Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Fuel Tech, Inc. Earnings Conference Call. My name is Crystal, and I will be your operator for today. [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.

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 our prepared remarks, we will open the call for questions. Before turning things over to Dave, I'd 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 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'd now like to turn the call over to Dave Collins.

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 led by our APC segment, and it's focused primarily on foreign markets. Consistent with prior discussions, our growth in foreign APC revenues is due to our contract in Chile and our continued 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 U.S. domestic revenues recognized. This higher gross margin profile of our APC segment business…

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, 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 currently predictable in margin. On a segment basis, APC revenues rose as projects progressed better than planned, while gross margin improved due to a higher concentration of U.S. 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-powered power plants. However, FUEL CHEM remains a trusted partner to its clients across the U.S., 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 U.S. while pursuing domestic opportunities, driven by state-level consent decree and other mandates. Through the first 9 months of 2013, our U.S. 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 revenues. 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…

[Operator Instructions] Our first question will come from the line of John Quealy with Canaccord Genuity.

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.

And Dave, do you think that's even throughout Q1 and Q2? Or how does that sort of ramp down in '14?

I'd say, I would model it evenly throughout the first 2 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's spread across a number of projects. One is the Chile project. We're through 2 of the units now finished the installation. And so when you look back at project estimates, we were able to revise those. We're also gaining some knowledge and know-how based on the first couple of units, which we'll leverage throughout the remaining projects. So that was a portion of it. We also were able to combine some projects here in the U.S. on a buying perspective as well as do some engineering enhancements to take some costs out. So it's across a number of projects but delivered some results in the quarter or so.

Okay. And then can you talk about the pipeline of opportunity, where you cut backlog into that sort of 30-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 40s, or do we bounce around the 30s here for the next little bit?

Sure, John. We worked 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're 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 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's a long sales cycle. So it's very difficult to predict on a quarter-by-quarter what we'll 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's not driven by a clear federal regulatory driver. When and if that comes, I think it'll only provide the clarity and 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've done a great job in China, but as we go to other areas, what else do you need to do to their operating platform to be able to capture that?

Sure. Good question. We've 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've 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 a 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 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's a freestanding, wholly-owned enterprise that we operate today.

Our next question comes from the line of Steve Shaw with Sidoti & Company. Steve Shaw - Sidoti & Company, LLC: Hey, Dave, did you break out the revenue times for the Chilean projects in the quarter?

I did not break out the revenue in the quarter. It's going to be around $5 million. I don't have that in front of me. I can get that for 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. The Chile was $5.4 million in the quarter.

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

Our next question comes from the line of Dan Mannes with Avondale.

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

Dan, 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, and 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 you know, some generation is improving. So we have a number of new projects that we proposed, we've not yet won. So a new customer acquisition remains a concerted effort, but the market makes that sales cycle continue to be long. But nevertheless, we've got the technology, and it's 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's driving that higher usage other than maybe a little bit 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's been a hard-fought war to win the new business, and we'll 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 U.S., so it was a foreign customer. It was one, so we have had a long-standing relationship with them and thought it was in our best interest mutually to agree to the settlement so.

Agree to the settlement. So is it bad debt or is it a revision on the -- meaning was it sort of a revision to a contract?

No, 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's not a lost account.

It's 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 like kind of different.

That's correct.

Yes, there was a contractual adjustment based upon a multiyear effort with that customer to achieve a certain operating result. And we provided an adjustment in accordance with that. [Audio Gap] of the account or anything like that.

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

A lot of it is in the U.S. and it's all project oriented. 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's just a buildup. A lot of it's unbilled. So it's a combination of work and process as well as payment status.

Our next question comes from the line of Steven Charest with Divine Capital Markets.

If I could turn this back to China real quickly. The third plan of meeting's over, and there's been a lot of lip service paid towards 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's 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 being 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, a city of 11 million people, had to completely shut down. Schools, businesses, you couldn't see beyond 16 feet. During the day, cars have driven with headlights on. And it's 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 and polluted environment. I mean, you're talking about, particularly PM 2.5 levels approaching 1,000, where under 20 is considered healthy. So I think awareness of the individual resident of the city to high-level Chinese officials is such that they're taking this far more seriously because it's not getting better. That means, I think there's a big work program for many companies, us included, to help that country address this serious need. We've all seen the pictures over there. It's not good. But that's what we're there to do. So that's 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 will be a large marketplace over the next several years to come. But quite frankly, I see the China market is where our greatest growth will be derived. This and I've had for a number of years.

Our next question comes from the line of 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 in? How could -- maybe you think we could see revenues from there?

Sure. One of the things we -- there are 2 aspects that we're trying to create for the company. One is the greater mix of recurring revenues that give us a more of a fly deal 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 timeframe, 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 and go back in and we try again. So I would say it's 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 and Air Toxic Standards rules that are in place that require compliance in the 2015-2016 timeframe are a big driver of opportunity for us. And there we're pursuing both organic development and licensing opportunity and possibilities to provide an approach that differentiates Fuel Tech from others in this marketplace. So stay tuned on all this. It's probably been the biggest percentage of our active spend. But it's also a longer timeframe in development. We're also looking at enhancing the capabilities of our SNCR offerings. As you all know, SNCR is a moderate NOx reduction technology, low capital cost, has a moderate operating cost. We have a trial going as I speak to prove out the capability, of enhancing our NOx reduction capabilities that might give renewed product life cycle to what has been a proven but older technology that which we've achieved a 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 in single layers of catalyst, that could offer advanced SCR capabilities, very competitive with SCR. They don't need 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. And then just going forward, as I think you alluded to a greater percentage of your APC's revenues coming from the international market, 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 margins can overall still stay flat?

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

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 margins. So we can see margins from the low 20s to the high 50s 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 it. 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're bidding on today, the average of all that was probably indicative of what -- on the good model. But again, I will caution you that 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. Then having a broader technology portfolio positions us to lend more -- committing ourselves to the international markets gives us what I'd like to call regulatory diversification. So here in the U.S., where the regulatory environment is small, [ph] we have drivers in other countries that enable us to make bids and successfully complete those projects that we win.

Our next question comes from the line of Walt Liptak with Global Hunter Securities.

I wanted -- you talked a lot about China, and I apologize for making the conversation go on longer. But you mentioned that you're looking for something to happen at the national level. So what data point is it that you're looking for? Obviously, there's 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 is not good enough to install a system that's 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 directions set at the provincial level, and I believe that people will be held accountable to operate facilities that are not in compliance with the regulatory mandates. I believe we could see possibly in certain technologies mandated to certain industries. I just think you can't live in a situation that's got -- that has become this bad without the population demanding the 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's 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. They may enact the regulations in what would have been the 10th Five-Year Plan. They didn't meet those goals in 5 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 their 12th Five-Year Plan, but over the course of 5 to 10 years. They got the capital, they've got the wherewithal, and I think they're going to have the outcry of people to require these regulations to be complied with.

Right, yes, that political will. One of the other questions was on China order activity and if you've seen better coal activity. I'm not sure if I heard the answer to that.

Yes, we are seeing an uptick in the coal activity. It's continuing to be strong. So we don't see -- the 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 show up in margins on project now?

You know what, 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've trended over the past 2 years in that mid-30% range. It can vary by project. But we've been real pleased with our margin profile in China to date.

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

We've quantified certain segments that we are interested in addressing. We've 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 -- well, this is one example, the market size that we believe exists for SNCR. Yes, we've tried to do that. Our ULTRA technology, we've 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. And it's not just for the utility industry either.

Our next question comes from the line of Peter Brown.

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

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

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

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

Yes.

Yes. I'm there on a quarterly basis. We have our Executive Vice President of Worldwide Operations in China currently. He's there for a 2-week stay. I would guess he's there every other month, so there is -- and then we have...

More than that.

Yes, there's a consistent stream of engineers from the U.S. traveling to China to support specific projects and installations.

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

Right. And are you -- is the head person there a Chinese-American, or an American, or a Chinese person?

He's 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 country, primarily the U.S. We have not been active in the China M&A market. Everything we've done to date has been internally grown. I rule that possibility out, however, as our business base grows.

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

Not that I'm aware of.

It's nice to see a turn on your company. And hopefully when the Chilean contract ends, you can maintain this rate of growth.

Thank you. It's our goal.

[Operator Instructions] Our next question comes from the line of Tom Harenburg with Carl M. Hennig, Inc.

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've -- we had 2 different programs, and we've run through both of those, so we're not active on any stock repurchase programs. And there's no money set aside for those at the current time.

Okay. Your last program ended in 2012, and is that correct?

That's correct.

That's correct.

Our next question comes from the line of 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? Or where does pricing stand right now?

I don't think there's 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 attracted to us, we may sharpen our pencil a bit. And quite frankly, we were the successful bidder of the Chilean project, and it's shown to be not only a significant contributor to our financial results, but through good management, we've achieved a better margin. And yet, a lot of our projects can be sold at traditional margins because our reputation perceives us as the right choice. So we're -- you do you see margin variation by technology.

Right, 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're 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's pretty conservative in it's 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 a 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.

With no other questions in the queue, I would now turn the call 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.