CCC Intelligent Solutions Holdings Inc. (CCC) Q1 2015 Earnings Report, Transcript and Summary

Welcome to Calgon Carbon’s First Quarter 2015 Earnings Results Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] I would now like to turn the call over to Gail Gerono, Vice President of Investor Relations. Please go ahead.

Good morning and thank you for joining us. As usual, our speakers today are Randy Dearth, Calgon Carbon’s Chairman, President and CEO; Bob O’Brien, our Chief Operating Officer; and Steve Schott, our CFO. Before we begin, I would like to remind you that today’s presentations or some of the comments that Calgon Carbon’s executives made during the Q&A may contain statements that are forward-looking. Forward-looking statements are subject to risks and uncertainties and Calgon Carbon’s actual results may differ materially from those expressed in the forward-looking statements. A list of factors that could affect Calgon Carbon’s actual results can be found in the news release that we issued earlier this morning and are discussed more fully in the reports we filed with the Securities and Exchange Commission, particularly in our last Annual Report on Form 10-K. These filings, as well as this morning’s news release, can also be found on the Investor Relations page of our website. Randy will begin today’s call with a summary of highlights in the first quarter. Randy?

Thanks, Gail and good morning everyone. Welcome to our first call of 2015. We are off to a good start to the year. Our sales, gross margins before depreciation and amortization, our operating income, net income and earnings per share all showed improvement over the last year’s first quarter. Let’s review some other highlights of the quarter. Sales to the mercury removal market were $11.6 million, a 72% increase over the first quarter of 2014. Testing of our ballast water treatment systems for U.S. Coast Guard type approval has begun in the EPA certified testing facility. Despite production issues caused by severe winter weather in the U.S., there were no significant delays in shipments to customers in the quarter. During the year, $19.5 million contract extension with a chemical manufacturer was successfully negotiated in the quarter. Calgon Carbon paid its first quarterly cash dividend to shareholders more than 9 years and the company purchased more than 80,000 shares of Calgon Carbon’s stock on the open market and considerably more since the end of the first quarter. Sales for the potable water industry in the first quarter increased in the Americas, Europe and Asia versus the first quarter of 2014. Noteworthy activity in the first quarter of 2015 included delivery of 4.3 million pounds of granular activated carbon to a potable water customer in South Korea. We awarded Calgon Carbon of a 3-year $10 million contract to supply virgin carbon and turnkey reactivation services for drinking water treatment in U.S. converging 8 municipal accounts in the U.S. to customer reactivation and contract awards for potable water reactivation in Helsinki and Amsterdam valued at more than €1 million. These are just a few of the accomplishments in the first quarter that contribute to our excitement of our company’s future in both our traditional as well as our regulation driven markets. And now, I will ask Steve to review the first quarter financials. Steve?

Thanks, Randy. Good morning, everyone. Total sales for the first quarter of 2015 were $135.7 million versus $131.6 million in the first quarter of 2014, an increase of $4.1 million, or 3.1%. Currency translation had a negative impact of $6.3 million, primarily on the activated carbon and service segment and their sales for the first quarter of 2015 due to the stronger U.S. dollar. Regarding our segments, sales in the activated carbon and service segment increased $5 million, or 4.3% for the first quarter of 2015 compared to 2014’s first quarter despite the $6.1 million negative impact of foreign currency. The increase was principally due to higher demand in the potable water market in all geographic regions as a result of significant new orders from municipal drinking water, sales to the Americas potable water market, included a large order for the treatment of disinfection byproducts. Also contributing to the quarter-over-quarter increase was higher demand in the Americas environmental air market as a result of customers complaining with the existing mercury removal regulations, as well as new customers preparing to comply with the mercury and air toxics standards regulations known as MATS, which became effective in April 2015. Partially offsetting these increases was lower demand in the European food market as certain large orders in 2014 did not repeat in 2015. Sales in the Americas specialty carbon market also declined primarily as a result of lower demand for both respirator and metal recovery products. Equipment sales increased $200,000 or 2.3% in the first quarter of 2015 versus the comparable 2014 period. The increase was due to higher sales of ballast water treatment systems of $1.9 million which was partially offset by lower sales of traditional carbon absorption equipment of $1.7 million. Sales for the consumer segment decreased $1.2 million or 34.7% as compared to the first quarter of 2014 due to higher demand from a single customer in 2014 that did not repeat in 2015, as well as a negative impact of foreign currency translation with the total of $200,000. Consolidated gross profit before depreciation and amortization as a percent of net sales was 35.7% in the first quarter of 2015 compared to 33.6% in the first quarter of 2014, an increase of 2.1 percentage points. The increase was primarily in the activated carbon and service segment. Approximately $1.2 million of this improvement resulted from higher margin products sold coupled with a decline in some of volume of lower margin products, particularly in Asia. Lower coal costs of approximately $500,000 and lower diesel fuel costs of approximately $400,000 also contributed to the increase. In addition, the favorable impact from the company’s cost improvement programs, including increased carbon production volumes of 5.2% in 2015 contributed to margin improvements in all geographic regions. Depreciation and amortization expense was $8.7 million in the first quarter of 2015 compared to $7 million in the first quarter of 2014. The increase was primarily due to higher depreciation expense of approximately $900,000 related to the improvements to the company’s Catlettsburg, Kentucky virgin carbon manufacturing facility and the addition of the North Tonawanda, New York reactivation facility that was placed into service in the second quarter of 2014. Also contributing to the increase was accelerated depreciation expense of approximately $800,000 related to certain assets that will be replaced later in the year as a result of new projects, including the company’s SAP reimplementation projects. Selling, administrative and research expenses were $22.5 million during the first quarter of 2015 versus $21.6 million in 2014, an increase of $900,000 or 3.9%. The increase was principally due to higher costs related to the company’s SAP reimplementation project of approximately $500,000, as well as the timing of certain employee related costs of approximately $400,000. The income tax rate for the first quarter of 2015 was 33.5% versus 34.4% for the first quarter of 2014. In summary, net income for the first quarter of 2015 was $11.1 million versus net income of $9.8 million for the first quarter of 2014, an increase of $1.3 million or 12.8%. On a fully diluted share basis, earnings per common share were $0.21 for the first quarter of 2015 as compared to $0.18 for the first quarter of 2014, an increase of 15.3%. Turning again briefly to our company’s business segments, the activated carbon and service segment recognized $25.9 million in operating income before depreciation and amortization in the first quarter of 2015 compared to $22.8 million in the first quarter of 2014. This increase was primarily due to the previously mentioned favorable mix, lower coal and fuel costs, as well as favorable production volumes. The equipment segment recognized $400,000 operating loss before depreciation and amortization in the first quarter of 2015 compared to $1 million operating loss for the first quarter of 2014. The $600,000 improvement was primarily due to cost improvements as well as higher sales volume that I previously discussed. Backlog for the equipment segment was $18.3 million as of March 31. The consumer segment recognized $500,000 in operating income for depreciation and amortization in the first quarter of 2015 compared to $800,000 in the first quarter of 2014. The decrease was related to some lower sales volume for activated carbon class. Regarding our balance sheet, at March 31, we had approximately $48 million of cash. Neither receivables nor inventories changed significantly from the end of the year. As of March 31, the company had total debt outstanding of $79.8 million, which represents an increase of $8.5 million from year end and primarily relates to borrowing some of our U.S. credit facilities for capital expenditures, which totaled $16.1 million during the first quarter. Also, the company spent $1.7 million during the first quarter to repurchase 80,500 shares under its share repurchase program at an average price of $20.88 per share. Through April 27, 2015, our repurchases were approximately 231,000 shares at a total cost of approximately $5 million. Operating cash flow was $8.9 million for the first quarter of 2015, a decrease of $1.3 million as compared to the first quarter of 2014. This decrease was primarily due to a net unfavorable working capital change partially offset by improved operating results. Capital expenditures totaled $16.1 million for the first quarter of 2015 and were primarily for improvements to the company’s Catlettsburg Kentucky facility, along with expenditures relating to the company’s new headquarters facility, which included $3.6 million for construction of the research and development center and $1.7 million for our SAP reimplementation project.

Thank you, Steve. Let’s go to Bob now for the operations review. Bob O’Brien: Thanks, Gail and good morning, everyone. The extremely cold weather in February negatively affected production of virgin carbon at our Big Sandy Kentucky plant. Our water intake to the plant was also damaged by ice and runaway barges. Losses from this winter storm event were still being tallied and likely to be in excess of $1 million. The cold weather also impacted our reactivation facilities in Pittsburgh, Columbus and North Tonawanda, New York. As Randy mentioned, however, through the period, we were able to meet all our customer needs. In the U.S., our two main current capital projects, the de-bottlenecking production line of Big Sandy and to refurbish our [indiscernible] reactivation facility are moving forward. The environmental permitting process for both projects, however, is taking longer than we projected. As a result, our capital expenditures for 2015 will be reduced by $10 million from our original estimate. We now expect to spend between $70 million and $75 million in 2015 on capital projects. In Europe, work on the refurbishment of our potable water reactivation facility at Tipton in the UK continues. We now project starting the facility in August. It will be capable of handling the needs of all of our potable customers in the UK. In China, we have had success in developing the market for reactivation of spent industrial carbons. As a result, we continue to pursue approval from the local environmental authorities to utilize both of our kilns at our Suzhou facility to serve the industrial market. Currently, one of our kilns is designated for the reactivation of potable and food grade carbons. We expect this improvement before the end of Q2. Now, moving on to some regulatory matters, last week, the U.S. Department of Commerce announced preliminary tariffs on steam activated carbon that was manufactured in China and entered the U.S. between April 1, 2013 and March 31, 2014. The preliminary average tariff rate is $0.24 per pound as compared to the current average rate of approximately $0.02 per pound. Please keep in mind, however, that this rate is preliminary. There can be a large discrepancy between the preliminary and final rates which will be announced in the fall. In the latest challenge to the EPA’s mercury and air toxic standards, oral arguments were held before the U.S. Supreme Court in March. Our ruling on whether the EPA unreasonably refused to consider the electric utilities cost to composite MATS is expected to be rendered by the court by the end of June. Continuing with the mercury market, we have remained focused on providing products to electric utilities, which will permit them through having the lowest cost of compliance with state and federal Mercury regulations. Since 2006, we have invested over $7 million in R&D to enable us to achieve this objective. And recent test at utility sites and in full scale operation, our products continue to demonstrate their value. This is particularly true, where utilities face a challenging flu gas environment such as with the presence of SO3 or the need to inject dry sorbents to also control acid gas submissions. We are pleased with our success to-date in the Mercury market and expect our sales for 2015 to be $50 million to $60 million versus approximately $29 million in 2014. We continue to believe that we will capture at least 30% of the value of the total Mercury market, which we estimate at $300 million per year by 2017. Through our recent commercial success with utilities, operating in states which have their own mercury regulations, we expect that our sales in 2015 will increase by approximately 50% over our 2014 level regardless of the ruling of the U.S. Supreme Court. Next, let’s move on to ballast water treatment. There were no new approvals of the International Maritime Organization ballast water treatment convention in the first quarter. In order for the convention to be ratified and go into force, five nations that account for 2.16% of the world’s shipping tonnage – ship tonnage must approve it. The IMO’s marine environmental protection committee, which in the past has provided a platform for five nations to announce approval of the convention, is scheduled to meet later this month. As for Hyde’s performance in the first quarter of 2015, revenue increased as compared to last year’s first quarter. However, orders for new systems were soft especially for offshore service vessels, a market in which Hyde has had excellent success. The softness in this market reflects the downturn in global demand for oil. Also, the strong dollar is a disadvantage to Hyde in global competition as most of these new ships are being built in Asia. Nevertheless, Hyde was awarded its first orders from Singapore in the first quarter to provide ballast water treatment systems for offshore service vessels. In another positive development, we began testing our ballast water treatment systems to obtain U.S. Coast Guard type approval. The testing should be completed in early 2016 and assuming the Coast Guard’s U.S. test protocol has been finalized, we will then send our results to the Coast Guard. The test results should also be used to apply for an updated type approval from the IMO. On news for drinking water, treatment of drinking water is a consistent major source of revenue for Calgon Carbon typically accounting for about 25% of our sales in any given year. In recent years, we have deployed additional resources to further the understanding and adoption of activated carbon in water treatment. This includes developing a closer working relationship with key federal and state government agencies, as well as federal and state elected officials. For example, Calgon Carbon provided input on the latter bill, which was recently approved by the U.S. House of Representatives. The bill includes signage to ensure that technology providers, such as Calgon Carbon are consulted by the EPA when it prepares its strategic plan to protect U.S. public from harmful algae blooms. The Senate companion bill contains identical language. In the first quarter of 2015, Calgon Carbon was awarded significant contracts for completed contractual obligations for traditional applications in drinking water treatment. For example, Randy mentioned in his opening remarks that we were awarded a 3-year $10 million contract for drinking water treatment in the U.S. The completion of one contract in South Korea for a large carbon fill to treat drinking water drove sales both for the entire Asia region versus the comparable period in 2014. In the first quarter, we also provided an initial sale of 2.2 million pounds of granular activated carbon for disinfection byproducts control in Texas. Taste in order to control treatment to prevent formation of disinfection byproducts and groundwater purification will remain the foundation of our municipal business in the short-term. Each of these opportunities can include customary activation. We have also identified other opportunities in the U.S. municipal market that could generate significant sales over the long-term. I would like to mention a few of these opportunities. They are the use of activated carbon as a very defense against algal blooms and chemical spills. The creation of federal regulations restricting the use of core means as a means to control disinfection by-products. The return to use of contaminated wells which require treatment, necessitated by drought conditions, including the removal of 1-2-3 TRICOR Propane, a carcinogenic solvent present in some California wells, next, the direct conversion of municipal wastewater into potable drinking water, and lastly, with the control of endocrine disruptors in pharmaceutical and personal care products. You will hear more about these opportunities in the future. We are beginning to see activity in the U.S. for several of these new applications especially those that are driven by the drought in the West. I should note within the 2017 to 2020 timeframe, the management of these applications in the U.S. and the rest of the world could result in a step change in the size of our municipal business. That concludes the operations review.

Thanks Bob. Now Steve will talk about the outlook for the second quarter. Steve?

Thanks Gail. Let me begin by discussing the impacts of foreign exchange. As we mentioned earlier, the impact of foreign exchange on our first quarter 2015 revenue was $6.3 million and we currently expect the second quarter impact to also be approximately $6 million. During the second quarter of 2015, we are also seeing some softness in the corn sweetener and respirator markets. These negative impacts on revenue are expected to offset growth in other areas including our FLUEPAC sales for mercury removal that we expect to grow by over $7.5 million or 120% as compared to our second quarter of last year. In total, we believe 2015’s second quarter revenue will approximate to 2014 second quarter revenue of approximately $145 million. Margins, our gross margins pre-depreciation and amortization are expected to improve sequentially and be approximately 36% for the second quarter of 2015, reflecting ongoing cost improvement and an ongoing favorable sales mix. Depreciation and amortization, we expect depreciation and amortization to increase by approximately $1.3 million versus the second quarter of 2014. Of this increase, $700,000 results from an acceleration of depreciation primarily related to certain of our information technology assets that are going to become obsolete upon the completion of our SAP reimplementation that is now scheduled to go live in early July. This incremental $700,000 of depreciation will end in June and not burden the second half of 2015. Operating expense, operating expense expressed as a percentage of revenue will increase over the second quarter of 2014 by at least one full percentage point due primarily to the ongoing SAP reimplementation project. Second quarter expense for this project in 2015 is estimated to be $1.6 million as compared to $1.1 million in the second quarter of 2014, a $500,000 increase. The operating expense burden associated with this project should end after the third quarter of 2015. Finally, we expect our effective tax rate to be approximately 34%. And I will now turn it over to Randy.

Thanks Steve. So before we take your questions, I would like to briefly comment on the status of our cost improvement program, the outlook for sales growth and how we intend to utilize our balance sheet to create additional shareholder value going forward. The goal of our cost improvement program, which as you recall was initiated in 2012 was $30 million of savings on an annualized basis beginning in 2016. This was later increased to 2013 to $40 million. Let me say we are on track to meet that goal, both the dollar amount and the timing. In our last call, I announced that we are beginning a new initiative to realize additional annualized savings of $10 million beginning in 2016 and being fully realized in 2017. One of the sources of those savings will be generated by the completion of the SAP reimplementation project that was initiated in 2013. This was an ambitious project that consumed financial resources, as well as the time of many Calgon Carbon employees for extended periods. The many benefits derived from this project will have a significant impact on the way we do business around the world. For example, the new system will provide real-time information which is essential for global business. It will generate consistent and integrated processes across regions which should improve business performance and promote information sharing to support product development as well as customer-supplier management. It will provide a platform for e-business, which in the future could account for more than 30% of the total sales. The improved ERP system will manage and mitigate risk by eliminating non-integrated systems and it will simplify future innovation of other information systems. We expect the new system to go live in July. Along with the cost improvement initiatives, we have also as you know, set a goal to realize minimum sales growth of 5% for 2015. Given the headwinds of foreign exchange, increased competition in Japan and continuing softness in the respirator and sweetener markets, this may prove however to be a challenge. We do expect sales to grow in the second half due to stronger sales in the mercury market, increased demand for outsourced carbon, additional sales for disinfection by-product controls and additional sales from emerging markets such as Brazil, North Lat-Am region, as well as India. Some of the applications that Bob mentioned in his remarks could also contribute to growth in the municipal market this year. Growth in the equipment segment will be dependent on sales of ballast water treatment, which could pick up if the IMO’s convention is ratified. With respect to utilizing our balance sheet, we intend to continue our stock repurchase program and subject to board approval to continue to pay quarterly dividends and we expect to have significant borrowing capacity should we decide to expand virgin capacity or undertake one or more acquisitions. So before we wrap up, I had one more items on the agenda. Some of you may know that Gail Gerono will be retiring this month. This is really hard for me because I consider Gail a dear friend and a wonderful teacher. For almost 25 years, Gail has kept Calgon Carbon investors educated and engaged in the company’s stock. And during her tenure, she has seen the company evolve. She has worked with seven different CEOs and has been involved with the production of 24 annual reports. From all of us, I want to sincerely thank you, Gail, for your contribution to Calgon Carbon. And we wish you all the best in your retirement.

Thank you. Thank you very much.

Well, there is no replacing Gail I think we all agree with that. We have hired someone we believe will be a great fit for Calgon Carbon and our investor community. Dan Crookshank will join us as the Director of Investor Relations starting next week. Dan most recently served as a Director of Investor Relations at RTI International Metals and prior to that, he was the Vice President of Global Investor Relations at Mylan Inc. He has a lot of great experience and we are excited for you to meet him an official announcement will go out this afternoon. So with that, that concludes my remarks and we will now take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Tyler Frank of Robert Baird.

Hi guys. Thanks for taking question and Gail congratulations on the retirement.

Thank you.

I just want to touch on order flow and what you are seeing in terms of activated carbon demand for the mercury markets, are orders being delayed due to the Supreme Court’s ruling and how are things shaping up there? Bob O’Brien: This is Bob. We don’t see orders being delayed because of the impending Supreme Court ruling. Those – in our opinion, those utilities that have a -- April 2015 deadline to be in compliance are in fact working or in place to meet their treatment goals. Those utilities will have 1 year extension, obviously they have been delayed till April of 2016, but we haven’t seen any impact of the impending court ruling.

Great. And then is there been update on the potential capacity expansion at Pearl River?

As we have said in the previous calls, it’s on the table, we have looked at that. But obviously we are going to be looking at the Supreme Court decision and how that will play into our decision. We are obviously going to be looking at the 2016 MATS demand and we are still working on that. We are actively out there looking at what that market size will be and how we will participate. And we have also mentioned this in the call we are also looking very hard at new strategies for outsourced carbons. We are really thinking outside of the box and how we could, perhaps, through that strategy, be able to be more profitable and to reach new markets.

Great, thanks. And then final question guys and I will jump back in queue. Just for the 5% sales growth for 2015, I am sorry if I misheard, are you still expecting for sales to grow 5% this year or with the potential headwinds of foreign exchange and competition in Japan are you sort of backing away from that?

Well, I think the three things we are really going to play into that, obviously mercury is a big part of that in the outcome of the Supreme Court decision, but that will be obviously a big factor in second half of the year for 4% or 5%. This new strategy that I just alluded to as well should provide us with a chance to be more competitive in some different markets. And also as we mentioned in the call, we are putting a considerable effort in looking at the LatAm region, especially Brazil as well as India and we are hoping in the second half of the year to see our results of our efforts there. So, all three of those contribute significantly to what we believe is still an achievable 5% goal.

Great. Okay, thank you.

Our next question comes from the line of Kevin Maczka of BB&T Capital.

Thanks. Good morning.

Good morning, Kevin.

I guess I would first start by going to comment about Gail. On mercury, can I just ask – I think one of your big competitors there recently they made a comment about more like 300 million to 350 million pounds when all is said and done here and potentially seeing something on the order of 70% of utilities now deferring until next year. Bob, I think I may have missed your comments, but did you change your view at all about the overall opportunity for this market? Bob O’Brien: We remain pretty consistent. I think where we – sometimes there is confusion, because sometimes there is confusion in our organization. As new products are developed as we went from our first generation to now our third generation products, depending on the particular site, they are working much more efficiently. And so the amount of carbon that could be projected to be used in the market is declining, because the carbon is getting more efficient, right? That does not mean that the overall market size in terms of dollars is decreasing significantly at all, because the third generation products that we are making, they are more expensive to make, we are selling them for considerably more money, but overall, they provide benefit to the customer. So, the overall market size isn’t shrinking. What we have tried to do when we say how many pounds are going to be used in the market, we have tried to focus on a standard of our first generation products. So, we are not trying to provide an analysis that says how many first generation products will be used in the market and how many second and third generation, it can get confusing. So, we have tended to say the pounds range from 350 million to 550 million pounds a year based on first generation products. The actual usage maybe lower as company – as utilities adopt third generation products, but the overall dollar size of the market really won’t decline even if, significantly, even if the amount of pounds of product that are used declines.

Okay. Bob O’Brien: So, hopefully that gives you a little flavor. We, again, I think in our last call we tended to say we divided the mercury market up in terms of folds, the historical market over the last number of years that was set in place by state regulations and Canadian regulations, the amount of market that was going to be set as a result of utilities complying with an April 2015 deadline date, those utilities received an extension through April 2016. So, roughly, we thought the market would be in thirds and I think that’s still our view that a third of the market will in fact develop as a result of the April regulations and the next third will come in 2016. So, we are not saying – I think as I mentioned earlier, we are not seeing a massive – we don’t believe there is a massive delay into 2016.

Okay, got it. Very helpful. And then if we come to June and get an adverse ruling from the court, how did you think about how the mercury market and your sales for that market will progress after that? Can we just, at that point, see all these customers that are now complying April ‘15 kind of burn off their stockpiles and then your sales would sort of drift back down to what they were a year or two ago can be the first third of the market if you will or how should we think about that scenario? Bob O’Brien: Well, obviously part of that will depend on what the Supreme Court actually says relative to mercury. And so we will see where that is when the time comes. What I mentioned in my portion of the script was we are having success with our third generation products and a number of utilities that are in states that have their current regulations. So, for 2015, we will project that our sales would – in mercury would grow by 50% over what we did in 2014 even if the Supreme Court basically made an announcement that did not require the continued federal implementation of the regulation. So again, we have been successful in the states where there are current regulations. So, we expect in 2015 our business to grow, again, regardless of the Supreme Court. Long-term, obviously a negative ruling would affect the timing and the ability to grow and that will be dependent on what the Supreme Court actually says.

As we said before and as you know there is 19 states today that do require or have made this their regulation. Could more states do it? I just don’t want – we don’t have to answer that, that’s also a possibility.

Just one more question on that, Bob and I will get back in queue, but your $50 million to $60 million outlook for mercury this year implies a little bit of an acceleration from what we did in Q1. So, you are saying you can do that even with an adverse ruling, but what – why would that business accelerate if there is an adverse ruling and even more uncertainty, because it didn’t…. Bob O’Brien: Well, okay. Let me – first of all, during the first quarter, we saw our business ramping up month by month as the utilities were preparing to meet the April regulations. And what I am saying is if the mercury regulation stays in place, we expect our sales to be $50 million to $60 million a year. If the mercury regulation – federal regulation will be struck down we would not expect to achieve $50 million to $60 million, but we would expect to achieve approximately $45 million or in that range, which would be a 50% increase over 2014. So, certainly our sales would be impacted by a negative Supreme Court ruling, but we would not revert back to 2014 sales level, because the success our products have had with utilities that are in the states that have regulations.

Okay, that clears it up. Thank you.

Our next question comes from the line of Gerry Sweeney of ROTH Capital.

Good afternoon – good morning everybody.

Good morning, Gerry. Bob O’Brien: Good morning.

Just to echo everyone else tired and they don’t probably feel that, Gail congratulations on your retirement. So, just want to say that. Second, talking about the, not to beat a dead horse, on the mercury market, you are talking about to say the Supreme Court ruling stay – I am sorry, if were to go away – the Supreme Court negative ruling, do you expect the market to – your percentage of the markets to increase. This implies that you were getting a lot more traction, I believe with your newer generation products over the competition, correct? Bob O’Brien: I think that’s certainly part of it. And we think that our products are being well received in the market. Some of the utilities that are in regulated states or states that have their own regulations also are being required to control acid gases. So, some of the utilities that traditionally were just not injecting activated carbon in these states now also have to inject – dry sorbents to control acid gasses. And what they have found and what we would believe is when they are forced to inject these dry sorbents it makes it more difficult for the activated carbon to remove the mercury, so that it takes a better product in order to actually allow them to not only control the acid gases, but achieve the mercury regulations that they have to meet. So there are a couple of drivers that are affecting our business in the States, again with the existing regulations. So our products are performing very well at those utilities that are also forced to inject dry sorbents.

When you – that’s in the regulated – currently regulated, but as we sort of go into the next step in 2015 and even we are going to look at 2016, do you have an idea of how many plants for boilers for situations that face those similar challenges with the acid gases, obviously what I am trying to get out is, is there – that 30% market that you say you want to at least get could that increase because of this reason – these reasons going forward? Bob O’Brien: Yes. It’s certainly a potential where it could increase. I think it’s really difficult for us at this moment to have a clear picture as exactly how many utilities in the future are going to face the same situation, because they have a few other levels that they can potentially look to coal such as they are – what the coal they are burning. So they have a couple of other things that they may think about before they make a decision on how best to solve the problem. But those who have realized that they have to solve their mercury problem and acid gas emission problems with injection of sorbents have taken favorably to our third generation products. So we will be certainly trying to understand that as time goes on rest of this year and next year, but it’s not extremely a clear picture right now.

Got it, that’s all for me. Thank you very much.

Our next question comes from the line of Dan Mannes of Avondale Partners.

Hi, good morning everyone. And again, my congrats to Gail as well.

Thank you.

Good morning Dan.

I am going to carbon mercury one more time just because I don’t think you have got enough questions about it.

Thank you for that Dan.

Maybe we will just focus on mercury and avoid the rest of the company. So just – as I kind of parse through your comments, I mean I think you are up roughly $11 million in the first quarter as things ramp, but at least as it relates to your tone on the second quarter it sounded like it was actually going to be down sequentially, was that due to kind of early fill activity, is that seasonality or did I mishear that? Bob O’Brien: It’s not because of mercury, Dan. We are going to be up even more attractively in mercury in Q2 than we were in Q1. So that’s not the issue. I mentioned in my remarks that we are seeing some softness in the sweetener market. The respirator market remains an ongoing challenge, particularly as it relates to sales into the U.S. government, military. So just some softness in other markets that hopefully won’t continue, but particularly in Q2, we are going to have a bearing on our results. Also, the Japan business looks to be down as we move forward, perhaps 2% or so. That has – while it’s hurt the top line, it’s part of the mix story like so as Japan decreases in volume we are selling more U.S. products and holding them in the U.S. and that has aided in the overall margin outcome.

Got it. And then the other question on mercury is, you talked about the state markets, one of the complicating factors here is you have had a lot of states that have been performing for a while, but the federal regs require increase in the reduction in mercury from the same states. So is there a challenge, perhaps in assessing what even the state level demand is going to be if the federals go away?

As we tune it ourselves here, it’s complicated.

Clearly.

And it is complicated. We are trying to take all those things into consideration and the team that we are working in the mercury market drives to put forward their best estimates taking all these things into account. And so, right now again as I mentioned, they are projecting based on their knowledge of the customers and how they would react to various scenarios with Supreme Court rulings and the like. We think we are still going to be up by that 50% and that’s about the best we could put forth at this time.

No. And hopefully we won’t find out the answer if the Supreme Court will uphold the rule?

Yes, we agree with that.

The last question I have, I guess is on the expansion plan, obviously it’s something you have been looking at for a while. Given what you are looking at on the outsourcing side and given the continued improvement and efficiency on especially in the mercury market, is that maybe a little bit more back burner now. And I want to kind of correlate that comments by [indiscernible] who – I mean they seem to think that based on their current view of the mercury markets that there probably was going to be adequate capacity to meet it. So I am wondering if, I don’t want to say rethinking, but maybe it’s a little bit less of a near-term item the bigger expansion. Bob O’Brien: No. Dan as we pointed out, we are looking at all of the things you mentioned and we are going to play our decision based on how those evolves. So, if you want to say it’s on the backburner, it’s perhaps a little bit of the backburner at this moment in time, but very quickly make it a big issue. Once again, you see what happens with our outsourced strategy and what happens with the Supreme Court decision.

And I think we talked to other markets too will and the growth of other markets will play a key role into our expansion requirements. So it’s not just only based on mercury although that’s certainly important. It’s the growth in our other markets including municipal. Bob O’Brien: I think our prudency is actually something that I think is well warranted at this moment given the facts we have.

Yes. It’s kind of tough to make decisions right now and the feds are potentially moving things around on you, so I get it. Thanks guys. Bob O’Brien: Thanks, Dan.

Our next question comes from the line of David Rose of Wedbush Securities.

Good morning everybody.

Good morning.

Thanks again for everything and giving us in the next chapter. I am hoping maybe we can switch over to a little different because of the mercury removal maybe we can talk a little bit about equipment sales particularly ballast water as well as some of the UV technology for water reuse, I think you seem to be a bit encouraged by the opportunities in California, so maybe starting with the notion of water reuse of the $1.6 billion and projects that are requesting funding under the safe water revolving fund, how much are you expecting for that?

I don’t really have that information available to me, Dave. Certainly we are tied in not only with UV, we are tied in or we are trying to be tied in I should say with our activated carbon, because we are very much aware that with the drought conditions the municipalities and water authorities are looking for various sources of water and there a lot of wells that are shutdown in California as a result of contamination with various organic chemicals. And so probably our short-term, most likely short-term benefit is with water providers looking to startup the contaminated wells as another source of water. And so we are actively discussing and involved with projects. We are also actively involved with a couple of research projects probably little bit more longer-term that are looking for ways to convert wastewater into potable water directly using activated carbon technology. And that’s something that I think most people believe is certainly going to come. It’s just a matter of timing, but we are trying to actively be involved in those projects and testing because we believe activated carbon is a base technology if you would for that type of upgrade. So I can’t answer your question directly, but we are active in the California market, that’s for sure.

Okay and that’s helpful. I think from the activated carbon side, maybe if we can go to the ballast water numbers, I didn’t quite get the number for number of units sold in the quarter and your backlog?

Well we don’t give backlog discreetly for that portion of our equipment segment. In total of our backlog was down from year end perhaps slightly a little more than $1 million. The backlog…

Units sold.

You know what, I don’t have that and I didn’t bring it with me. So I will just apologize. We are going to work as Gail might have it but I will continue to address your question just for little bit. We are seeing some softness in that market currently particularly as it relates to offshore service vessels with the decline in the oil price. That is an important market to us and that we have seen slow. So, clearly for our success over the balance of this year, we are going to need movement on the IMO front probably to have a significant change in our year-over-year sales. So, it’s – go ahead, Dave.

Sorry, Steve. Go ahead. I didn’t want to interrupt you.

No. I probably said as much as I can. It’s a little slow at the moment. I don’t think we saw an increase in the number of sales. We saw a good revenue outcome for the first quarter from ballast water, but that was to a certain extent working through backlog. And I think the backlog is down a little bit and again I think that’s largely the offshore service vessel market slowing at least temporarily.

So, on that note Steve, last quarter, I was pleased with your progress on the operating profit margins, you were coming close to breakeven and I asked you if you thought you would be profitable for 2015 if the implication was a good chance of profitability that you expect it to be profitable. Now, sequentially, you have almost doubled the losses and you are saying that you are probably not going to see much growth on the top line year-over-year. So, how do I think about profitability for the equipment segment? Can you be profitable? I mean, I am assuming Q2 is going to look something like Q1 maybe even worse, so how do I get comfortable with profitability? Bob O’Brien: Yes, there is a lot of elements to the equipment business and first I would at least highlight this as we compare back to the first quarter of last year many of the cost improvement programs are put in place were taking effect and we were more profitable than we were in the first quarter a year ago. Certainly putting ballast water aside, there is a number of other components to our equipment business, some of which we certainly have aspirations to grow over the last three quarters and a lot of that could be second half oriented. We are not giving up on the hope if not expectation that we can be breakeven in this segment. It will remain a challenge for this year. We will certainly need to get top line growth. We are not going to achieve breakeven, I don’t believe if we don’t grow sales. And I think at the onset of the year we had hoped we could grow equipment sales by $10 million. I think clearly there is an element of ballast water growth in that and we will need activity to improve for that to occur. So, we will see. It’s too early to tell. We are not giving up. We certainly don’t want to have a business settlement that doesn’t make money. Certainly, we do have an ongoing large investment in our capabilities as it relates to the Hyde Marine business. That’s not going to stop. So, we will keep you apprised.

Okay, thank you.

Our next question comes from the line of Christopher Butler of Sidoti & Company.

Hi, good morning everyone.

Good morning.

Good morning.

Just staying on ballast water for a minute, going back a few months or I guess the end of last year, there was a lot of optimism that we might see ratification relatively quickly. Since then we have had industry group move in favor of ratification and we have seen oil prices fall significantly. I mean, where do we stand now? Does any of that really help us move towards that final goal?

I am sorry, go ahead Bob. Bob O’Brien: The things I read are perhaps same things you see continue to make it look like, there is less opposition from the shipping industry to approve the ratify the IMO convention, continuing appreciation for the fact that ballast water treatment is something that is required to protect the planet. So, I mean, I personally am getting more optimistic that the adoption of the IMO regulation will be sooner rather than later, but I am pointing out that we have made this call before and it hasn’t happened, but everything I am reading and hearing tends to say we are moving closer and closer in the right direction. So, I think there is an expectation that certainly will be before the end of the year and we said that before, but I think strategically now that it’s much more realistic than perhaps in the past.

No, the reason being Chris coming up in 2 weeks I believe, Gail?

Ending May 11.

May 11. So, this topic again will be on the docket so we will see what comes out of that.

And shifting back to the mercury market for a second, as I think through the next few months with the Supreme Court ruling in June, I can’t imagine that your customers while complying with the regulation are going above and beyond that to build any inventory, if MATS gets okayed by the Supreme Court, do you see an influx of new demand as some of your customers try to sort of create a safety stock?

I don’t necessarily think there is going to be a huge ramp-up strictly from building up inventory on their sites. Users here have storage tanks in bulk. They would take shipments in bulk and they have storage tanks where the carbon is delivered into. I don’t necessarily think they are running them at the minimum right now. So I don’t think an increase in the on-site inventory held by utilities is going to be much of a factor in sales in the second quarter and third quarter.

And just finally with the change in tariffs, I don’t recall that changing tariffs really has that big of an impact on your business that in general that tariffs are doing their job and things haven’t don’t change that much regardless of where the rates are set at, anything different this time?

I think you are correct. Obviously, higher tariffs probably would be more favorable to the business, but the fact that there are tariffs in place, I think has been successful in maintaining fair pricing in the marketplace. So, probably not much change expected based on these preliminary tariff ruling just $0.24 per pound.

Alright. Thank you for your time.

Excuse me, I found the high number, there were 18 systems sold in the first quarter.

[Operator Instructions] Our next question comes from Steven Yang of Alger Management.

Hi guys. Congratulations and thank you for all your help Gail.

Thank you.

Good morning Steve.

Good morning. How are you? A question for Steve. What was the impact of foreign exchange to your operating income this quarter and how should we think of the impact for the rest of the year?

Yes. It looks like it’s shaping up to be about a $6 million impact per quarter on revenue and I don’t think we will see that being a whole lot different over the balance of the year depending, of course on where foreign exchange rates move. On the bottom line, that is a former difficult competition given hedges we have in place. But in general, it is $0.01 to $0.02 impact per quarter. Probably a little closer to $0.02, but it’s in that range. So it’s about $0.01 maybe $0.02 for any given quarter and we will just have to watch the rates as we go forward.

Okay, thank you.

You are welcome.

I am showing no further questions at this time. I would now like to turn the floor back over to management for any additional or closing remarks.

No. Thank you very much and thank you all for listening today. Let me just conclude by saying in terms of strategies, the strategy for mercury, I truly believe we have found the right strategy for success. And I do want to thanks Bob O’Brien and his leadership as well as the excellent team that we have both from the marketing and sales, as well as R&D. They have done a phenomenal job. And I think that’s evidenced in today’s results. Secondly, our strategy that we have implemented for improving costs I am very pleased that it appears that our gross margins have proven to be sustainable and as we said all along our goal will continue to be to drive that even for higher numbers. And the focus on sales and growing our sales globally we spent a lot of time today talking about that. I am absolutely convinced that the strategy that we have outlined for you today will indeed provide a basis for a stronger Calgon Carbon going forward. So with that, I will conclude our remarks. Thank you again all for listening and have a great day.

Thank you. Ladies and gentlemen, this does conclude today’s call. You may now disconnect.