Fuel Tech, Inc. ( FTEK)

Q3 2010 Earnings Conference Call

November 5, 2010 9:00 AM ET

Executives

Tracy Krumme – VP, IR and Corporate Communications

Doug Bailey – Chairman, President and CEO

Dave Collins – SVP, Treasurer and CFO

Analysts

John Quealy – Canaccord Genuity

Lucas Pipes (ph) – Fred Beans

Graham Madison – Lazard Capital Markets

Rick Hoss – Roth Capital Partners

Jeff Osborne – Stifel Nicolaus

Dan Mannes – Avondale Partners

Carter Shoop – Deutsche Bank

Steven Charest – Divine Capital Market

Presentation

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2010 Fuel Tech Incorporated earnings conference call. I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

I will now like to turn the call over to Tracy Krumme, Vice President Investor Relations and Corporate Communications.

Tracy Krumme

Thank you very much. Good morning everyone and thank you for participating on today’s conference call to discuss our third quarter results. Joining me on the call is Doug Bailey, Chairman, President and Chief Executive Officer; David Collins, Senior Vice President, Treasurer and Chief Financial Officer; and Ellen Albrecht, Vice President and Controller.

As a reminder, the matters discussed in this conference 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 our forward-looking statements. The factors that could cause results to differ materially are included in our filings with the SEC.

The information contained in this call is accurate only as of the date discussed and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call and as a reminder, this conference call is being broadcast over the Internet and can be accessed at our website, www.ftek.com.

With that said, I would now like to turn the call over to Doug Bailey. Doug, please go ahead.

Doug Bailey

Thank you, Tracy and good morning to everyone. We appreciate all of you joining us on this call this morning.

Our financial results for the third quarter include revenues of $20.3 million, an increase of 23% over the comparable prior year period. We reported net income for the quarter of $0.8 million or $0.03 per diluted share, which was an increase of $0.06 from the third quarter of 2009 and an increase of $0.04 from the second quarter of 2010.

In two minutes, Dave Collins, our Senior Vice President, Treasurer and Chief Financial Officer will discuss our financial operating results in greater detail. Dave will also cover our balance sheet in detail, but note that we remain successfully (ph) strong with cash and cash equivalents of $23.9 million, $35.5 million in working capital and debt was only $2.2 million.

We have an attractive business model, which generates a significant amount of positive cash flow and topline growth curves.

As most of you know, Fuel Tech as a fully integrated company uses the extensive suite of technologies to provide boiler optimization and efficiency improvements along with air pollution reduction and control solutions to both utility and industrial customers worldwide. For reporting purposes, we broadly group those technologies into two principle business segments, one is return on investment driven specialty chemical business for efficiency improvement that we call FUEL CHEM, and the second is regulatory driven business for air pollution control or ATC that consists of engineering design services, a large portion of which are capital project related.

So let’s begin with our FUEL CHEM business where segment revenues were $10 million for the quarter, down 3% from the comparable 2009 quarter but up 4% from the second quarter of 2010. Gross margins increased to 53% for the quarter, up from 42% in the same quarter last year. This margin increase was principally due to risk-share demonstrations and the associated costs that were present in the third quarter of last year but they were not repeated in the third quarter of this year.

While electricity demand today still remains sluggish, as we have reported to you in prior calls, the recent trends are encouraging and showing improvement over last year. Total power generation through the first half of 2010 was now up 3.5% year-over-year and coal-fired generation was up 6% though production remains below pre-recession levels.

Nevertheless (ph), the coal-fired generation continues to account for 45% to 50% of total power production. Despite the sluggish economy and weakness in the power market, this was still the strongest nine-month period in terms of revenue recorded for our FUEL CHEM business. While we continue to be impacted by a number of plants that are running below expectations as natural gas and alternative energy sources run heavier loads, we are winning new business in this challenging environment and commencing new programs at coal-fired units, which is offsetting some of the revenues lost from unit sales (inaudible) reduced powder level or even shutdown repair at the time.

As power generating stations continue to be under pressure, we achieved maximum availability, higher efficiency and minimal environmental emissions at the lowest possible cost, fuel flexibility has become more critically financially and operationally than never before. The growing divergence of pricing for major US coal fields is a significant driver for our business as utilities are increasingly attracted by the compelling economic benefits of shifting from Appalachian coals, generally one of the fuels with higher heat content and fewest operational issues to the lower price, you have lower quality coals originating in the Illinois Basin and Powder River Basin.

Given this lagging and fouling challenges by higher levels of sodium found in Powder River Basin coal, and iron and sulfur found in Illinois Basin coals, this ongoing shift in fuel preference should enable Fuel Tech to market its programs to an expanded base of Illinois and Powder River Basin coal users. Additionally, as gas prices remain low, coal units are having to compete with lower cost gas units and therefore are looking to increase fuel flexibility to more pricing (inaudible).

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