Fuel Tech's Plans to Clean Up

Pat Dorsey: Hi. I'm Pat Dorsey, Director of Equity Research at Morningstar and I'm delighted to have with me today John Norris, President and CEO of  Fuel Tech (FTEK) a company we've been talking about to Morningstar subscribers for quite some time. Thanks so much for joining us, John.

John Norris: Thank you, Pat. It's good to be here.

Pat Dorsey: Now, Fuel Tech has two large segments -- you do emissions controls on one segment and then slag reduction, sort of, more an efficiency business.

John Norris: That's exactly correct.

Pat Dorsey: Let's talk about the emissions reduction business first. What makes your products unique in the marketplace?

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John Norris: The uniqueness is really our cost effective solutions, especially for small to medium-sized plants we have a whole suite of technologies and for large plants that are putting on big, selective, catalytic reduction systems that may cost a couple hundred million dollars, they've a safe ammonia supply in there. All of our systems use non-hazardous materials urea as our basic ingredient and it's that suite of technologies that makes us unique.

Pat Dorsey: So, moving over the FUEL CHEM segments, one of the -- this part that reduces the slag and it's kind of your big growth engine right now, you know, the sales process for this is kind of unique given the way utilities work and I had a lot of subscribers asking me, you know, it sounds so darn great, why doesn't everybody use it? So, talk to me a little bit about the sales process.

John Norris: Well, there's two reasons why it's hard to break into the market as a utility -- prior utility exec for a few decades and I've been a running a lot of plants in them, I'd been around them. One is credibility. These plants have been operated for decades with high slagging problems, SO3 problems and there hasn't been an effective solution. Most of the stuff got nicknames of snake oil in the industry. So, overcoming that sort of a mind set to get people to really believe that it works. The other is really utility budgeting. The cost for such a program are all incurred at the plant manager level and the plant will see some benefits directly in his budget, but the actual majority of the benefits with more power to sell because they can put out more power and they can burn cheaper coal, those occur at the trading desk or at the fuel purchasing.

Pat Dorsey: So, the plant incurs most of the cost and most of the benefits kind of occur at the corporate level. That's got to be a sales problem for you. So, how do you overcome that? Do you sort of connect plant manager to each other or how do you try to overcome that obstacle?

John Norris: Well, the first is what you just described. You have to get the plant manager to buy in that this is a solution that works at their plant, get them to believe that. So, the marketing has to be at the plant level and they're going to believe their fellow utility brethren a lot more than they're going to believe some vendor. Once you get the plant manager though to believe it, you then have to also have convinced the Senior VP level that this is good because that's where all the benefits are coming into at the fuel buyer and at the trading desk. So, it's really a two-prong, two-level sales effort.

Pat Dorsey: And so, there is a process in the US then it sounds like it's going to be incremental in some ways. It's kind of plant-by-plant to some extent?

John Norris: Well it is, but utilities do not want to be the first to do anything. We used to laugh at…

Pat Dorsey: Fairly conservative industry.

John Norris: …they call it the bleeding edge as opposed to the leading edge. You don't want to be first or second or third, but you also don't want to be last. Once you can get that snowball of acceptance going, then actually the acceptance rate can go up dramatically. We hope we're on that cusp of that…

Pat Dorsey: That acceptance curve?

John Norris: Absolutely.

Pat Dorsey: Sure. Well, now moving over to China. You know the big news last year was your partnership with the ITOCHU to sell some of the FUEL CHEM and the emissions control solutions into China. Give us any updates you think that might be useful on how that relationship is going?

John Norris: Relationship is going well. We've lots of project leads. We have now one project due to the extremely cold winter that's delayed to get started up with our system until this summer, but the sales process is going with lots of opportunities on the FUEL CHEM side. Our air pollution control equipment is probably going to see quicker success, more quick success in there in 2008 because NOx reduction is a big deal.

Pat Dorsey: Especially with the Olympics coming up.

John Norris: And our products have started up and all exceeded the performance guarantees that we've given and that has impressed the Chinese.

Pat Dorsey: Now, going forward, what kind of milestone should Fuel Tech shareholders, folks who are following the story be looking for over the next year or couple of years, you know, what kind of -- the Santee Cooper Paper was a big milestone in terms of, you know, they had demonstrating the credibility of the product. What are the milestones should we be looking for?

John Norris: And there maybe another one of two of those kind of testimonial papers coming out this year we hope from recognized authorities, but the ones I would watch for as an investor if I was -- I'm an investor.

Pat Dorsey: So, what are you watching for?

John Norris: That's right. I'm looking for a string of announcements for successes on the FUEL CHEM side, to see that ball rolling in the US and then to see more acceptance, especially in Mexico, India and China. On the APC side, I'd like to see our newer products and services. Ultras keep coming on. I think that's going to be a big deal. Then people will know that from our announcements. And the other one is Cascade. Cascade tends to come in bigger chunks as opposed to 4 or 5 million dollar Ultra announcement, Cascades will probably 20 or 30 million. So, if that technology really takes off -- like we think it may, that could be a game changer and since we announced our stuff, the investors are going to know it right after we sign it.

Pat Dorsey: Thanks so much for the update, John. I really appreciate you spending your time.

John Norris: Thank you Pat. Thanks for having me on.

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