Greetings, and welcome to the Fuel Tech 2017 Fourth Quarter and Year-End Financial Results Conference Call. At this time, all participants are in a listen-only mode. And a brief question-and-answer session will follow the formal presentation. [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 results, which is available at the company's Web site, 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 the 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. These could cause Fuel Tech's 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 eight years of participation with the Fuel Tech team as CFO. Today, we have two 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 three 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…

Thanks, Vince, and good morning everyone. Revenue for the fourth quarter of 2017 totaled $13.4 million reflecting a $4.5 million 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 in a non-cash 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 non-cash 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…

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

Thank you. [Operator Instructions] Our first question comes from the line of Pete Enderlin with MAZ Partners. Please go ahead with your questions.

Thank you. Good morning, Vince and Jim.

Hey, good morning, Pete. How are you today?

Good. Congratulations on all the good things that are happening.

Thank you very much. Appreciate it.

A lot to absorb at everything that you said; your quarterly revenues troughed in the first quarter of last year, and those were down about 50% from a year earlier. Now you've 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 it obviously depends a lot on what kind of conversion of orders you get to revenues and also obviously what kind of revenues do 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 good question. It's won on a quarter-by-quarter basis. It's always been a little bit challenging for us, obviously, to answer. And you raised the primary point, and that is if the timing of conversion on the APC projects that it's 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 four quarters in a manner that we just can't predict, okay. I hate to be -- to not as be direct in answering your question, but we think revenues are going to increase on the 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 shakeout 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. Does that help a little bit, Pete?

Thank you. 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. 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 it is sort of like 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 the mix and match to them, whatever they need you guys can provide. Is that overdoing it?

Yes, Pete, excellent question. As we've looked 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. And that isn't…

I was going to say it's 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. And 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 in 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, and 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 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 recurring 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.

Okay, thank you. I'll get back in the queue. Thanks.

Thanks, Pete.

Thank you. [Operator Instructions] Our next questions come from the line of George Gaspar who is a private investor. Please go ahead with your questions.

Yes, thank you, good morning.

Hi, George.

Very nice report, thank you. 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 just 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, 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 the standpoint of trying to create an alternate application away from ammonia?

Ammonia is obviously -- it's a great concern, as you note. And it's an issue that we'll look to investigate. The food and beverage marketplace 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 and 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. You mentioned trying to broaden your penetration more into the industrial areas 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 a 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, and since we actually opened up our office in Beijing back in 2007, and just our landscape of opportunity within that area is -- it's just shrinking, as 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.

All right, okay. And just one last comment on your discussion on India on 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 year-and-a-half, probably close to two 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 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 year-and-a-half in the company, and 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.

Thank you, George.

Thank you. And our next are follow-ups from Peter Enderlin with MAZ Partners. Please go ahead with your questions.

Thank you. 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 contribute to that strong show?

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. It just drops right down at the gross margin line. So that's one comment. The second comment is it's really year-over-year mix of products between our technologies as well as geography as well.

Okay.

Yes, we do have -- Pete, we had some timing impacts on quarter on 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 are 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, 90 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 the ones you've already made?

Yes, right now, Pete, I would say it just going to be just the play out or the call it the full-year year-on-year impacts of what we have done already. And to answer your question, yes, we would expect to see a full-year decline 2018 versus 2017 in SG&A just due to the realization of call it the full impact of the work we have 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 the run rate in 2018 that's going to be a little bit less than the 4.9 million that we realized in Q4 without being specific. But on overall basis, -- again it will be less than the 4.9 million again without being specific at this point. Full year year-on-year, it will be a reduction.

That gives us a good idea. I have sort of a semantic question. In your press release and looking at the sort of long-term strategy of the company, you talked 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 and existing technologies? And when you refer to potential growth markets, is that all the really new stuff using your core base of technology but good things like the NaO2 and so and maybe others? Is it sort of a semantic difference when you say that in the press release?

Pete, I think you actually just described it pretty well. The gross margin side is what we are looking to do on the water side obviously. That's what we are targeting for the future of the company. As we have been saying over this past year -- year to two years, we can't specifically sit here and rely on our base business segments to continue to provide us with revenue run rates long into the future. That's just not realistic. And so, we finally had to take steps to put ourselves into a position to get involved and active in some of the other market opportunities. And that's exactly what we are 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.

Well, would there be some other new potential growth opportunities? I mean we have had some discussion about the petrochemical industry or 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 it yet?

As it relates to the water application specifically?

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…

Okay.

-- from that perspective. We are using our core technologies.

Right, and certainly water is a big enough potential by itself, but…

It is. And that's where we are 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 or -- not much at this point, or would you want to wait until we have more sustained profitability?

I think, Peter, your second comment is spot on, Pete. We have gone through obviously a 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 are consistently generating positive cash flow, and we are taking steps to move into new market areas. Once we get to that point in time, Pete, I think we will have a better landscape of opportunity to do a variety of different things.

Okay, great. Well, that's very helpful. Thanks again, and congratulations.

Thank you, Pete.

Thank you. This concludes today's question-and-answer session. I would like to turn the floor back to management for closing comments.

Thank you, Operator. I would 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 turn back to profitability; very pleased to be able to discuss profitability with our shareholders, and we look forward to continuous improvement 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.