Good day, ladies and gentlemen, and welcome to the Quarter One 2013 Fuel Tech Inc. Earnings Conference Call. My name is Julianne, and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Devin Sullivan, Senior Vice President of The Equity Group. Please proceed, sir.

Thank you, Julianne. Good morning, and thank you, everyone for turning us for Fuel Tech's 2013 first quarter financial results conference call. Yesterday after the close, we issued our release, a copy of which is available at our website, www.ftek.com. Speakers on today's call will be a Doug Bailey, Chairman, President and Chief Executive Officer; and Dave Collins, Senior Vice President and Chief Financial Officer. After 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 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, the call is being broadcast over the Internet and can be accessed at 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. Consolidated revenues for the first quarter were $22.5 million, a year-over-year decline of 11%. As we discussed last quarter, 2012 was a slow year for domestic air pollution control bookings, which led to lower year-end domestic backlog and revenues in Q1 of 2013. On the other hand, quarterly foreign revenues for Q1 were up threefold from last year to $9.6 million and represented 43% of Q1 2013 revenues. Consolidated gross margin for the first quarter was 41.9%, down from 47.6% in the prior year. The decline in consolidated gross margin is attributable to a higher concentration of foreign revenues, which carry a lower overall gross margin profile, principally our Chile project. We expect to see the reduced gross margin continue on a comparatively quarter basis through 2013 as we execute this large project. Our selling, general and administrative expense for the current quarter decreased by $536,000, while our research and development cost increased by $427,000 from Q1 of 2012. The decline in SG&A is associated, with, among other things, lower employee and sales-related costs, while our increase in research and development costs is associated with continued funding of new product development initiatives. Consolidated net loss for the current quarter was $21,000, essentially breakeven, down from a profit of $1.5 million or $0.06 per share in Q1 of 2012. Our adjusted EBITDA for Q1 of 2013 was $1 million. Now let's move on to a more in-depth discussion of our business segments. The APC segment reported quarterly revenues of $12.9 million, down 18% from the prior year. While we have experienced slower APC revenue in the first quarter, we are looking for a strong second half of 2013, as we're seeing our domestic bid and order activity…

Good morning, everyone and thank you for joining us today. Results for Q1 2013 must be viewed within the context of a dramatically different year-over-year regulatory atmosphere with respect to our domestic APC sales. In last year's first quarter, we were the beneficiary of a more robust purchasing environment that developed during the second half of 2011. The backlog that we built in 2011, driven almost entirely by federal mandate, converted into revenue at an impressive pace during the first 2 quarters of 2012. As you all are aware, when the Cross-State Air Pollution Rule was stayed at the end of December 2011, the urgency within our domestic markets all but disappeared. This rule was, ultimately, vacated in August 2012. However, we were already hard at work building our international business as a part of a conscious strategy to pursue long-term growth and what I'd like to refer to as the creation of a geographic regulatory diversification. As a result, our team produced a record 2012 APC bookings of $72.8 million, nearly 90% of which were generated in Latin America, China and Europe. Larger complex projects, like our $36.6 million Chilean job, are now being executed and will continue well into it 2014. With respect to our current domestic APC end markets, I'm encouraged by the strengthening of our bid and proposal activity. During the first quarter of 2013, we announced contract awards with a value of approximately $8.9 million. And as a -- subsequent to quarter end, we announced additional APC orders valued at $7.6 million. We do anticipate additional wins for our traditional SNCR capabilities in the near-term and recording some substantial projects that would utilize our catalyst technologies. You may recall that on our last earnings call, I noted that we're seeing potential projects that are larger…

[Operator Instructions] Your first question comes from the line of John Quealy, Canaccord.

So first on the outlook. Dave, I think you talked about APC picking up especially in the -- I think the June period on the Latin American contract business. So basically, right as we stand right now, so a couple of questions, for about $52 million-plus in backlog at this stage for APC, can you comment how much you think is going to be incurred and recognized in '13? Number two, for the June quarter, is that a $3 million or $4 million spike in Latin America? And then the third question, Dave, is the margins on APC. Better than Q4, but seems like a level that we actually could compress a little bit more. So those are my first 3 questions.

Okay. So first on the amount of revenue on the Chilean project in Q2. We could see as much as 20% of the overall project recognized in Q2 and that is resulting from the installation work that's being done, as well as the shipment of the 2 additional units. That will then tail off, marginally, in Q3 and Q4. We are going to roll some dollars over to 2014, as mentioned. So that's what -- that's how that spreads. Regarding the margin, we could definitely see the margin compression, especially when you see more of the Chile product revenue come through in the next quarter, so you will likely see the margin compression there. Our blended margin and our backlog at end of the quarter is around 26%. So that will roll out and then, lastly, if you could remind me on the third question.

The amount of backlog, in total, that's going to hit in '13.

So of the $52 million, that's the $44 million at quarter end plus the additional $7 million we will recognize in excess of $40 million of that prior to year end.

Yes. Yes, okay. And then on the regulatory environment, your comments about bidding activity. Can you talk about a little bit more, geographic split? Domestic, international? It is a very, very power market currently. As you folks know with -- I'd say Western Europe and North America under just demand strain for generation. And certainly, in the U.S., we've got some spark spread issues. So if you could give us a little bit more context about the relative strengths and order flow.

Sure. Without a clear EPA rule in place, as I've said before, what's driving business today are consent decree agreements between power generators, EPA, Department of Justice, permits. And actually, this has resulted in quite a bit of a domestic bidding activity. As I also said, some of this is rather lumpy and you should expect to see that kind of activity. It's quite a bit different than when we had a sudden implementation of a rule that caused a large number of utilities to very quickly deploy our traditional SNCR systems. Now what you're seeing is conscious larger programs to comply with these consent decrees and they are geographically somewhat dispersed. You're also seeing the Regional Haze Program and the Boiler MACT rule as drivers today. Boiler MACT was finalized in December 2012, requires compliance through February 2016. So this is going to affect reduction of particulates, mercury, hydrogen chloride, tighter CO requirements. So that's going to lead to new opportunities for burner tuning, our SNCR technology will open up due to the CO requirement and a compliance to those existing site permits. In the Industrial segment, opportunities for our catalyst technology and SCR services to maximize NOx reduction exist. But the western states have considerable activity relative to the Regional Haze Program. And we expect there to be sufficient drivers to increase our revenue activity even without a clear substitute rule for CSAPR. So as you see our further announcements, those will be the kinds of things that drive our business in the United States.

And then a last one, in China, can you talk about that opportunity? Obviously, there has been a lot of focus on air pollution, et cetera. Can you talk about the relative pipeline there, competitive positioning, I imagine, the environment from a competitive perspective is very difficult and perhaps, a little bit more so, given some of the macro drivers there.

Sure. Well, the environment is pretty robust over there. You see our ULTRA technology being widely adopted and there's still many, many units that are eligible to deploy ULTRA. We have a leadership position in that, but we're not without competition. Some of those are small upstarts, as this market is relatively new. There were no substantial entrenched competitors before and we have a great reputation for performance. Margins are moderated in China compared to our -- let's say, our domestic SNCR-type installations. But nevertheless, we're anticipating a very healthy, continued bid win and quotation activity. We're also seeing a fairly active market for SNCR and we're also witnessing demand for flue gas -- FGC applications. And so our Flue Gas Conditioning market is surprisingly picking up, but I think you should anticipate to see the bulk of our sales activity to continue along the lines of ULTRA, SNCR and the traditional things we've sold over there.

Your next question comes from the line of Dan Mannes, Avondale Partners.

A couple of questions. First on the FUEL CHEM segment. Flat year-over-year, did -- are you starting to feel any benefit? We did actually saw -- we did actually see coal usage improve year-over-year given -- I'll say, seasonality. But we had a real winter this year and we didn't last year. And we'll see gas prices tick up little bit. So we're seeing a little bit better coal utilization. Did you see that at all in your first quarter? And do you expect sort of a normal seasonal downtick to go in the second quarter?

We didn't see it in the first quarter, Dan. But to your point, there is increased interest both from customers that we've done business with before, as well as others. So there is some, I would say, some initial marketplace.

Okay. And then, secondly, as it relates to your APC business, your work capital did tick up a chunk and it looked like your cash position ticked down some, can you maybe give us an idea, is that mostly to Chile or is that to China? So where is that AR hanging out? Because it looked like a pretty big spike up in AR this quarter.

Yes, we'd collected quite a bit of cash just after the quarter closed, first couple of weeks. So it's just -- it's timing in nature. A fair amount of that is Chile-related. We do have a couple of other large projects as well that we've collected on also.

So should we -- but we should anticipate as you do more and more of these larger, more complex projects that we may see your working capital move around a little bit more?

That's correct. Right.

Yes. As you think about the capitalization of the business and then the amount of cash flow that's free, does that impact your thinking at all as it relates to the $25 million total of cash, give or take? Or would we use $25 million?

Yes. It's a good question. Not really, we still have a lot of credit for -- $15 million in the U.S, we have a $10 million accordion feature on that. We haven't extended that at all. And we watch the projects that we have coming down in the pipeline. We have to provide bonds against those. And in some cases, letters of credit against those. So we do watch that pretty carefully, but we're comfortable with the capital base that we have.

And Dan, I think as you do more work internationally and you are executing larger projects, it's normal to expect to see a little more of fluctuation in the timing of collections. We keep our eye on that pretty closely and, as Dave said, our collection, subsequent quarter end, turned our cash position to a stronger position. Sitting here today, we don't have any concerns about adequate cash reserves to manage these projects.

Got it. And then just closing out. As you think about the year, it does sound like, excluding sort of the big payment -- the big revenue realization from Chile in the second quarter. It sounds like the year's a little bit more back-end loaded. And then secondly, it sounds like maybe the new products that we've been talking about for a while, sound like there more 2H as well. Is that the right way to think about it? Or is there a possibility things could be coming a little bit sooner?

Yes, I definitely think the year-end is necessarily back-end weighted as it relates to APC, simply because of the way the regulatory environment evolved and the way bookings evolved. I think it was absolutely extraordinary what the company did, in light of significant change in the United States. And as I noted, 90% of our bookings in 2012 came from the international markets. We had an enormous backlog, domestically, in the U.S. at the end of 2011. We realized those revenues through 2012, but our bookings were, I believe, only $7.7 million, domestically, in APC. So we replaced that, and more, with our international activity. So we actually -- consciously, we're carrying out that plan back in 2010, 2011, as well into 2012, did we realize the benefit of it. I think you do learn things as you enter new markets. Certainly, Chile was a new market for us. We were a successful bidder against well-established companies. And we have seen the opportunity for additional bidding down there. So again, these projects are larger, a little more complicated. They don't carry the same margin as our traditional work, but they are very accretive to what we do and the value of that is, we have been able to build the infrastructure and skill sets to carry out more work on a global basis. The transformation of the talent of organization that these projects enable us to achieve are rather extraordinary to position us to bid for additional work in all markets, including the domestic market. So we're very satisfied that we accomplished what we did in 2012. And as you just carry out the execution of those programs in 2013, the logic of the revenue and the margins and changes in levels of activity should be well apparent.

Your next question comes from the line of Steve Shaw, Sidoti and Co. Steve Shaw - Sidoti & Company, LLC: I wanted some color on the R&D. One, if we can expect this quarter's number to sort of be the normal run rate throughout the year? And then two, how close we might be to some new chemicals or products?

You want to take that? On that spending and I'll...

Sure. Yes, spending. This was a spike in the quarter. We had a number of initiatives under beta quarter so I wouldn't expect that level of spending continue -- drop down a bit. So...

And relative to the program rollout, they really vary in timeframe. Probably the area that we've spent the most money on doesn't necessarily have a current driver, but we know, long-term, the drivers are there. So for example, to extend our TIFI chemical injection strategy to applications other than filing and sliding, and then use it for removal of flukes. For example, we've successfully demonstrated that with SO3 in Mexico and elsewhere. We believe we have opportunities to mitigate SO2, but there's not a current driver for that. That will be a long-term program at which we'll be ready to participate. On the other hand, there are drivers for acid gases, particularly hydrogen chloride. I mentioned earlier that the Boiler MACT rule that was finalized at year-end 2012 requires compliance. We're also seeing the opportunity to create economic chemical programs that aren't just going to be utilized because there's a regulatory requirement. So if you can remove corrosive acid gases to avoid either the deterioration of, or the expenditure of very large capital expenditures on the back end, that's valuable. So if anything, I would think our program for mitigating the generation of hydrogen chloride as corrosive gases has the earliest opportunities. When are those? Probably, at best, the rollout is late this year, could be 2014. But we have a program of -- that's really diversified projects that, over time, will yield these new opportunities. We've also been conducting tests to enhance our traditional SNCR and NOx reduction capabilities. And if you think about that, there's 2 benefits: One, you can go back to previous installations and improve their performance without applying a different technology; two, you can make your technology more competitive versus those that require greater capital expenditures and enjoy a more competitive position. So enhancements to existing capabilities like SNCR, new chemical programs that either provide an economic benefit or meet a regulatory requirement that utilize our FUEL CHEM business model that, therefore, give us recurring revenues are the principal objectives of our R&D program. So like any development, if you don't make the investments, you're not competitively positioned to enjoy the benefits. So that's why we consciously began that some time ago and will continue. I think our guidance for you is to look to us to spend about 3% of our revenues overall. Every one of these projects has a keen eye towards meriting investment. And many of them require investments related to commercial testing before they can be marketed. So we're on top of an interesting portfolio of opportunities.

[Operator Instructions] Your next question comes from Lucas Pipes, Brean Capital.

Most of my questions, half have been asked and answered. But I wanted to follow up a little bit more about the bookings. You had a really great year in 2013, shifting the portfolio towards the international side. Now the year-to-date run rate appears to be a little bit lower than total last year levels. What should we expect in terms of bookings for the remainder of the year? Do you think you can replicate 2013 levels?

The answer to that is, yes, I believe we can. We know based upon our recent bidding and contract negotiating activities that we should be the beneficiary of additional awards. I do believe that they will continue to be, as I said, a little lumpy. Something that we might think would be pulled into a quarter, might fall into the beginning of another quarter, because larger projects require longer bid analysis and negotiations. And because of their size, it's sort of a binary outcome on the large project, you either get it or you don't. So actually forecasting the total bookings that you're anticipating to realize is difficult, at best. That being said, knowing that the activity that we have, on a global basis, I feel good that we can continue to demonstrate growth. Why? We can see the activity level. We know that the needs, on a global basis, for environmental solutions as ever-growing and three, we are well-positioned to meet those needs. So I have a good feeling for the long-term prospects for our business. And I think 2013 should yield a fine result in the overall bookings. But it will be lumpy on a quarter-to-quarter basis. It makes it harder for you to forecast but I think you certainly appreciate why the results end up being what they are.

No, I completely agree with that. And maybe to circle back to the margin fronts again. For the full year 2013, what kind of margin level should we target?

Let me just take a general answer to that for you, Lucas, and then Dave could add some specifics. We know that a certain level of revenue that come from our Chilean job carry a moderate margin and that will temper overall traditional margins. We know that the domestic wins that we're anticipating carry higher margins. So when those are executed, they will elevate the average margin for the segment. So they range, we can see margins on projects range from 20% to 50%. FUEL CHEM has been evidencing steady margin maintenance and I think it carries an exceptional margin, which means that the customers who utilize the program see -- realize benefit that has great value. In reality, the value that they receive economically far exceeds the cost of the program. So we don't see any meaningful change to the margins that we see in that business. But APC will vary by project and by geography.

And Lucas, we've -- I've got APC in at about 30% for the year on a blended margin, and then the FUEL CHEM is running at levels that you're seeing right now, at 48% to 52% range. So you are looking at a blended margin of mid-30s for this year. That depends on the mix. So if you see more of the domestic orders come through, then that can certainly change.

Any other questions, operator?

We have no further questions. I would now like to turn the call over to Doug Bailey for closing remarks.

Well, thank you for your questions and thank you for participating and listening on today's call, and your continued interest in Fuel Tech. We are excited, we are optimistic about our future and we do look forward to keeping you apprised of our further progress. Thank you, everybody. Have a great day.

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