CCC Intelligent Solutions Holdings Inc. (CCC) Q3 2007 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Calgon Carbon ThirdQuarter 2007 Results Conference Call. For your information, all participantswill be in listen-only mode. There will be an opportunity for you to askquestions at the end of today's presentation and instructions will follow whenthe first question session begins. (Operator Instructions) Please note thatthis conference is being recorded. At this time, I would like to turn the call over to Ms. GailGerono. Ms. Gerono?

Thank you, Keith. Good afternoon and thank you for joiningus. As usual, our speakers today are John Stanik, Calgon Carbon's Chairman andCEO; and Leroy Ball, our CFO. After John makes some brief introductory remarks,Leroy will provide the standard review of the third quarter financials, andJohn will make some additional comments on third quarter performance, providean update on the mercury removal market, and comment on the fourth quarter. As always, before we begin, I would like to remind you thatthe Private Securities Litigation Reform Act of 1995 provides the Safe Harborfor forward-looking statements. John's or Leroy's comments, or perhaps some ofthe comments during the Q&A may contain certain statements that areforward-looking relative to Calgon Carbon's future strategy and performance. They involve known and unknown risks and uncertainties thatmay cause the company's actual results for future periods be materiallydifferent from any future performance discussed in the presentation. Further, the company operates in an industry where it may beinfluenced by economic and other factors beyond the company's control. Theinformation in this conference call related to other forward-looking statementsmay be relied upon, subject to the previous Safe Harbor Statement, as of thedate of this call and may continue to be used while this call remains on CalgonCarbon's website or on PRE's website. John?

Thank you, Gail. Good afternoon everyone. In the thirdquarter, we continued to implement our initiatives to improve performance, andare pleased with our year-over-year progress. Once again, compared to lastyear's third quarter, revenue, margin, net income and EPS all increased. While there were some factors, which affected the quarterfrom a cost perspective, we were successful in managing price and controllingcosts. After Leroy's presentation, I will cover a number of topics. The organizational change we made in October, costs that hitSG&A in the third quarter, the impact of the Chinese VAT rebate cancellationand higher freight expenses, which have led to a new price increase. I willalso provide an update on the mercury market and preview the fourth quarter. Leroy will discuss the tax provision, which had a majorimpact on third quarter earnings. Leroy?

Thanks, John. Good afternoon everyone. Looking at theconsolidated entity, total sales for the quarter were $84.9 million, ascompared to $79.7 million in the third quarter of last year, which equates toan increase of $5.2 million, or 6.5%. Sales were up in the carbon and servicesegment by $4.5 million, or 6.6%. Third quarter 2007 carbon and service sales were strongerthan the comparable 2006 quarter in all geographies with the largest increase,37%, being shown in the company's Asian region. Equipment sales were up by $0.5million, or 5.9% compared to last year, due almost entirely to stronger salesof UV and odor control equipment technologies. Consumer sales in 2007's third quarter were $0.2 million, or6.9% higher than the similar 2006 quarter, due to positive currency translationof $0.5 million, partially offset by lower home product sales. Overall, currency translation had a positive $2 millioneffect on the quarter-to-quarter sales comparison. Consolidated gross profit beforedepreciation and amortization, as a percentage of net sales was 32.1% in thethird quarter of 2007 versus 26.1% in the third quarter of 2006, an increase ofa full six percentage points. The margin increase is driven almost exclusively by thecarbon and service segment through a combination of price and the stronger Euromaking sales of our products more profitable in Europe. While the third quartermargin of 32.1% stepped back slightly compared to the second quarter margin of32.7%, it was not entirely unexpected, considering the lower sales quarter. Operating expenses were $16.3 million during the thirdquarter of 2007 versus $17.7 million last year, a decrease of $1.4 million, or8%. The decrease is the result of reduced legal spending of $1.4 million, thenon-recurrence of $800,000 of pension settlement charges from Q3 2006 relatedto changes in the company's pension plans and other benefit cost savings ofapproximately $0.5 million, partially offset by increased incentive comp foremployees and directors…

Thank you, Leroy. As Leroy noted, revenue was up 6.5%overall. Each business segment showed growth in all three regions, Americas,Europe and Asia, posted increases in revenue compared to last year's thirdquarter. Most of the increase came from the carbon and servicesegment and was due to price. At roughly $85 million, the third quarter sales wereconsistent with the seasonality of our business. As I've noted in the past,third quarter revenue usually falls between the range of the first and secondquarters. Market segment volumes were a bit unusual for the quarter.The third quarter is historically a stronger one for drinking water. But, thatwasn't the case this year. In fact, our year-over-year volume was downsignificantly for this market. But we're not concerned. This does happen occasionally. Onesizable new fill, which will generate revenue in excess of $1 million, waspostponed from September to December because construction of the new filtershad not been completed by the municipalities contractor. Hopefully it will occur before the end of the year. Unlikemunicipal, industrial volume was up significantly for the quarter. It'simportant to note that activated carbons manufactured by Calgon Carbon continueto be sold out for the year. However, coconut and outsourced coal-based carbons provide uswith an opportunity to grow revenue. Equipment and consumer sales increased --increases for the quarter were explained in the press release. As Leroy related, margins were up over the third quarter oflast year, but they were not up sequentially. And there are two main reasonsfor this. The first has to do with the volume of business in the secondquarter, as it relates to the third quarter. As I've said many times, thesecond quarter's usually our largest revenue quarter of the year and the highervolume of business and products sold absorbs more plant and supply chainoverhead expense. The second reason has to do with cost…

(Operator Instructions) And our first question comes fromMichael Horwitz from Pacific Growth Equity.

Hello.

Hi, Michael.

John, you sound a little sick.

Yes.

Hope you feel better in time for our conference in a coupledays. My question is, given the size on the market as you just described it formercury, is there, are there discussions being had at the board level to movemore quickly than you currently are, and it's nice to see you start thatprocess. Are you waiting for a larger off-take agreement from one ofthese utilities before you really pull the trigger on more aggressive plans?

Yes. We, this is an environmental regulatory market. As youknow, throughout our history, we've been involved with situations like this,and in some cases, the market has slowed because of states or regions abilityto get the regulations to be postponed. Now, that does not seem to be happening now. And by virtueof the statistics that I gave you during my presentation, the fact that we arenow talking to well over a dozen customers that were involved in terms andconditions, negotiations, it does seem to be happening. But we're not aware ofany major contracts. We have the one and the one that I mentioned during thepresentation is the one that we've been selected for, I guess nearly a yearnow. So we just feel more comfortable and considering the fact that we have theluxury of not having to put that line on stream at this point, because it's avery short construction project to get it back on stream and still have enoughtime to build some inventory before the July 2009 deadline hits, should we getany business in Illinois, which is the state that should have the first majorvolumes actually consumed.

And so, and I also assume for any capacity expansion and anyfinancing around that, it becomes an easier proposition with a large off-takeagreement.

It does, but frankly, we have no concerns whatsoever aboutfinancing BEE-Line. We will be able to do that within our own cash generationwithin existing debt structure. So there's no worry about that. However, there is value in what, in the fact that we do havetaker pays, we do have commitments from customers, which make us feel a littlebit better about making that investment there, as opposed to investing itperhaps in some other area.

And then lastly, in your discussions with some of thesefolks, clearly there are multiple injector systems out in the marketplace andit doesn't appear to us that they have to go hand in hand, meaning that youhave to sell them an injector system to then get the activated carbon sale. How many different channels can you go through to get tothat customer, or are those utilities buying these things separately and reallycoming to you for your capacity?

The latter there is, first of all, there are at least threeor four companies that we feel comfortable going to, should we need to acquireinjection technology. However, that hasn't been necessary and we don't expectit to become necessary. The power companies have informed us that they considerNorit and Calgon Carbon as the activated carbon manufacturers in the UnitedStates. They realize those are the two parties that they are going to have todeal with, and they are prepared to do that.

Are they also prepared to deal with the tariff and getactivated carbons or carbons from other where, other places in the world orbecause of the capacity constraints?

We'll see how that plays out, Michael. In our presentationthat we're planning for this week, we'll talk a little bit more about thecompany's options. And I've talked about them in a previous call. We feelfortunate because not only do we have BEE-Line, but we have the ability toswitch existing capacity to this market. If that proves to be a, let's see, how I put it, a good wayfor us to achieve all, to achieve supply of all of the market demand that wehave. So we have four options. We have the BEE-Line option, which is one thatwe will certainly exercise first and have ready in time for market demand. The second would be that we could consider switching currentcapacity to this market and supply granular activated carbon market needs viaoutsourced products. The third would be to directly outsource products from ourhuge network of suppliers in China to serve this market and then the fourthwould be to expand greenfield or brownfield site capacity, say, at Pearl River. Now, thus far the utility companies have indicated apreference to not deal with outsourced products from overseas. I believe thatthey are concerned with a number of different things. The logistics, the amountof containers that have to be shipped, the storage of product in the UnitedStates, anything that might jeopardize them getting their product in time tokeep their plant running. So I think that's one major issue. And then the other issuewe've talked about in the past is the vast majority of Chinese manufacturersare very small capacity companies, where the typical Chinese producer makeanywhere between £5 million and £10 million a year, and they are uncomfortablewith dealing with a whole collection. One of the values that Calgon Carbon can bring is because ofthe net, the large network of suppliers that we have in China, we can serve asthe coordinator of this and we can bring those capacities together, if thatwould be an option that we would select. It might not be the one that we wouldselect. And again, because of the tariffs, there is an economicspart of this that is very big, significant from a numbers standpoint and aprofitability standpoint that could drive us to that second option, which wouldbe to convert existing capacity to this market.

Okay, great. And then just as a follow-up to what you justsaid, John, so what kind of returns can we look at if you could just give us arange, when you're exploring these options, what kind of returns can we expectby either bringing idled capacity online or switching or what have you?

My answer is BEE-Line is huge. It's almost. Do you want toanswer?

Well, the return from bringing BEE-Line up would be well inexcess of 50% based upon the small amount of, or modest amount of capital thatwe would have to invest to get the capacity that we are bringing online.

But something like additional lines at Pearl River, whatkind of returns would you be getting out of that kind?

Well over the cost of capital, maybe in the high 20s.

Yes.

Okay. Great. That's very helpful. I'll jump back in thequeue.

Thank you.

Thank you. And the next question comes from RosemarieMorbelli from Ingalls and Snyder.

Good afternoon, all.

Hello, Rosemarie.

Continuing on the, on this particular line of questioningregarding the mercury market, there is one thing that you did not mention,John, and it is the fact that ADA-ES is looking for permits in the U.S. tobuild two and maybe four Greenfield activated carbon plants. Could you give us some idea as to how quickly they can getit, what are the potential problems and what kind of competitors, how well theindustry operates. It's no longer being Calgon Carbon and Norit. Now you willhave a whole lot of additional problems from ADA-ES if they can proceed withtheir plan.

Well, I'm not sure I'm comfortable talking about what theirplans are and what they can accomplish and what they can't accomplish. Being aworld leader in granular carbon manufacturing, being, in fact, an experiencedplant manager who knows the difficulties associated with manufacturing activatedcarbon, I can tell you that there are certain challenges that need, will needto be made, or will need to be met and overcome to become a reliable anddependable manufacturer. There will be some logistics issues that will have to alsobe met to become a reliable and dependable supplier of product quality. I'm notsaying that they can't meet those. I have no idea. I don't have any idea howthe states that they’re trying to receive permits, how that's going to go andhow quickly and how smoothly it will go. I will say this. I think that if everybody's marketestimates are correct, if we're talking about in excess of £1 billion, or ifyou take Calgon Carbon's forecasts, which are somewhere between £750 million bythe middle of next decade, I don't think that that's going to jeopardize thekind of improvement and increase in our performance that we're expecting fromthis market. So, if you just pick some numbers. If it is £750 million andassume there are three suppliers, we're talking about £250 million per year ofactivated carbon. And if you multiply that by an average price of - pick one,if it's brominated, it could be $1 or more, if it's not brominated, it could be$0.60 or $0.70 So, if you take £250 million times $0.80, just as an average, justto throw some wild numbers out, talking about incredible numbers, whetherADA-ES is in the picture or not, I think it's a little too early to beconcerned about that. They are going to have, their hands full, I think,getting ready. I'm not saying that they can't, but I am saying that themarket's going to be big enough and there's going to have to be and the impactof this market is going to influence the entire global supply and demandsituation. So, maybe in other words, there will be room for ADA-ES in theglobal picture, if they can somehow pull this off.

And just continuing on the global supply, you said that youcan act as a coordinator and therefore the power plants are not going to bedealing with thousands or hundreds, let's say, of small Chinese producers. Theywill deal for all of that capacity, but you can obviously put it all togetherand then eliminate a lot of the concerns. There are a lot of other brokers out there. If they can doit, I mean, if you can do it, couldn't someone else do it as well andtherefore, the market could be floated by all of that excess carbon capacity inAsia, or am I not looking at this properly?

I think that our brokers could serve as brokers. We are thelargest importer in the country today, so obviously we’ve proven that we can dothis. I'm not sure I understand the question. The…

Well, what I mean is that you are saying that you are in avery good and Norit are in a very good position because you are the only U.S.suppliers and that the power plants really don't -- are not that interested ingoing through dealing with a lot of small producers in Asia. But if you can not put all of those small producerstogether, then I am assuming that someone else will do it because it is justbrokering and therefore they could be additional competition from Asia at lowerprices versus the U.S. manufacturers.

Again, there's the tariff to deal with, which will limit thelowness, if you will, of whatever competitive price. But, yes, I think I followyour logic and I think it's possible. I just think it will be difficult forthose types of brokers to be successful.

And the tariff, John, when are they expiring?

'12. 2012.

Okay. All right. I'll get back in queue. Thank you.

You're welcome.

Next question comes from Matt Schaenen from SomersetCapital.

Hey, John. Couple related questions for you. I sort ofmissed what you said earlier in response to the returns on Greenfield capacity.Is that high 20%, that's an EBITDA margin?

That, Matt, would not be an EBITDA margin. That would be areturn on capital.

Invested capital.

Okay. And maybe you can speak, I guess, that's probably twocalls ago now, where you gave, I guess, I’d say loose guidance of kind of $55million to $60 million EBITDA figure. And obviously running through the math,looks like things have maybe changed a bit. I was wondering, I don't know, how much you're able to speakto this or maybe if you can speak directionally, but as things in terms ofmarket opportunity and perhaps timing have clarified themselves, I'm wonderingif you have sort of updated numbers that you could share with us.

I'm glad you bring that up actually. The call you'rereferring to was the one that occurred shortly after Board approval of ourstrategic plan. If you look at our EBITDA for the third quarter and I guess,it's not something, I'm permitted to talk about, but you can calculate theEBITDA for the first nine months, all right. Never mind. And it's a significant improvement over what the EBITDA wasin 2006 obviously, and exceeds what we expected when we put the strategic plantogether. The other thing that was the condition when we had that first quartercall was the mercury market was a hell of a lot more unknown than it is now. The market has developed quite a bit in the past six orseven months since, we had that conversation. And obviously, the impact, thevolume of the market, the size of the market and the fact that we're beingaccepted as one of the two leaders at this point in time with a potentialmarket size of £400 million, or up to £400 million by the year 2010, wouldimply EBITDA margin or would imply revenue and contribution margin that wouldsignificantly blow by the number that you mentioned, if we were successful inachieving a minority of that volume increase. So, the answer to your question is we've got to besuccessful in the mercury market. We've got to continue to do things that wesaid we were going to do with respect to our strategy in other parts in othermarkets. And the fact that we're considerably beyond where we thought we wouldbe at this point in time all indicates that that number I gave you two quartersago is a more than conservative number, a number that potentially as thesemarkets develop, a number that we should blow by rather easily.

Okay. Terrific. Thanks so much.

You're welcome.

Thank you. And the next question comes from Corey Amen fromRice Voilker (ph).

Hey, guys.

Hi, Corey.

I wanted to ask you, what is your target for SG&A? Imean you had indicated in a prior call what your target was either in terms ofpercentage of sales or in absolute dollar amount. And I just can't seem to findthat.

We were if I remember correctly in 2006, 19 and a fraction.

Okay.

And what I've set as our target is, that we would like toreduce SG&A as a percent of sales by a minimum of 1% per year between nowand 2010 when we conclude this strategic planning period that we just talkedabout in the first quarter. What additionally we’ve said is there will be increases,we're not saying that we're going to decrease it in terms of whole dollars, butwe feel that if we are able to get that number staff of 15 eventually

Okay.

That we would feel better than we, than we do if we don'tmanage to get it above, or if we don't manage to get it below 15%.

Okay. So that's a pretty good target, the 15%, you think?

Yes, 13% to 14%to 15%, Leroy and I work on thiscontinuously, we're looking ahead to see, we haven't finished our 2008 businessplan. We'll do that over the next four weeks and then we'll have a bettersnapshot again as to what we're going to be able to accomplish next year. But we feel pretty good that the, that we can get to the15%, but we would like to get a little bit lower than that, I'm not sure we'regoing to do that by the year 2010, but it's certainly an internal target thathe and I have for each other.

Okay. On BEE-Line, how much will this cost, again, and howwill this show up in the financial statements over the next two quarters, andif it does affect the income statement, are you going to break it out?

The additional £4 million I talked about?

Yes.

We will try and get that capacity online as quickly aspossible. We will get nothing from it until after it comes online, which shouldbe April, this is Northern Kentucky, so we have some weather issues, whichmeans that we probably won't get online until after the weather breaks, whichwill be late March, mid-April, something like that.

I'm talking more in terms of the costs. Like how much willit cost you and should we expect to see some excess expenses in the incomestatement associated with those costs?

No, the capital cost that was approved by the board was $1.4million, or $1.5 million.

Okay.

It represents a lot of work. The reason the number lookssmall compared to the $15 million to $20 million I've talked about previouslyis because essentially we're not buying new equipment. We're just getting the instrumentation and the equipmentback online, performing what I would call a much more intensive maintenanceturnaround and rehabilitating some of the coal delivery conveyor equipment fromour coal supply to the pressroom, which is if I remember correctly somewherearound 300 yards or 400 yards away. So that's where the money's really going, as opposed to therest of the production line where we're going to have to buy new environmentalabatement equipment to satisfy Kentucky environmental requirements.

Okay. Final question and I'll jump back into queue. If thedrinking water volume is so short in the September quarter by a materialamount, I mean what's going on there? Are the utilities waiting longer toreplace the carbon? Are they having to get budget approval to pay higherprices? Can you just, I mean what do you think is happening?

Maybe some of both. The everybody's trying to get more outof everything. Doesn't have anything to do with the tariffs, doesn't have to doanything with anything. All companies are trying to get as efficient aspossible, get the most for their dollar as possible. So, the municipalities in many cases aren't any different.Now there are some municipalities that replace their carbon on a calendar on aclock and it doesn't matter really what their analyses say. They replace it onthe basis of time. But some do on the basis of when the carbon's spent. Theother thing is the reason that our business is seasonal, the reason that thishappens, varies from quarter to quarter is as they do have to get approvals andthey do spend their money usually on a calendar quarter and when they run outof money, which is typically as they get close to the fourth quarter, that'swhy there aren't any municipal fills. I honestly don't think that this is anything significant.This has happened in the past it doesn't happen every year, doesn't happenevery other year, but it does go in cycles. Now, this big fill that we hadpredicted -- or not predicted, that we had had the business we got the contractin March, the shipment was supposed to occur in September, and the constructionwasn't complete. And that happens pretty frequently, and for those of youthat are listening in that know the company for several years, you've heard theCEO talk about that previously. We were short about £3 million in the thirdquarter. That's the materiality. That is a fairly big number. And we're going to pick up some of that in the fourthquarter if, if that December shipment does in fact go in December. Now, it's asouthern state, so I'm hoping weather won't have any influence.

Okay, great. Thank you.

Thank you. And we have a follow-up question from RosemarieMorbelli from Ingalls and Snyder.

Looking at the fourth quarter, John, you are expecting Imean it is usually smaller than the third quarter, but you are expecting that£1 million to come through $1 million, I'm sorry, £3 million, into the fourth…

No, no, Rosemarie please excuse me. I didn't say £3 million.It's more than $1 million.

Okay. What was the £3 million you were just talking about,saying that you were short?

We were short in volume third quarter of this year overthird quarter of last year by £3 million of municipal water carbon.

Okay, but it is not this it is a lot more than this one fillthat has been postponed from September to December?

Yes.

So if we look at that additional business out of Q3 into Q4,would that translate into similar margins for the carbon in service in Q4versus Q3?

Well, let since I can't give you guidance, let me talk aboutlet me see what I can say. We are making progress passing through the VATcosts. We are putting a price increase in place for the Americas October 1. Soit's effectively already begun. Europe and Asia will probably have little to no priceincrease in the fourth quarter at all. So, the freight costs are what they are.I'm not sure that we're expecting in any significant deterioration the VATcosts aren't changing, so we shouldn't expect any deterioration. We should expect an improvement. So I would say that there'sno reason to believe that the margins would be any worse than they were in thethird quarter. In fact, there might be some reason to expect the opposite.

Okay, and so the reason the margins were lower in the thirdquarter versus the fourth, and I am only talking in that business. I mean youonly had 2.5, top-line was only short by $2.5 million, more or less, Q3 versusQ2, and the margin was substantially lower. So could you give us a little more flavor? I am assumingthat it is the VAT costs that you were not passing through. It is a little lessvolume. Was there anything else in that operating margin for that particular…

The freight.

Okay.

The freight. The fact as I think you've got them all. Whenyou sell less volume our plant overhead in our production service expense, ourwarehouse expenses, our supply chain overhead, are not being covered as well atthe lower sales volume, and then the addition of the VAT expense and the freight,and we're talking about 0.6 percentage points over the $85 million. So…

Well, the $0.5 million -- not the $0.5 million. I'm sorry.The $0.25 million that we essentially were up in, on the operating expense linethird quarter versus second quarter also was primarily driven into carbon. Soyou had that affecting the third quarter margins as well.

Okay. When we look at 2008, you are still not going to haveanything from mercury removal in those numbers, are you?

Yes, we'll have a bit and I'll know more about that in amonth, but when I look at what our commercial folks expect to have for the onecustomer, the one contract that we do have, there will be consumption in 2008.I think in the presentation, I said £4 million. If I didn't, I'll say it now.

You probably did and I missed it. I apologize.

Oh, that's okay. We'll have that for we expect to continue tobe doing full scale testing. Full scale testing can mean up to truckloads,40,000-pound truckloads, multiple for tests. So there we expect there will be some level. I just don'tknow what that number is and I won't know it until the first week of December.

But it will be so small that it is fair to assume that youwon't get, it will be at a cost to you going through this exercise?

A cost to us …

You are not going to make any money. You probably are goingto lose money on the mercury going, I mean, on the carbon going into themercury market in 2008.

No, no.

No?

No, we'll be selling it at prices that we believe we can getfrom the market. Now, if you're saying, are you saying, are you asking istesting prices the same as commercial prices for long-term contracts, I'll haveto get you an answer. I don't know the answer to that question. If the questionis, are we charging customers full price for testing, I don't know the answerto that. I don't think I've never suggested we'll lose money in 2008 for themercury market. We'll make money.

Okay. And could you talk about the progress you are makingin the UV and ion exchange businesses, because those are the ones with thehighest margins? And are they popping up into carbon activated carbon andservice or are they split between that and equipment?

There is a service component in UV and a service componentfrom ion exchange that are represented in the carbon and service segment. Thenumbers are relatively small, but they are nice margin projects, and they areincluded in service. Regarding just the equipment segment, there we have theafter-market, which is sale of spare parts, etcetera, and then the largeequipment or the new equipment sales are incorporated into, into the equipmentsegment.

And what kind of, what kind of gross are we seeing in thosetwo businesses? Do you have a lot of new contracts? Could you bring us up todate on the outlook for that?

Sure. We're doing, we continue to do what we expect with UVbusiness, which is continue to grow it at a greater than 25% rate from a yearfrom an annual standpoint, so we're still very pleased about that. The ion exchange business is not growing. Nothing really haschanged in terms of perchlorate to at least nothing significant has reallychanged to cause a lot of growth in the perchlorate market, which is the reasonthat we're not seeing a lot of growth in ion exchange sales. And I'm talking about the equipment segment now. And weagain, in that business plan for 2008, I'll get an idea of what our folks inCalifornia are projecting for 2008. I understand there are a number of projectsthat they expect to be awarded in 2008, but California really is becoming thetour from a perchlorate standpoint.

All right, and what about, I can't remember the name of it,but leftovers from fertilizers that was a big…?

Nitrates?

Yes, thank you.

What's the, what about…?

Well, are you making any progress on that, or is that youare not talking about that business that had a lot of potentials in priorconversations, probably a couple of years ago? I was wondering whether anythingwas happening in there.

Not really. We're not pursuing that market aggressively. Wehave a product or two that we offer in that market, but we have not put a lotof development money into treatment for nitrates. It's an ion exchange technology. It can utilize the serviceequipment that we utilize for other ion exchange type business. It's just notone that we have been pursuing aggressively.

Okay, thank you. Good luck.

Thank you. And we have a question from Michael Gaugler fromBrean Murray Carret.

Good morning, John. I'm sorry. Good afternoon. Hello?

Yes, can you hear me?

I can hear you now, John. Thank you. I was taking a look atthe balance sheet and I've noticed that cash position is building prettynicely. I was wondering, what your thoughts were in terms of future uses ofcash?

CapEx for one, Michael. As I mentioned a little earlier inthe call, we're not concerned about BEE-Line. The other, the other part,because we believe we can support it and pay for it from operating cash flow. There's another major project that's heading down the path,which is grinding capacity. We are making powdered activated carbon for themercury market and we are expecting to install grinding capacity, materialhandling capacity, tanks, truck loadouts, rail car loadouts for the mercurymarket and we're in the process. Right now the board has approved engineering study to comeup with a project scope and an estimate for the capital project to, associatedwith this grinding, will not be a small project. It could be north of $10million, maybe even $15 million worth of capital. When you add, so that's $20 million roughly or $15 millionor $20 million for BEE-Line, $15 million, let's say, for grinding capacity,plus we have other projects elsewhere in the world. We're talking about asignificant amount of capital that we're going to be spending here in the nextthree years for growth. So that's the first priority for us in terms of use of ourcapital.

Okay. Just as kind of a follow-up to that, are you primarilyfocused on organic growth at this point or are you still looking potentially atacquisitions if something good comes along?

If something good comes along, something like the Waterlinkacquisition we made in 2004, in other words, something with really high synergyvalue, consolidation, a competitor that is something that would be veryadvantageous for us. So we would look hard at doing something like that. In termsof getting outside of what we're doing right now, I don't think it would be agood idea, primarily for the reason that we're really working hard at thesemarket opportunities and we're very focused. I wouldn't want to take on anything new at this point intime that's very different from what we do now. But if there's something that'sin our wheelhouse, so to speak, we'll definitely be interested.

All right, thanks, John.

You're welcome.

Thank you. And we have a follow-up question from Corey Amenfrom Rice Voilker.

Hi, guys. Hey, with the mercury emission powder carbonbusiness are you concerned about locking in prices now over the span ofmultiple years? I mean if we're dealing with a situation of demand exceedingsupply, I would hate to see you cap your prices over the course of multipleyears, when Calgon Carbon's been under earning and now we have an opportunityto over earn for a few years. Do you have any thoughts on that?

It's, it's a tough one. We've talked about it (inaudible)here. We, we want to have our cake and eat it, too. So we want take or pays. Wewant commitments. We want to make sure that the capital investments that wemake, forget BEE-Line. If we decide to build an expansion at Pearl River, which isvery possible and we talk about committing another $75 million to a newproduction line, we want to be comfortable that we've got the, a sufficientbackbone of that capacity committed. So if we're satisfied with the operatingmargin that we're going to make in these take or pay contracts, and we can getthree years out of them for major volumes, that will make us feel more secureabout investing the money and it will also allow some things to play out sothat if the global supply and demand does strengthen -- let me see. I'll saythat better. So that if the demand situation globally strengthens to apoint where there's a lot more value and a lot more price potential inactivated carbon, that we can take advantage of it at that time.

Okay. That's fair. Are you seeing signs of curtailment ofChinese-activated carbon imports into the U.S. in the past three to six monthsabove what you expected?

Yes.

Okay, and do you think that's the value that situation,causing that?

I think, let's spend a minute. That's a good question. Let'sspend a minute talking about it. There is a lot of things happening in Chinaright now. The VAT is one of them, obviously. That's a 13% effect that when youbring it in and put the tariff on top, makes it a 21% impact. So that's asizable number. If you pick up any periodical and you read about itnowadays, you hear about what's happening to coal, you hear about what'shappening to labor costs in China, hear about environmental pressures. China ischanging very, very quickly. The currency pressures, if you think that there'sa currency pressure between the United States and China, think about what theEuro versus China is. So China is a place that's going to undergo significantchange. I'm not sure, I'm not smart enough to know what's going to happen ayear from now or two years from now, but I know that their cost advantageappears to be weakening, and legitimately so. And you're right. The import statistics that we've seen have shown that atleast in 2006, the imports were down dramatically. Now, that could becompletely the effect of the tariff and people not knowing how bad the tariffwas going to be until it was finalized in April, but I'll bet based on whatwe're seeing, that we're going to see the 2007 imports also be down compared to2005.

Okay. My final question is from speaking to people in theindustry, I'm hearing that the reactivation market is really heating up. Whenwill we see some benefit in your numbers from react?

You're seeing it already in Asia and Europe, and if youremember the discussions I've had about Asia, strategic plan and Europestrategic plan really center a great deal about reactivation. Central Europeand southern Europe are big reactivation growth areas in Europe. China andother parts of Asia are big growth opportunities in Asia, and we are being veryaggressive in those. We've seen new projects in 2007. We'll see more new projects in 2008 and that's kind of anexciting part of our growth. Not a lot happening yet in the United States, butthere are, there are some things that are developing in the United States. There's a large reactivation potential in Southwest UnitedStates, in Arizona, where three communities are getting together to talk abouta potable reactivation facility, potable meaning that municipal carbon fromthree areas may be pooled and reactivated. That would be new. That would be a major volume. Those threeareas are supposed to consume about £55 million of activated carbon, whichwould be reactivated. Naturally they are talking to us and our competitors tosee what our interest level is. And there's another project in eastern-central United Statesof the same ilk. So there are reactivation opportunities in the United Statesalso. They just seem to be happening a little bit slower than the ones inEurope and Asia. So we, let's remember, we love service and it's our favorite,it's our favorite way business model. So we're excited about that.

Okay, great. Thank you very much. That's all I had.

(Operator Instructions) All right. There appear to be nomore questions at the present time. Do you have any closing remarks?

Yes, I do have a closing comment. First of all, thank youfor joining our call. I apologize for my coughing. We're pleased with theoutcome of the third quarter, both from a financial perspective and for thechanges that we've made to the organization and the work that we've completedto prepare for growth in 2008, and there will be growth in 2008. We believe we're on course for continued improvement. Wewill manage our global price increases over the next few months. We'll continueto aggressively pursue the mercury market and solidify our position in thatmarket. We'll put the new organization in place as quickly as possible, andwe'll finish the 2008 business planning during the next four months. Thank you.

Thank you. That does conclude today's teleconference. Youmay now disconnect your phone lines.