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Edited Transcript of FTEK earnings conference call or presentation 14-May-19 2:00pm GMT

Q1 2019 Fuel Tech Inc Earnings Call

WARRENVILLE May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Fuel Tech Inc earnings conference call or presentation Tuesday, May 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James M. Pach

Fuel Tech, Inc. - Principal Financial Officer, VP, Controller & Treasurer

* Vincent J. Arnone

Fuel Tech, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Peter Enderlin

MAZ Capital Advisors, LLC - Portfolio Manager

* Sameer S. Joshi

H.C. Wainwright & Co, LLC, Research Division - Associate

* Devin Sullivan

The Equity Group, Inc. - SVP

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Presentation

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Operator [1]

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Greetings and welcome to the Fuel Tech 2019 First 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 Equity Group.

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Devin Sullivan, The Equity Group, Inc. - SVP [2]

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Thank you, Dana. Good morning, everyone, and thank you for joining us today for Fuel Tech's 2019 First Quarter Financial Results Conference Call. Yesterday, after the close, we issued a copy of -- 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 that 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, opportunities as well as assumptions made by and information currently available to our company's management.

Fuel Tech has tried to identify the 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.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [3]

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Thank you, Devin. Good morning, and I want to thank everyone for joining us on the call today. I'm here today with Jim Pach, our Principal Financial Officer and Controller.

It has only been a short time since we last spoke, so I'll keep my remarks today brief this morning. While our Q1 results were slightly below our expectations due to a variety of extraordinary items, we remain optimistic regarding our outlook for the full year, whereby we expect to generate operating income from continuing operations for the second consecutive year, excluding the losses and charges associated with the suspension of our China operation.

Our first quarter 2019 net loss from continuing operations of $1.3 million included operating losses that are soon-to-be suspended Air Pollution Control business in China and other charges totaling $1.2 million as well as the unfavorable impact of the timing of completion of current APC project under contract.

Absent these charges, the financial results from our core operations fell just short of breakeven for Q1 of 2019.

We continue to pursue a promising pipeline of APC contract opportunities, particularly in U.S., and we are in various stages of negotiation with potential clients that, in the aggregate, represent $10 million to $15 million of contract award opportunities that we expect will close by late Q2 or early Q3 of 2019.

Additionally, the outlook for our FUEL CHEM business is promising. We are currently installing our FUEL CHEM program on 2 incremental coal-fired units in a domestic utility this month and expect to have these new units up and running by the end of Q2 of 2019.

Our soon-to-be suspended APC business in China had an unfavorable impact of $0.9 million on the quarter via a combination of planned employee severance payments and incremental operating costs.

We continue to make progress towards the suspension of this business, and we expect that the activities associated with this suspension will be substantially completed in the second half of the year. We are no longer originating project work from our Beijing office and are focused on completing our work on several projects under contract and on collecting our outstanding accounts receivable.

As we wind down these operations, the impact of the associated losses will be removed from our profit and loss statement.

Beyond this item, we experienced some unfavorable project timing for our APC segment, and we incurred some additional costs in support of completing one project.

Additionally, we experienced some unplanned customer-driven outages at FUEL CHEM, which otherwise would've allowed for a larger favorable revenue variance versus Q1 of the prior year.

Moving down our profit and loss statement, our SG&A declined by $0.5 million versus Q1 of 2018, largely due to the organizational actions in China and to a reduction in other foreign expenses. Consolidated gross margin was approximately 40% in Q1 of 2019, which was of the same level of the prior year. R&D investments remained stable with Q1 of 2018. Total cash was approximately $13.2 million at the end of the quarter, and we remain debt free.

Although our capital projects backlog was at the same level as Q4 of 2018, we are optimistic about the balance of the year due to our business development efforts for APC and our strong outlook for FUEL CHEM.

With respect to our APC business, as I noted, we are in various stages of negotiation with potential clients that, in the aggregate, represent $10 million to $15 million of contract awards on a global basis that we expect will close late in Q2 or early in Q3. Domestically, these APC opportunities focus primarily on ULTRA and SCRs for industrial applications, whether they be for new site developments or in support of Title V permit renewals and on ESP refurbishment work for plant maintenance and expansion.

In Europe, BREF, which is also known as the best available reference technology, guidelines were issued in August of 2017, with a compliance timeline through 2020.

These guidelines reduced target NOx emissions from prior level. Plants in EU countries with heavy reliance on coal-fired generation, such as Poland and Czech Republic need to upgrade their current DeNox systems as well as neighboring countries and the Balkans and Turkey. However, current economic condition has stalled projects in Turkey indefinitely. Earlier this year, Germany decided to extend the coal-fired generation through 2038, which will necessitate upgrades to primary and secondary NOx-control systems to meet the BREF guidelines, and we will pursue these opportunities with the German partner.

We are currently pursuing this for our SNCR, SCR and ammonia delivery system technologies in multiple countries in Europe and also through European partners with global exposure for technology deliveries in non-European geographies.

We continue to pursue opportunities associated with our various licensing agreements. In India, via our partner ISGEC Heavy Engineering Limited, we have mentioned in the prior quarters that the government had backed off from initial compliance timelines and had prioritized remediation targets in the order of importance: first, the particulate matter, then SOx, and finally NOx. This presented an opportunity for Fuel Tech to capitalize on our fuel -- on our Flue Gas Conditioning or FGC technology in the marketplace and showcase it as a low-cost, highly effective, particulate-controlled technology compared with ESP or bag filter hybrid solutions.

We are currently in the bid process on an opportunity for an FGC system, and we will continue to report on our progress in the future.

We expect the demand for SNCR systems to pick up in 2019 as technology demonstrations are concluded at NTPC plants. And NTPC officials have acknowledged that combustion modifications alone are not adequate to reach the 300 milligram per normal cubic meter NOx target for pre-2016 units. As a result, we have finally started to receive firm inquiries for SNCR in India.

As I stated in our last call, in 2018, approximately 60% of total APC revenue was derived from natural gas applications, up from 21% in 2017 and only 4% in 2016.

We expect this general trend to continue into the future as natural gas is still expected to be the primary fuel source for new sources of power generation.

We continue to believe that coal will remain a part of the countries' evolving fuel metrics for years to come. Our FUEL CHEM program predominantly assists coal-fired power generation in their effort to burn lower-quality fuels more cleanly and efficiently.

To this end, I am very excited to state that we are currently installing our FUEL CHEM program on 2 incremental coal-fired units at a domestic facility and expect to have these new units up and running by the end of the second quarter of this year. In addition to the normal sale of chemical as part of the FUEL CHEM program, this project also includes in the order for approximately $1 million for equipment and installation for these 2 units, which is expected to be realized as revenue in the second quarter of this year. I wanted to emphasize that these units are not base-loaded units, and the revenue potential on an annualized basis will be driven by power demand and dispatch on a seasonable basis. When operational, these new units are expected to generate historic FUEL CHEM gross margins.

You may recall that early in the third quarter of 2018, we added a new coal-fired unit and an existing customer on the Midwest. This had been the first incremental coal-fired unit that we had added to our customer base in almost 4 years, and we are very pleased to have added 2 more units in this relatively short period of time.

We are continuing to pursue FUEL CHEM applications in other geographies: in Europe, where we are focusing on biomass and use municipal solid waste opportunities; in Southeast Asia, via our partner Amazon Papyrus for the pulp and paper industry, where we are using our RECOVERY CHEM program; and in other southeastern Asian countries, where core is the primary source of fuel, power demand and related pricing is high and where slagging and fouling is an issue. One such country is the Philippines.

Regarding our Dissolved Gas Infusion and water technology business. At the outset, we knew that developing this new product and market application would take some time. Our investments have been modest and our progress, steady and tangible. We now have a mobile demonstration trailer, and we are in discussions with multiple potential customers across a variety of industries with the primary focus currently on the oil and gas industry.

The Permian Basin is now the largest oil-producing region in the world per the Energy Information Administration report just -- issued in April of this year.

Future growth in oil production is anticipated and produced water volumes from fracking operations are exploding.

The fate for produced water is either reuse for fracking, disposal wells or recycling. It is important to note that disposal wells are becoming more difficult to permit due to seismic considerations and transportation costs either via truck or pipeline to more remote disposal wells are becoming a severe economic issue in the region.

The specific water issues that DGI can address include total suspended solids, hydrogen sulfide and metals removal along with keeping the basins aerobic over time.

We are investigating other industrial and utility markets concurrently as we believe DGI can provide benefit in these markets as well.

We expect to have a demonstration up and running by the end of Q2 or early in Q3 of this year.

We are excited about our opportunity landscape for the remainder of this year and thereafter as we have good visibility to new APC project awards, a strengthening FUEL CHEM business and continued traction with our water treatment initiative.

Additionally, we are on the process of eliminating approximately $2 million in annual operating losses from our financial performance as we finalize the suspension of our China operations.

As I noted previously, for the full year 2019, we expect to generate operating income from continuing operations and positive cash flow. In closing, I want to thank you once again for your ongoing interest in Fuel Tech and for your patience as we continue to work diligently towards the next steps of our development for our company. While our first quarter results did fall slightly short of our expectations, I still remain confident about our future, and I can assure you that the entire Fuel Tech team is doing everything possible to ensure that we provide a successful return to our shareholders.

I will now turn the call over to Jim for a discussion of our financial results. Jim, please.

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James M. Pach, Fuel Tech, Inc. - Principal Financial Officer, VP, Controller & Treasurer [4]

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Thanks, Vince, and good morning, everyone. As Vince had noted, our Q1 results were impacted by the following items: a $0.6 million severance-related restructuring charge associated with the ongoing suspension of Beijing Fuel Tech's operations; a $0.3 million operating loss of Beijing Fuel Tech, excluding the restructuring charge previously mentioned; and finally, a $0.3 million charge for incremental work for a domestic APC project.

We expect the operating loss for Beijing Fuel Tech in Q2 to be consistent with Q1, excluding the severance and other charges.

As it relates to the $0.3 million charge for the incremental domestic APC work, we are working with our customer to satisfy all of their requirements for our scope of work. As you all see, we operated just below breakeven for the first quarter exclusive of these items.

With respect to the top line, first quarter revenues declined to $10.2 million from $12.8 million, reflecting a $2.8 million revenue decline at APC and a $160,000 revenue increase at FUEL CHEM as compared to last year's first quarter.

Lower APC revenues were the result of a decline in backlog entering the first quarter of this year as compared to last year's first quarter.

As Vince has mentioned, we are actively pursuing several promising contracts in the U.S, which we expect to close in the near term.

Consolidated gross margin was 39.5% of revenues compared to 39.3% of revenues in Q1 2018. Gross margin in Q1 of 2019 included the $0.3 million domestic charge. Exclusive of this item, gross margin in Q1 of 2019 was 42.1%.

APC gross margin was $1.9 million or 32.8% as compared to $3 million or 34.8% in Q1 of 2018. Excluding the $0.3 million charge, APC gross margin in Q1 of 2019 was $2.2 million or 37.4%. APC results for Q1 2019 included revenues of $0.3 million from Beijing Fuel Tech and an operating loss including restructuring charges of $0.9 million.

In 2018, in Q1, revenues from Beijing Fuel Tech were $0.7 million with an operating loss of $0.5 million. FUEL CHEM's segment revenues rose to $4.4 million from $4.2 million in Q1 of 2018, reflecting favorable weather conditions and the addition of a new coal-fired unit at an existing customer site in the Midwest U.S. during Q3 of 2018, partially offset by earlier-than-expected customer-driven outages and regional dispatch in Q1 of 2019. Segment gross margin was 48.4% of Q1 in 2018 and 48.5% in Q1 of 2018.

For the full year 2019, we are targeting a blended APC and FUEL CHEM gross margin of between 35% and 40% excluding the impact of China.

We continue to focus on cost control, and our SG&A reflects that in Q1. SG&A for Q1 of 2019 was $4.5 million, a 9.4% decline from Q1 of 2018.

For the full year 2019, we expect SG&A to range between $15 million and $16 million, which excludes China SG&A of approximately $1.4 million, which we expect to report as discontinued operations following the anticipated completion of the suspension of our APC activities in that geography during Q3 of 2019.

R&D expenses of just under $300,000 were stable compared to last year's first quarter. R&D for 2019 is expected to be comparable to or slightly above the $1.1 million we reported in 2018, with higher spending driven in large part by our development of the Dissolved Gas Infusion technology.

Net loss from continuing operations was $1.3 million or $0.05 per diluted share compared to the net loss from continuing operations of $191,000 or $0.01 per share in the last year's first quarter.

Excluding the charges and the impact of the operating losses at Beijing Fuel Tech, Fuel Tech's net loss from continuing operation for Q1 of 2019 was $0.1 million or $0.01 per diluted share. Excluding the China operating loss in Q1 of 2018, adjusted net income was $0.3 million.

Given our accumulative net operating losses of $26.1 million at March 31, 2019, which covers several geographies, we continue to expect that our income tax expense for 2019 will be at or near zero. This figure includes China's NOLs, which we will maintain, given that we are preserving the legal entity in China.

Our balance sheet at March 31, 2019, remained debt free, and we had cash and cash equivalents of $13.2 million, including restricted cash of $6 million.

We continue to monitor our liquidity in all of our geographies. Our working capital balance at March 31, 2019, was $22 million, which will continue to support our ongoing operating needs of the business.

Our existing U.S. credit facility with JP Morgan Chase expires at the end of the second quarter. The company is actively pursuing the renewal of its U.S. domestic credit facility and intends to renew the U.S. facility at maturity. We are currently evaluating our banking options and structures available to us. At a minimum, we expect to be able to maintain our existing facility with the same terms as currently provided to us.

With respect to valuation, our book value per share was $1.36, our tangible book value per share was $1.23, and our working capital per share was $0.91 at March 31, 2019.

In addition, we have approximately $0.68 per share in deferred tax app that's for the U.S. and Italy, which have been fully reserved and are not included in any of the per share amounts quoted above. With those remarks, I'd like to turn the call back over to Vince.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [5]

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Thank you very much, Jim. Operator, we'd like to now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Amit Dayal with H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [2]

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So just going over the backlog relatively flat at the end of 1Q '19 versus 4Q '18. How does this impact sort of our expectations for the full 2019 relative to 2018? I know you mentioned you're expecting $10 million to $15 million in contract opportunities to potentially close over the next few months. But the current rate is a little bit sort of year-over-year slower than what we saw in 2018. So just wanted to get some context around how we should expect the next 3 quarters for 2019 to play out.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [3]

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Understood, Amit, and you're right. The pace of bookings in 2019 has been slower than 2018 thus far. As it relates to impact on full year, we're still focused and obviously to delivering operating profit from continuing ops on the bottom line. That is our target.

From a top line perspective, without giving, call it, full year guidance on top line, I can tell you that FUEL CHEM, we're expecting to trend in a similar to slightly favorable fashion in '19 versus '18. But just given the timing of contract award thus far, in 2019, on the APC side, I would expect a little bit of a reduction on the APC side in '19 versus '18 just based on pure timing today. So we're focusing on getting the orders under our belt, and then timing of execution is going to depend on customer requirements project by project. But just generally speaking right now, Amit, your point is accurate. Bookings are a little bit slower than we would like to see, but it's -- as you know, it's timing that we can't control. And from a revenue-recognition perspective, we'll just have to follow how those contracts are going to be executed throughout the remainder of this year and then going into 2020. We'll have, obviously, more this year once we have the opportunity to work through this, call it, the full second quarter and then talk later at that point in time. We'll have more visibility to more specifically what our result is going to be for the full year.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [4]

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Understood. I apologize if you touched on this topic, but the U.S. revenue declines, any particular reason for the slow pace on the U.S. revenue side?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [5]

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Really, no specific reason, Amit, other than one as Jim noted. When we compare going into 2018 with the $20 million-plus backlog versus coming into 2019 with a $12 million -- approximately a $12 million backlog, we're just not executing on projects at the same level and as a result, just not recognizing that same level of revenue either. So that's the primary driver.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [6]

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Understood. Okay. And then just related to these China items, are these onetime? I know, Jim gave a little bit more clarity on this, but the $600,000 in restructuring charges probably is a onetime thing. The $300,000 in operating losses, I mean, should expect to model for those levels of losses for the next 1 or 2 quarters as well?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [7]

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Yes. Right now. Yes. First of all, answering your question, the severance charges are indeed onetime. We took that charge in Q2. We actually went through a first round of employee layoffs in January of this year, and we reduced the team by about half in China at that point in time.

At the end -- right here at the end of the second quarter, we're going go through a second round of restructuring, if you will. But we're not going to take any incremental restructuring charges. We've taken that already in Q2, okay? But to answer your question more specifically on, call it, the running operating costs, Q2, we would expect to have approximately a similar level of operating cost that we had in Q1, excluding the severance costs. So approximately $300,000 or thereabout for Q2. As we move throughout the remainder of the year, that number will then decline dramatically. Q3, Q4 will be much lower numbers because we're just going to be having left a skeleton staff that's just going to be on hand to finish up a couple of projects and to work on collecting accounts receivable. So we'll drop from the $300,000 level in operating cost to sub-$100,000 or even lower in Q3 and Q4 as we do with the final wrap-up, if you will, or wind-down of the APC business in China. Okay? Did that help?

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [8]

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Yes, yes, yes. And just one last one for me. You're still targeting sort of non-China markets in Asia. Is this primarily through distributors and other partners? Or are you also planning on just creating some presence in some of these other geographies to support sales efforts?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [9]

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No. We're not looking at establishing other footholds in some of those geographies, Amit. We'll do it through other partners, whether they be OEMs, whether they be licensees or implementers of technology, but we'll use other entities to delivery our -- to deliver our technology solutions in those geographies. We're not looking to establish another presence.

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Operator [10]

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Our next question comes from the line of Pete Enderlin with MAZ Partners.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [11]

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On the 2 new FUEL CHEM utilities that you're going to be providing for, how will the magnitude of those compared with the one -- big one that you got last year when they're seasonally dispatched? I know it's not going to be year around. But in terms of when they're actually running there -- really running or not running, so how would the magnitude of those be?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [12]

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Just -- I'll give you an approximate answer, Pete, because it's difficult to know how these units are going to be running. Right now, we would expect a summer run, but that's going to be weather-dependent as well. But just as a, call it, a factor to use, I would expect the revenue from these 2 units on a monthly basis to approximate the 1, call it, larger coal-fired unit that we actually brought on board in Q3 of last year. So when these 2 units are dispatched this summer, anywhere, just a range, $150,000 to $200,000, $250,000 in total for both of them per month, approximately. Approximately. If, you know what, we're pleased by the opportunity, if you would asked me a 1.5 years ago that we would have had the opportunity to add 3 incremental coal-fired units to our FUEL CHEM base, I probably would've said that the opportunity or probability was pretty slim. So we're pleased to have these come on board. They are being driven -- these last 2 units are being driven by the need to burn a specific challenging coal. So it fits very well for the FUEL CHEM program, and we're very pleased to have these units come our way.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [13]

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And would that likely be for basically the summer quarter or more?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [14]

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Predominantly, yes, and then we'll see what happens when winter comes around as well. But during spring and fall, we would not necessarily expect these units to be running.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [15]

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And you've mentioned $1 million equipment associated with that. Is that $1 million -- or was that in the backlog at the end of the first quarter?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [16]

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No. We don't have a backlog calculation for FUEL CHEM, Pete, it's -- because it's a recurring revenue sale generally. Our sale of equipment and installation services, I would call it more of a one-off, specific situation for this customer.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [17]

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Okay. On the overall accounting for China, wouldn't it be clearer and simpler just to treat Beijing as a discontinued operation instead of waiting until it's actually completely shut down?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [18]

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Yes, I'll let Jim comment on that, Pete.

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James M. Pach, Fuel Tech, Inc. - Principal Financial Officer, VP, Controller & Treasurer [19]

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Yes, Pete. I wish I could do that, obviously, make the financial presentation a lot cleaner, but unfortunately, U.S. GAAP accounting rules require that the entity be completely closed down or suspension of the activities is finalized before you can get to that. So unfortunately, that's an accounting literature item that we don't really have flexibility on unfortunately.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [20]

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Yes. I thought so, but I just wanted to check. Is there any potential for legal redress in China? I mean I know you guys have some sense that you've got sort of, what would you say, (expletive). So is the legal action possible?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [21]

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It is not at this point in time, Pete. And you're referring to IT issues that we had historically in China with our Beijing Fuel Tech operation. We actually did, Pete, some years ago engage in a legal activity, if you will, to see if we can find remedy for what transpired, and this was actually 4 to 5 years ago. At this point in time, there is no remedy. We're taking our action in China because of obvious operational concerns, and it's for the better of Fuel Tech's future. And we'll move forward from here, and we'll be a better-structured, more focused company absent Beijing Fuel Tech.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [22]

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Okay. Is the 60% natural gas statistic for APC that you mentioned, is that a U.S. number or worldwide?

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James M. Pach, Fuel Tech, Inc. - Principal Financial Officer, VP, Controller & Treasurer [23]

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Worldwide.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [24]

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Okay. Last one...

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [25]

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Worldwide.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [26]

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Yes. When -- and of course, the foreign part of that isn't very substantial at this point anyway, but I was just curious.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [27]

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Correct.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [28]

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On the DGI outlook, it sounds like there really is a lot of pretty major potential. Could that become significant as a percentage of revenues as early as 2020? Or is it going to be a longer-term wrap-up?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [29]

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I'd say, it's going to be a longer-term opportunity for us, Pete, at this point in time. And you're correct. What we're seeing in terms of activity, again, particularly on the oil and gas side, can possibly provide some very, very large opportunity for us. But we're progressing on a step-by-step basis. And we're methodical about our approach, and ultimately, it's going to be best for us in terms of us establishing ourselves as a potential player with a good technology solution in that marketplace. But before we have material revenues, it will likely be post 2020.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [30]

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And for the potential of those -- that technology in a bunch of different markets, is it really sort of a breakthrough technology? Or would it be incremental and done in cooperation with other things that the customer would need to do at the same time? I mean that's sort of a general question, but I don't quite get the scale of the impact what you're talking about.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [31]

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Right. All right. No, understand. Two things. So first of all, we consider our technology application to be an improvement over other oxygenation technologies that have been deployed in all of the industries that have water treatment issues, okay? So we consider our technology to be a material improvement, okay? So I'm answering one question. And then secondarily, in almost all cases, oxygenation solutions are not the sole solution for treating that water. It's used in conjunction with other technology applications, other chemical applications and the like. So it ends up being part of a solutions package for that user at the end of the day.

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Operator [32]

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(Operator Instructions) Our next question comes from the line of Sameer Joshi with H.C. Wainwright.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [33]

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The gross margin outlook for the rest of the year, 35% to 40%, isn't it a little bit conservative given that you already have 34.4% -- or rather 37.4% on APC and 48.4% on FUEL CHEM?

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James M. Pach, Fuel Tech, Inc. - Principal Financial Officer, VP, Controller & Treasurer [34]

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Generally speaking, Sameer, 35% to 40% is -- it's a range that we use as a rule of thumb because it will be impacted by, call it, project mix on the APC side and then as you point out, also just the relative percentage of revenues that come from APC versus FUEL CHEM, okay? So as we look at a full year landscape, we typically quote a 35% to 40% as, call it, our general range. As we have a better picture to, a, the project mix on APC, and then to, b, the revenue mix between APC and FUEL CHEM, we were able to then get a little bit more granular. But as of today, premature to make that a more specific number.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [35]

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Understood. Clarification on the APC incremental work that you did on 1 or 2 projects during this quarter. What was the nature of that work? Why was it necessitated? And is it likely to be incurred on other projects that you're working on?

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James M. Pach, Fuel Tech, Inc. - Principal Financial Officer, VP, Controller & Treasurer [36]

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The answer would be, no, on your -- the second part of your question. On your first part, as we -- for a particular customer, as we delivered our system to a customer site location, we actually found that there was a little bit more work we needed to do on our delivery system to meet the customer's requirements, okay? And as Fuel Tech, our priority is our customers, and we're doing right by them. And as a result of ultimate -- ultimately meeting their -- all of their requirements, we had to do a little bit of work on our delivery system at that site. So that's the driver for the incremental cost. It's not -- it's a little more expensive than what I would call a normal scope of work for doing something incremental, which is why we called it out, and we're not expecting it to be recurring.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [37]

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Okay. And then one last one from me. With the previous question, you did give color on the coal-fired units that you're bringing online, but as you look out into the next few quarters, do you expect additional incremental coal-fired units to be under the FUEL CHEM program -- or installed?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [38]

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Yes. If it was going to happen domestically, I have to say, I'd be a little bit surprised, Sameer because I'll tell you right now, the 2 that we just brought on board were a little bit of a surprise to us. We didn't necessarily expect it to happen here domestically.

We are pursuing coal-fired opportunities, I had mentioned in my comments, and actually in Philippines at 2 different stations out there, whereby, they're having some great difficulty burning fuel at boilers, at our base-loaded boilers with a market that has a very high demand for power and power pricing is extremely high. So we think the return on investment is going to be there for the end customer. So if I was going to say where a next source of a FUEL CHEM coal-fired unit would be, it would probably be outside of the U.S.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [39]

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Understood. Is Germany part of that equation as well, given that they have extended their use of coal?

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [40]

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It -- we tried to pursue FUEL CHEM in Germany some years ago, but given their experience in running their coal-fired utilities with lignite as their fuel and how they design their boilers to burn lignite very specifically, they haven't had, what I would call, critical slagging and fouling issues that we would be able to address just because of how they engineered their boilers very specifically to the local coal that they use in Germany. So I would not necessarily expect anything incremental in Germany from FUEL CHEM.

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Operator [41]

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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.

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Vincent J. Arnone, Fuel Tech, Inc. - Chairman, CEO & President [42]

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Thanks, operator. Once again, I want to say thank you to everyone for joining the call today, and thanks for your interest in Fuel Tech. We're going through a multiyear planned reorganization, restructuring, redevelopment of our company. These past 3 to 4 years, we've gone through significant restructuring to the point whereby, in 2018, we generated an operating profit and positive cash flow for the first time in 5 years. We expect additional improvement to continue. And as I mentioned previously, the entire Fuel Tech team is dedicated to continued success and to providing value to our shareholders. You have that as my commitment to the shareholder base. Thanks, everyone. Have a great day.

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Operator [43]

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