Greetings, and welcome to Fuel Tech 2018 Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Devin Sullivan, SVP of The Equity Group.

Thank you, Dana. Good morning, everyone and thank you for joining us today for Fuel Tech's 2018 third quarter financial results conference call. Yesterday, after the close, we issued a release, a copy of which is available at the company's website www.ftek.com. The speakers on today's call will be Vince Arnone, Chairman, President, and Chief Executive Officer; and Jim Pach, the Company's Principal Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors. Before turning things over to Vince, I'd like to remind everyone 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 which 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 I want to thank everyone for joining us on the call today. I am here today with Jim Pach, our Principal Financial Officer and Controller. We are very pleased to have returned to operating profitability in the third quarter. Revenues rose nearly 19% from prior year’s third quarter, reflecting higher contributions from both our APC and FUEL CHEM business segments. SG&A declined by approximately $900,000 or greater than 17% from the prior year, reflecting the continued positive impact of the cost containment initiatives that we have executed over these past three years. We reported $1.1 million in operating profit as compared to a loss of just under $200,000 in last year's third quarter and generated adjusted EBITDA of 1.3 million. Our near term business activity remains promising. We ended the third quarter with a strong backlog in excess of 21 million and continue to pursue new contract awards of between 15 million to 20 million that we hope can be closed by the end of the current fourth quarter or early in 2019. Our outlook for the full year 2018 continues to remain positive. The primary business highlights since our last earnings conference call are as follows. First, for our FUEL CHEM business segment. As discussed on last quarter's call, early in the third quarter, we added a new coal fired unit at an existing customer in the Midwestern US. This was the first incremental coal fired unit that we added to our customer base in about four years. We fed chemical at this new unit for almost the entire third quarter and it generated incremental quarterly revenue of approximately $500,000 at our historic FUEL CHEM gross margin of approximately 50%. We are pleased with this performance, however, just like many of our coal…

Thanks, Vince and good morning, everyone. Revenues for the third quarter of 2018 totaled 16.1 million, reflecting a 2.1 million revenue increase for APC and a 439,000 increase at FUEL CHEM as compared to last year's third quarter. APC backlog to revenue conversion remained strong through the third quarter. Our September 30, 2018 backlog of 21.3 million rose by 6.9 million from June 30. We announced 18 million of new orders in the third quarter and are pursuing additional opportunities, which we hope to close by year end. Gross margin declined to 33.7% from 37.3% in Q3, 2017 due to the revenue mix between APC and FUEL CHEM and the impact of projects in foreign geographies. APC gross margin was 2.8 million or 25.4% as compared to 2.6 million or 29.7% in the third quarter of 2017. FUEL CHEM’s segment gross margin was 2.6 million or 51.1% as compared to 2.4 million or 51.3% for the third quarter of 2017. For the full year 2018, we expect the blended APC and FUEL CHEM gross margin of between 35% and 40%. Selling, general and administrative expenses continued their downward trend, coming in at 4.1 million or 25.5% of revenues from 5 million or 36.7% of revenues in last year's third quarter. On a sequential basis, SG&A has declined from 4.8 million in Q2 2018 and 4.9 million in Q1 2018. On a year-to-date basis, SG&A declined by 2.3 million, while revenues have increased by 8.9 million. For the full year 2018, we expect SG&A to range between 17.5 million and 18.5 million. R&D expenses were 265,000 in third quarter of 2018, up about 50,000 from the prior year’s quarter. We continue to expect that R&D spending in 2018 will increase slightly from our 2017 spending levels driven in large part by…

Thank you, Jim. Operator, I would now like to open up the call for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Pete Enderlin from MAZ Partners.

Congratulations on the solid operating progress.

Thank you very much. It's been a lot of hard work as you well know. We're very pleased to finally come to this operating performance and we expect more in the future.

Right. The press release says, you announced 22 million of new orders in the APC segment. But you just mentioned that you did 18 million of new orders in the third quarter and I think if I remember 12 million in the first half, so if the arithmetic is correct, it does not mean you've actually gotten about 30 million in orders, and does that also then imply that there are a number of orders that you haven't actually announced yet or what am I missing?

Well, so the quote says we have announced 22.3 million in new awards through -- in 2018. So it's not a $30 million number. We have 22 million.

All right, but you just said 18 in the third quarter I think and…

The 18 is included in the 22.

Right. But if you have 18 in the third quarter, 6 million in the first and 6 million in the second, that's adding three quarters to get 30 million?

Pete, let us check the numbers on that, while we continue if you don't mind.

And the basic question is, are there some orders that you've actually included in backlog that you have not actually announced or would you? I mean, is that to find a distinction?

That would be, I would say, to find of a distinction. We’ll verify the numbers, but typically when we put out a press release on contract awards, it includes everything that we looked in-house up until the date of that particular press release. And then we wouldn't do another press release until we typically have another 2 million of order in hand. That’s sort of our norm in terms of how we've operated regarding issuing press releases for new business. So, yeah, the distinction would be a little bit too fine, but we’ll verify the numbers.

Okay. And then the gross margin in APC segment was down more than 4 points and you mentioned mix, and -- product mix and geographical mix, just within the APC segment. So could you elaborate on that a little more? I mean which one was more significant impact?

I would say, it's actually both, Pete in probably about equal. Generally speaking, our margins from our foreign geographies are a little bit less than what we realized in the US. So we had the impact of that coming through in the quarter. And then for the US project business, we always have a mix of business that comes through at any given point in time as we execute on a project, in particular in the third quarter, we executed on some, what I would call, some incremental change order related work on a specific project that we did for a customer and we did that incremental work at a little bit of a lower gross margin. So those two items really impacted the APC gross margin for the quarter.

And accounts receivable were up quite a bit, you mentioned sort of timing of invoices and all that, but is there any issue with the quality of any of those receivables?

As of right now, no. We do have a little bit of a reserve in China because those tend to be slow to pay receivable, but in the US, we just had a bunch of timing that had happened at the end of the third quarter where we had executed on a bunch of projects and reached several milestones. So I'm not concerned about collectability. We've kept our reserve at the same level it's been in prior quarters and that's largely China related.

Right. And to just add something additional to that, we have stated that before the end of this year, calendar year 2018, we do expect a nice uptick in our cash balance at the end of the year and that's going to be specifically related to the increase in AR that you're seeing on the balance sheet today as we expect collections here before the -- where we end the year that relates to specifically milestone billing timing on projects we have in progress.

Well, thanks again and congratulations on the good results.

Pete, one more thing. Jim did take a look at what we've announced thus far and it looks as though we had announced 4 million back in February of this year and we didn’t announce any incremental orders in Q2 and then we announced the additional orders in -- the 18 million in Q3 for a total of 22 million for the year. So we just –

That was basically a sort of a narrative that didn’t necessarily include everything that you had booked at that time. Is that fair?

We'd have to check back on the narrative, Pete, but we booked 18, 9 million in Q3 and then 4 million prior to that.

Well, that's a great booking in the third quarter.

It sure is.

You're thinking that there's a good chance to book another, somewhere between 15 and 20 in the fourth quarter, right?

We're following contract awards to that amount. The timing could be end of this year or early in Q1 of next year, so but we have a nice backlog of projects that we're actually following from a contract award perspective and we're hoping that we get our share.

Our next question comes from the line of [indiscernible]

If natural gas is trading up towards $4, if that continues, we get a cold winter and trade is up in the $4, $5 range, I mean would you anticipate some fuel switching from some of your customers benefiting the FUEL CHEM segment.

That could be the case, Bill, but what we’ll likely see is perhaps a favorable impact on the dispatch of those coal units as they're likely to be a little more financially attractive than versus natural gas, which could have a nice impact on our fuel chem business as we move through the winter time. Relative to a unit that would specifically switch from firing coal to natural gas, that's a little bit less likely to happen at this point in time, but we're hoping to see some favorable dispatch opportunities for coal which would be a nice favorable impact on our fuel chem revenue generation.

Right. I mean you've always spoken in the past as at $4 natural gas as being sort of a tipping point where people start to look at that seriously and that's still the case, okay?

Correct.

Okay. Great. And then just -- maybe if you could just elaborate, I’m just trying to give an answer, I mean, it's great news but on the APC, kind of the sudden strength in the business, I mean, is there any one driver of that, is it the stronger economy or changing your strategy, your marketing strategy, I'm just trying to get my arms around that.

Yeah. I mean I would -- the -- what I would point to Bill is the fact that the natural gas sector and the strength in the economy has been a nice boon for us and so we see that continuing as we move into 2019. Other than that, we’ve always had a little bit of an ebb and flow with our APC business. We are seeing a lot of consolidation of players in our market space. We've seen it happening over this past year and we expect that to continue as we move into 2019. So it is giving us perhaps some additional opportunity that maybe we've had in the past as well. The overall business segment for air pollution control technologies, particularly as it related to coal fired utilities obviously has been hit extremely hard. So, a lot of players in that space actually had -- they either had to retract or they were acquired by other parties. And so we see ourselves in a, just generally, a more favorable position on a competitive basis as well, which should help us going forward. So at a high level, I would point to, a, improvement in the economy, b, the fact that the new power generation is natural gas and our technologies play well with that and then just a little bit of a change in the dynamic of the competitive landscape.

Our next question comes from the line of George Gaspar, a private investor.

If you could update a little bit more on the water treatment area. As you're moving forward, it sounds like you obviously are targeting the end of the year to get close to being able to go out and do some sampling efforts or demonstration efforts. Can you just cite some possibilities of types of water treatment that you would be looking to try to get involved or could get involved early on with this system?

George, at the onset here, we believe our first opportunities are going to be in the oil and gas sector. I think that’s going to give us our first ability to demonstrate the technology and we will start there and then we'll look to expand further from that particular market segment, but that's where we're going to be starting out at this point in time. And as I noted, we’re working our lab scale system with our technology team internally here at Fuel Tech. We're definitely coming up to speed on the capabilities of the technology and we're going to be ready to go with our demonstration system here before the end of this month and we have a couple of target opportunities in mind whereby we'll be able to demonstrate the technology fairly soon here as we look to end this year and move into 2019. Once we're able to do that George, once we have demonstration and process whereby we're actually able to get a reference client for success and performance of the system in this particular market space, then our doors are going to be further opened for us and then we'll move forward from there, but that is our first step and it's a mandatory first step for us.

And second question related to financing requirements as you're moving forward. Now, it looks like you've got pretty reasonable financial situation with some cash to draw against and can you identify your borrowing plan or what you're anticipating possibly having to look to do going into, by the end of the year or into early 2019 in terms of financial requirement that you may have to change out?

As we look towards the end of this year, George, is I just mentioned to Pete when he was on the call, we're looking for a nice uptick in our operational cash balance as we look to end this year. Based upon the development plan that we have in place right now currently for the water treatment business, we're not planning on going outside for any external financing at this point in time. If we see something develop whereby we need to have 15 demonstration systems out in the marketplace fairly rapidly, obviously, that will change our positioning on that subject, but right now, we're not planning on that. We don't see it evolving that way, but we're going to keep our options open and flexible depending on how the market develops.

And in terms of looking at the international side between Europe and China, using those particularly, where do you see you're so concentrating more effort in 2019 on?

As we sit here right now George, I personally see more opportunity coming out of our European opportunity platform than we see coming out of China today. We're watching China very closely. I've mentioned this on prior calls whereby with all the modifications that we've gone through, all the restructuring we've gone through in this company, which has been predominately domestically focused, our objective, as a company, is to have all of our business segments, all of our geographic office locations generate profit. If we feel as those strategically we can make the modifications to enable that to happen in all of those locations, we'll look to make changes. So right now, I feel confident about the European operation, there are opportunities. China, we're watching very closely.

[Operator Instructions] Our next question comes from the line of Bill Chapman, a private investor.

What degree of difficulty is the changeover for an oil and gas company to what they're using now concerning your water treatment?

From what we see today, most of the oil and gas applications that we're taking a look at do utilize some form of aeration technology and so initially, as we're looking at doing a demonstration, it would be a substitution effort from the current aeration technology that they’d be using today to what we would be looking to offer, which is a more effective ability to aerate that body of fluid. That's where we would start.

So this is more -- a better outcome. What about the cost component to what they're using now?

In all likelihood, our system is going to be a higher expenditure related to what they're using today. But what we believe in terms of what the end result will produce in terms of operational cost savings over a longer period of time and just more effective performance and perhaps less utilization of chemical as they also look to treat that body of fluid, we think the investment is more than worthwhile, but that's one of the reasons why we were going to go through this demonstration process just to ensure that we have all the operating parameters hammered out to ensure that we're able to justify the investment in the technology we're going to be providing. It's a necessary first step for us, but we're encouraged with what we see with the technology thus far.

Let me ask you two of them on the higher cost part of it, are you talking 10% or 20% or 100% roughly or just kind of a range as you could please?

As we sit here today, I'd say somewhere and it really depends on the applications because we've studied some applications that we believe are woefully under aerated, so it ends up not even being a fair comparison. So I give you a 10% to 50% number, but it varies widely depending on the application.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Vincent Arnone for closing remarks.

Thanks, operator. I'd like to thank everyone for taking their time today to participate on the call and thank you so much for your continued interest in Fuel Tech. We've been on a long, dedicated plan to returning to profitability. And we're very, very pleased with our third quarter financial performance and we're looking to deliver more of that type of performance here in the near term. Just as a note to everyone, we are planning on being in New York City in the month of December to visit with some of our investor base. If you're interested in meeting with us, please don't hesitate to reach out to myself, to Jim or to Devin Sullivan with The Equity Group. Thanks very much everyone. Have a fantastic day. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.