that addresses particulates, mercury, hydrochloric acid, acid gases, dioxins and furans. And we have R&D programs oriented to develop additional solutions for that. That final rule just issued in mid-December 2011 and has a compliance timeline of about 3 years from the final rule. There's probably going to be some litigation around that, but not so much as you saw with CSAPR. You also see a lot of need to address SO2, SO3 and both utility Mercury Air Toxic Standards Rule and boiler MACT come into play here. So we have programs in place to add to our capabilities in reducing oxides to sulfur. Probably, in terms of market size there's over 50,000 megawatts through 2015 that the EPA would estimate need to comply with these programs, probably calling for equipment solutions on the order of $0.5 billion. Quite a number of competitors in that arena. And even reagents alone that would be fed into those units is a marketplace that through 2015 could easily exceed over $2 billion. So a lot of different companies come into play and addressing that marketplace, and we'll be there as well.

[Operator Instructions] And your next question comes on the line of Jeff Osborne of Stifel, Nicolaus.

I was wondering if you could possibly touch on the Chinese market, in terms of what you think your market share is there and in terms of the outlook?

Well, I think the best way to characterize that is the China environmental controls market is still immature and evolving, very difficult to specify market shares when even market sizing is not often easily ascertained. That being said, you can kind of get your arms around it when you think about all the domestic U.S. market has been sized and grown over decades. China will follow the same pattern as a modern country. But I would put a scale factor of about 3x the size, and I get that from the fact that while we burned, consumed about 1.2 billion tons of coal, let's say, in the United States, they're consuming over 3.5 billion tons and growing. Coal powers about 80% of the Chinese economy. It's 40% worldwide. And so the need for environmental controls on coal-fired plants in all solutions will be a very large market. And I would say, look to our historical past that penetrated U.S. market and recognized that over a number of years, that will probably be 3x larger.

Got you. And then one quick follow-up. I just missed the stock-based compensation for the quarter? I don't know if you could provide that?

I don't think we've provided that, did we?

I don't know that we provided for the quarter. Let me just give it to you real quick. For the quarter, it was $600,000. It compares with 2010 fourth quarter of $500,000. it was up slightly.

Perfect. And that should trend down through 2012 as some of the awards roll over?

That's correct, yes. We're projecting $1.5 million for the stock compensation for all of '12. And last year, for the 2011 period, it's $2.8 million.

[Operator Instructions] Your next question comes from the line of Steven Charest of Divine Capital Markets.

A question on CapEx, you had mentioned maintenance CapEx of about 1% of sales going forward. Do you have an estimate roughly on total CapEx, especially with the idea that you're going to be spending a little bit more effort on expanding the product line or the suite of products in lieu of CSAPR being on hold?

We don't really have much CapEx on the APC side. So the tie in to CSAPR is not a strong tie. Our program related or revenue-related CapEx is really on the FUEL CHEM side, and that's new customer related. We do have the ability to rotate some of our systems around our install base, so it really depends on new customers coming online the FUEL CHEM side. As far as our maintenance CapEx, it's just general IT related, some office spend, but not anything heavy. We're not managing the industrial manufacturing facility or anything of that sort. So it tends to be pretty minimal.

Right. And it looks like it's coming down a little bit in 2011, 2010 and 2011 versus '09. And would it be reasonable to assume that we kind of stay level?

Yes, that's fair.

I would say there's 2 factors. The short-term factor relates to new revenue activity, new account activity with FUEL CHEM, where we either can utilize existing on-hand equipment or we purchase -- and we own the equipment to service those accounts. As opposed to the APC segment, where we do capital projects, and we sell all that. So we don't have a capital expenditure requirement that's borne by Fuel Tech in APC. Now longer term, our TIFI technology is capable of doing a number of beneficial things for customers other than flag control filing. So as we begin to look at ways to apply our TIFI technology through the requirements levied by the utility and Air Toxics Standards rule and so forth to address oxides and sulfur, acid gases, mercury, other pollutants, we may very well be utilizing the same business model, where we own the equipment and we create our revenues through chemical feed. So I would say, they're largely going to track our revenues in the TIFI category.

And there are no further questions at this time. I'd like to turn the call back over to Doug Bailey for concluding remarks.

Okay, thank you, operator. Thanks, everybody, for joining the call this morning. As I reflect on 2011, I look forward to 2012, I see a lot of similarity. We saw regulatory uncertainty in the first half of 2011. I think I told our investors, shareholders that we saw expected robust APC market activity unfolding in the second half of the year, and indeed it did. Now we find ourselves with a short stay on CSAPR. But nothing takes my eye off the ball with the long-term need for increasing environmental controls in the very pollutants that we look to reduce. So I think there's a similar story unfolding for 2012, a nice revenue stream assured in the first half of the year coming from the execution of contracts won, particularly in the second half of 2011, and a full belief that those bookings will only accelerate as we move through the first half of this year into the second half. Regulations get challenged, we get increasing and decreasing clarity on what those final rules will be, but there's no question over the next several years that our customers face significant investment requirements. And Fuel Tech is the company that's got many low-cost solutions to providing those compliance needs. We're not just about Air Pollution Control, we're also about generating clean, efficient energy. So energy-efficiency solutions come about by well-designed FUEL CHEM programs, that are targeted to our customer needs, will continue to be at work. I'm very also encouraged by the prospect of growth in the global markets. We've made an important investment overseas in China. I think you're beginning to see the early results of that positioning, and those doors are only going to begin to open. To be sure, we'll face a lot of competition over there. We'll be challenged, but we bring great technology, a very motivated organization and ability to deliver on over 25-year reputation for excellence. I'm very proud of our organization and what they accomplished in 2011. And I think they're going to delight our shareholders in what they can accomplish in 2012. So with that, I thank everybody for being on the call this morning, and we wish you all the best. Thanks, operator.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.