CCC Intelligent Solutions Holdings Inc. (CCC) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Calgon Carbon’s Second Quarter 2015 Earnings Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] It is now my pleasure to hand today’s program over to turn the call over to Dan Crookshank, Director of Investor Relations. Dan, please go ahead.

Thank you, Christen. Good morning and thank you for joining us this morning. 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 presentation and 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. With that, I will now turn it over to Randy for his initial comments on the quarter and recent developments. Randy.

Thanks, Dan, and good morning everyone. Let me also welcome you to our 2015 second quarter earnings conference call. So before getting started, this is Dan’s first quarterly conference call with Calgon Carbon, as he joined us in May and I would like to welcome to the team. Very pleased to have him on board. So now to business in hand, the second quarter was an eventful one for Calgon Carbon as we experience a number of positive developments and highlights, as well as a number of challenges in several of our markets. I’ll begin by discussing this quarter’s headline event which was a supreme court’s ruling issued on June 29 on the EPA MATS rule and share with you what we know as of today and how that translates into how we currently expect to operate in this area for the reminder of the year. As a reminder, MATS, which represents the first national standard for the reduction of power plant emissions of mercury and other air toxins is expected to be a key driver to one of our near and long-term revenue growth areas. As powered activated carbon produced by Calgon Carbon is often the best performing solution that offers the lowest total mercury control cost to coal fired powered plants. As you know, the MATS rule became effective in April 2015, but its future has been clouded by recent decision of the Supreme Court of the United States. Before I get into our views on the future of the rule, I want to remind you of our perspective on the size of the market from powered activated carbon for controlled mercury emissions for power plants. As a result similar regulations already in place in 19 states and in Canada, many power plants have already invested in solutions the utilized powered activated carbon, which created an annual market of between 120 million to 160 million pounds of powered activated carbon as measured on the basis of first generation product solutions. We believe this market will be largely unaffected by the future of the MATS rule. Should the MATS rule stay in effect on its original compliance timeline, our projections are for the size of the powered activated carbon mercury control market will increase by an additional 220 million to 310 million pounds by 2017. Once again, as measured in terms of first generation standard products. This will result in a total market revenue value of between $270 million to $300 million. In terms of its importance to us, these incremental market volumes would represent the single largest activated carbon growth market in Calgon Carbon’s history. Now let’s talk about the future of the MATS rule. The validity of the MATS rule has been challenged through the court system over the past few years. And ultimately landed at the Supreme Court for their review late last year. On June 29, the Supreme Court issued its ruling which overturned the decision of the US Court of Appeals for the district of Columbia that held that the EPA did not need to consider cost when initially deciding to regulate power plant emissions and remanded the MATS case back to the court of appeals to determine the fate of the MATS rule. As a result, MATS currently remains in place and as of today, the DC Circuit Court is here to act. So given this, what we think will happen next, to answer this question for our investors and for ourselves from a strategic and operational planning perspective we’ve spent the past 30 plus days studying the likelyhood of potential outcomes from the DC Circuit Court and taking the pulse of MATS related customer base. Let me share our findings and our best current estimate of where we are potentially headed. First, with respect to potential outcomes from the DC Circuit Court, we received different legal opinions as to the likely action to be taken by the court. Some of which will be significantly more favorable to Calgon Carbon and others. On the negative side, one legal opinion has suggest the DC Circuit Court would like follow what has been described as a normal process for a regulatory case that has traveled to pass similar to this one and simply vacate MATS and suggest the EPA go back and consider cost before determining that the rule is appropriate and necessary. Essentially invalidating the new rule and instructing EPA to start over. This outcome would certainly be a catalyst for another multiyear delay in the formation of a powered activated carbon mercury control market across the United States. Well on the positive side, a second legal opinion suggest, that because of the security court’s previous actions supporting the rule were grounded on the rules intent to protect human health and the environment and that the cost of the regulation are now known and we’re ultimately considered by the EPA during this process the court will likely ask the parities to present additional arguments and which should be done with MATS, then leave the rule in place while at the same time we remanding it back to the EPA to reconsider costs. This would be favorable to Calgon Carbon and could potentially keep the market growth trajectories I just highlighted on track. In addition, we’ve been advised that these are the not the only possible outcomes we could see from the DC Circuit Court, there are others, meaning the ultimate legal path this rule will follow remains uncertain as this the time. Turing to our MATS related customer base, in all cases, customers with an April 2015 compliance date have continued to retreat. Why? They realized the rule is still in effect. In some case, their operational permits call for mercury treatment with powered activated carbon injection. So this activity has to continue and in some cases the cost of treating mercury is already built into their rate structure. In addition, we’ve received no order cancelations and business continues to flow as we had expected it would have under a favorable Supreme Court ruling scenario. With respect to customers subject to the April 2016 adoption date, customers remain on their previously intended track for implementation with respect to ordering product for testing as well as issuing request for quotes. With only a single exception, where specific customers delaying ordering products for testing. In summary, attempting to make a definitive call in the DC Circuit Court’s course of action will be highly speculative. However, based on our review of the merits and details of each of these opinions, we believe Circuit Court ruling the keeps matching effect while the cost determination issue is reviewed as a reasonably good chance recurring this view combined with the actions of our relating customer base continuing to implement Mercury control measures on schedule gives us optimism that an outcome at both favourable near and long-term consequences for our business is more likely than you originally anticipated on the day that Supreme Court decision was handed down in late June. Accordingly, our operation and financial forecast for the remainder of the year includes production and shipment activities that are expected to result in full-year Mercury control market revenues of between $55 million to $60 million. Turning to the highlights of the quarter, let me begin by staying on topic and start with the continued success of our Mercury contol FLUEPAC products. Compared to last year’s second quarter sales increased $9 million ahead of our expectations in total $15.4 million for the quarter and stand at $27 million for the first six months. The growth is due to the continuing success of our products in the state Canadian regulated markets as well as with new customers treating due to MATS. In addition to this positive development our cost reduction initiatives continue to deliver desired results as our second quarter gross margin before depreciation and amortization was 37.5%, 36.6% excluding the favourable impact from expected import duty refund. Our SAP reimplementation project we put live in early July, on schedule with only an expected level of business disruption. Moving forward this enhanced platform will enable more efficient methods to interact and transact business with our customers as well as provide additional cost savings as part of our Phase 4 of our cost reduction initiatives. Our Chemviron business in Europe was awarded a 10 year contract for custom carbon reactivation services by municipal drinking water company in Belgium. This represents a renewal of our 10 year contract with this customer that expired earlier in 2015 and is expected to result approximately 9 million pounds of reactivation volume over this term. The repeat business is another demonstration of the value of the quality of the products and services we provide to our customers. In finally in the deal value of approximately $1 million municipality of Michigan selected us to provide granular activate carbon and associated services as part of their decision to put their portable water plant back online. Using our products to treat and removable disinfection byproducts has proven to be a more cost effective solution for the municipality to provide water to its population versus continuing to purchase its supply from other municipalities. While these positive developments give us continued confidence in our near and long term revenue and profitability growth prospects we did encountered challenges in several of our markets this quarter that resulted in our top line results falling shy of our expectations. I mentioned the nature of these challenges in this morning’s press release let me spend a moment to expand them on each. In the oil and gas market continued low oil prices and labor disruptions combined constraining customer spending on maintenance related and new capital projects which in turn negatively impacted our activated carbon and carbon absorption equipment sales of refineries and ballast water treatment equipment sales were also affected for offshore service vessels. Our sweetener market activated carbon sales were impacted by demand shift within the food market from high fructose corn sweetners as well as changes that are occurring in the manufacturing base of artificial sweeteners. In the North American Municipal water treatment while we continue to see growth in the amount of activated carbon being placed into service and continue to convert additional customer municipal reactivation services, our second quarter sales were impacted in part by lower than expected reactivation services due to certain customers extending the time between reactivation exchanges. In addition, the abnormally high rainfall in the North eastern United States led to a lower demand for water as we do see usage for activated carbon in our expected revenues. In the environmental water market a significant grant to activated carbon order related to a specific remediation project expected to occur in second quarter shifted into the second half of the year. And finally in Japan orders for DST and carbon were lower than expected in the second quarter, but we expected to improve in the third quarter. Despite these dynamics our cost reduction initiatives are proving their importance and allowing us to maintain elevated profitability levels and based on the highlights I mention and a few other data points that Bob, will provide momentarily we believe our marketing position, our market share and the general level of demand of our products and services remain on sold. I will be back in a few moments to give you my thoughts and our growth for the remainder of the year as well as our strategic focus. I’m now I am going to turn it over to Steve to take you through the second quarter financial results.

Thanks Randy and good morning everyone. Total sales for the second quarter of 2015 were a $135.5 million versus $145.1 million in the second quarter of 2014 a decrease of $9.7 or 6.7%, due to the stronger U.S. dollar in the current year currency translation had a negative impact of $6.6 million for the second quarter of 2015 primarily on sales in the activated carbon and service segment. Regarding our segments sales in the activated carbon and service segment decreased $6.4 million, or 4.9% for the second quarter of 2015 compared to 2014’s second quarter. The decrease in sales was principally due to a $6.3 million negative impact of foreign currency translation. Sales in the Americas Environmental Air market increased by $9 million due to sales of powder activated carbon for mercury removal. This increase was partially offset by lower sales in the potable water market primarily in Asia to a large water in 2014 that did not repeat in 2015. As well as lower demand and the timing of certain municipal carbon fields in both Asia, and the Americas. Sales also declined in the Americas Environmental Water and food markets due to certain orders from the prior year that did not repeat in 2015. Equipment sales decreased $2.2 million or 18.6% in the second quarter of 2015 versus the comparable 2014 period. The decrease was primarily due to lower demand for carbon absorption equipment resulting from the completion of projects related to installations for the initial, disinfectants and disinfections by product rule as well as the decline in our customers project related discretionary spending primarily in the oil and gas market. In addition, lower balanced water treatments system revenues were partially offset by higher sales of traditional ultraviolet light systems that resulted from revenue recognized under large municipal drinking water project. Sales in the consumer segment decreased $1.1 million or 32.8% as compared to the second quarter of 2014 due to higher demand from a single customer in 2014 that did not repeat in the current year. In addition, foreign currency translation negatively impacted current year’s second quarter sales by approximately $200,000. Consolidated gross profit for depreciation and amortization as a percentage of net sales was 37.5% in the second quarter of 2015 compared to 34.4% in the second quarter of 2014, an increase of 3.1 percentage points. The increase was primarily in the activated carbon and service segment and includes a $1.2 million or an approximate one percentage point benefit related to the import duty refunds in connection with the Trade Preferences Extension Act of 2015 that was signed in the law on June 29, 2015. In addition, approximately $1.2 million of the improvement resulted from higher margin products sold including FLUEPAC products for mercury control room coupled with the declining volume of lower margin products sold particularly in Asia. The company’s cost improvement programs including lower coal costs of approximately $700,000 primarily from two long-term coal contracts and increased carbon production volumes of approximately 1% during 2015 also favorably contributed to margin improvement in all geographic regions. Our equipment segment also favorably contributed to the second quarter of 2015 gross profit before depreciation and amortization as result of improved margins and reductions in estimated cost to complete certain projects and progress collectively totaling $900,000. Depreciation and amortization expense in the second quarter of 2015 increased by $900,000 to $8.5 million as compared to last year’s second quarter. The increase was primarily due to higher depreciation expense related to improvements for the company’s Catlettsburg, Kentucky virgin carbon manufacturing facility. And accelerated depreciation expense of approximately $700,000 due to certain assets that are being replaced in the second half of the year as a result of new projects including primarily the company’s SAP reimplementation project that went live in July. Selling, administrative and research expenses were $22.6 million during the second quarter of 2015 in line with our expectations versus $21.2 million in 2014, an increase of $1.4 million or 6.8%. Costs related to the company SAP reimplementation project which totaled $128 million in the second quarter of 2015 were approximately $700,000 higher in last year’s second quarter. In addition $1.2 million in higher outside consulting services were offset other favorable impact of foreign currency translation of $900,000. Our effective income tax rate for the second of 2015 was 34.2% in line with our expectations. This compares with last year’s second quarter effective income tax rate of only 27.3% which included a net $1.4 million discrete benefit related to a completed IRS examination and the effective settlement and release of uncertain tax positions. In summary, net income for the second quarter of 2015 was $12.6 million versus net income of $15.2 million for the second quarter of 2014. On a fully diluted share prices, earnings per common share were $0.24 for the second quarter of 2015 as compared to the $0.28 for the second quarter of 2014. Turning to the company’s business segments again, the activated carbon and service segment recognized $27.3 million in operating income before depreciation and amortization in the second quarter of 2015 compared to $28.7 million in the second quarter of 2014. The positive effects of the more unfavorable mix of products sold, our cost production initiatives and the expected import duty refunds under the trade preferences extension act of 2015 were more than offset by unfavorable impacts of a currency translation and higher selling administrative and research expenses. The equipment segment recognized $400,000 of operating income before depreciation and amortization in the second quarter of 2015 compared to $600,000 operating loss for the second quarter of 2014. The $1 million improvement was primarily due to improved margins and a decrease in estimated cost to complete certain end process projects, as well as lower selling, administrative and research expenses as a result of cost improvement actions taken in 2014 including headcount reductions in our Hyde Marine business. Backlog for the equipment segment was $14.2 million as of June 30, 2015. The consumer segment recognized $600,000 in operating income before depreciation and amortization in the second quarter of 2015 compared to $800,000 in the second quarter of 2014. The decrease was related to lower activated carbon class sales volume. Turing now to our balance sheet and cash flows. Cash increased slightly during the second quarter of 2015 and at June 30 we have approximately $50 million of cash. Receivables were $97.7 million for the second quarter of 2015 which is approximately $2.4 million higher than at the end of 2014. Inventories were $106.9 million at June 30, an increase of $8.5 million from the end of 2014. This increase is primarily due to the increase in the quantities of outsourced materials as we being to execute on our initiative to source more outsourced product into the current year for new market areas. Cash flow provided by operations was $17.1 million for the second quarter of 2015 which is a decrease of $13.2 million compared to the second quarter of 2014. The decrease was primarily due to the inventory increase I just mentioned. As of June 30, our total debt outstanding approximately for $90 million which represents an increase of $18.7 million from year end. This increase relates the borrowings under our U.S. credit facility which supplemented our operating cash flow for our capital expenditure investments in returning value to shareholders through share repurchases and common stock dividend payments. Capital expenditures totalled $18 million in the second quarter of 2015 and we are primarily for improvements to the company’s Catlettsburg, Kentucky activated carbon manufacturing facility along with expenditures related to the company’s new headquarter facility including our new research and development innovation center. For the first six months of the year, capital expenditures totalled approximately $34 million. During the second quarter, we continue to return value to shareholders through our open market share repurchase program by purchasing 311,000 shares for $6.7 million. We remain active after the end of the quarter and used approximately $4 million to purchase an additional 212,000 shares during July. Year-to-date through the end of July, we spent $12.3 million to purchase 640,000 shares which brings our remaining authorization for future share repurchases to approximately $95 billion.

Thanks Steve. We will now hear from Bob O’Brien for the operations reveiew. Bob O’Brien: Thanks Dan. As Randy and Steve already mentioned our profitability and specifically our gross margin before depreciation and amortization continues to improve, this improvement is due in part specific capital investments over the past few years that in addition to increasing our Virgin activated carbon and reactivation capacity have also contributed to production efficiencies which have combined our overall product cost. Also contributing is a five year agreements entered into approximately two years ago for the procurement of a majority of our coal requirements. So far this year we have realized $1.2 million reduction in our coal cost and expect additional benefits in the back half of the year. Let me update you on our [indiscernible] capital investment projects. In the United States, the pace of our two primary capital projects one could debottleneck a virgin carbon production line at Big Sandy and the second to refurbish and expand our Neville Island reactivation plant continue to be impacted by the environmental permitting process. Beginning with our Neville Island project we now believe the permitting process will be completed by October of this year. With an estimated 15 month production schedule starting in October 2015 we anticipate that the plant will be back in operation by the first quarter of 2017. At Big Sandy debottlenecking of one of our three production lines is occurring in two phases first portion of the project was completed late last year and has given us additional capacity of about 2.3 million pounds. The timing of the second phase of the project which would add an additional five million pounds of capacity has not yet been finalized as we continue to work through the environmental permitting process. Construction work in the second phase however will need to be coordinated with plant maintenance activity on this slide. In addition to this work other productivity enhancement investments occurring at Big Sandy plant and elsewhere remain on track. We continue to expect our normalized granular activated carbon production capacity to increase to approximately 162 million pounds by the end of 2015 from 156 million pounds at the end of 2014. In Europe our construction work on refurbishment and expansion of our potable water reactivation facility in Tipton, UK is nearly completion despite minor delays related to weather and the timing of supplier deliveries the project remains unbudget and we expect to bring the facility online in September the Tipton facility will be capable of meeting the needs of all of our potable water customers in the UK. Company wide we now expect total capital investments for the year to be in the range of $70 million to $75 million. Moving to our markets and starting with municipal water the use of activated carbon in specifically the use of Calgon Carbon’s product and services continues to increase. Our strategy in this market remains providing cost effective solutions to meet the current and future needs of our water utility customers. As Randy mentioned earlier we were awarded a significant reactivation contract extension in Europe and a notable new virgin activated carbon field in Michigan. Although the EPA dates to disinfection byproduct rule is in its final phase of implementation, we continue to expect further growth in the installed base of granular activated carbon in the U.S. numerous water utilities including some that are very large continue to evaluate a change to granular activated carbon as a form of DBP control. Including the impact of this driver, we expect to see growth in the installed base of granular activated carbon at U.S. water utilities increase by much as 10 million pounds this year. In addition to the new Michigan Municipality Award, are results in the second quarter include initial virgin carbon cells at municipalities in Texas, in Colorado that totaled 3 million pounds. Of the 8900 or so community water systems in the U.S. they represent our primary addressable market only about 10% are currently using granular activated carbon. With the increase in the amount of installed granular activated carbon comes the opportunity to convert these customers to customer activation. We continue to be successful in this area as we’ve added 14 new reactivation accounts to our list over the first six months of the year, bringing our total number of accounts in North America to nearly 140. Customer reactivation is a prime example of an area of our business that can be inconsistent on a quarter-to-quarter basis however, due to potential for significant variability in the frequency and timing of reactivation. As Randy mentioned earlier, we experienced some of this variability this quarter. With respect to our industrial markets, Randy already commented on the market dynamics we are seeing in the sweetener in the oil and gas markets. However I would like to add that we are beginning to see some success from our focus on distributing outsource products and we saw gains this quarter from the sale of coconut carbon. In Latin America, we are pleased with the progress that we have made in the Brazilian market and building key customer and distributor relationships as well creating awareness of the cost effectiveness of our granular activated carbon solutions. We continue to expect this effort to lead the growth in Brazil as economic conditions there begin to improve. Now brief comment on import tariffs, let me remind you that in early May the U.S. Department of Commerce announced a preliminary tariff rate of $0.24 per pound based on steam activated carbon that was manufactured in China and U.S. between April 1, 2013 and March 31, 2014. This compares to the current average rate of approximately $0.02 per pound. The final rate for this period will be issued in the fall and keep in mind that there can be a large of discrepancy between the preliminary and finally determined rate. Let me conclude with ballast water, as I mentioned last quarter we began testing our treatment systems in order to obtain U.S. coast guard type approval and to apply for an updated IMO type approval. We are moving along on schedule and all task conducted to date have been successful in meeting the protocols that we believe we are automatically be adopted by the U.S. coast guard for certification of UV based ballast water management systems. We expect our testing to be completed in the fist half of 2016. We were successful on obtaining four new orders for ballast water systems in Q2, which was however a significant decline from prior quarters. We believe there were two major factors leading to the so order pattern, first the persistent low oil prices negatively impacted orders with vessels which service offshore oil platforms. These vessels had been a major component of our customer base. Second, the realization by the shipping industry that IMO ratification is drawing closer was offset by the fact that U.S. coast guard has not yet create type approval for any ballast water treatment system. This we believe has led many shipping companies which have been early adopters to delay purchasing decisions until there was more clarity on the U.S. position. Our ballast water revenues for the first half of the year have remained fairly steady in comparison with 2014, but our equipment segments backlog declined to $40.2 million from $18.3 million at the end of last year. This was driven almost entirely by the lower rate of ballast water system orders. Based on these dynamics we now expect our total ballast water equipment revenues to be down in 2015 compared to last year. With the fast approaching final U.S. coast guard rule compliant state of January 1, 2016 where all sizes of ships will come under regulation. We are however beginning to see a pick up in the number of request per quote including particularly more interest for retrofits. We therefore, do expect to see our order activity return to a higher level in the second half of the year, which would bode well for 2016. At the same time, the number of vessels that have been granted two year compliance extensions by the Coast Guard has increased to more than 1200 as of June 30 compared to 330 at the beginning of the year. Although a negative in the very near term, this is another indicator that market is paying attention to the upcoming compliance date. And is a tangible indicator of the pent up demand that will come into this market. Once the IMO convention is ratified and the Coast Guard begins to grand type approvals for ballast watered systems. Given the status and expected time to complete our testing, we believe we are in an excellent position to garner our fair share of this market as it develops moving forward. The acceptance of the high guardian product line remains very strong. Published estimates from industry sources show high marine maintaining its overall market share and holding a very significant share of the retrofit market to date. That concludes the operations review, Dan.

Thanks Bob. Steve will now discuss the outlook for the third quarter. Steve?

Thank you, Dan. Let me first start with revenues including the impact of foreign exchange. Revenues in the first two quarters have been negatively impacted by the strong dollar and relevant to the last year have been reduced by $6.3 million and $6.6 million respectively. We expect foreign exchange headwinds to continue and for impact in the third quarter to be approximately $6 million to $7 million. On the cost side, we expect another strong quarter in Mercury Control, as well as a stronger quarter in the municipal water market and a 70% sequential improvement in sales in Japan. In total, we believe 2015 third quarter sales will improve sequentially by $5 million to $10 million. Margins, third quarter 2015 gross margins before depreciation and amortization, are expected to decline sequentially to approximately 36% primarily reflecting the absence of the $1.2 million import duty refund benefit recognized in the second quarter of 2015. Depreciation and amortization, we expect depreciation and amortization to decrease slightly sequentially. Operating expenses. We expect the operating expense in dollars to be approximately flat sequentially and to decline as a percentage of sales to slightly below 16%. Income taxes. We expect our effective tax rate to be approximately 34%. And I will now turn it over to Randy.

Thanks, Steve. So while we are disappointed by not achieving our revenue target this quarter, we realized going to ensure that you do as well that our strategic focus on driving near and long-term revenue growth for Calgon Carbon is not something will be accomplished on a straight line quarter-after-quarter. Our results this quarter which on whole I’d describe as another quarter of very solid execution representing good example of the quarterly variation we can expect to see from time-to-time in the slope of the growth trajectory we are targeting. As I mentioned in this morning’s press release and based on the current market dynamics we’ve just described for you, we expect the second half to reflect revenue growth compared to the first half of this year as well as compared to the second half of last year. Despite the challenges of the second quarter, expected continued currency translation headwinds in slower than previously expected materialization of the ballast water equipment market I still believe we have the opportunity to delivery modest growth in revenues for the full year compared to 2014. Moving beyond 2015 financial results, let me conclude by reminding you our strategic focus areas to drive future revenue growth and increased shareholder value. I already mentioned two of these earlier and establishing the strong position in what we believe will continue to be in emerging Mercury market in U.S. and fully utilizing our updated ERP system to better manage global business and create efficiencies. Our other areas of strategic focus include expanding our efforts to increase our presence in Latin America; teams are in place opening towards for growth opportunities throughout the region. I’m now happy to report that we’re moving forward on establishing a presence in India, similar to our LatAm approach; our goal would be to identify key markets in multinational customers who value the product and services Calgon Carbon offers. We will continue strengthening our partnerships with global activated carbon producers to provide quality products for Calgon Carbon that will allow us to expand into new markets and secure long-term sourcing as well. We’ve been strong in bituminous coal and coconut based carbon products but are now expanding our offerings to other base materials. This is a new and unique approach for our company. We are well we are focused on acquiring assets that will allow us to expand our internal activated carbon portfolio that will provide a stronger presence in other countries such as Brazil, India and perhaps South Korea and would allow us to provide a more balanced growth platform which could come from a geographic regulatory focus where product technology expansion including technologies adjacent to activated carbon and the last point I would like to make is that we will remain focused on continuing margin expansion and returning capital to shareholders through dividends and other share repurchases. We believe our execution in these areas will drive future growth in revenues and profitability of Calgon Carbon. So we are ready to take your questions.

[Operator Instructions] Our first question comes from Kevin Maczka with BB&T Capital Markets.

Thanks. Good morning.

Good morning, Kevin.

First question if I can ask the revenue question that is not related to Mercury, in the core business excluding Mercury we didn’t have much growth in 2012 or 2013 we had a little bit in 2014 and now if excluding currency in Mercury it looks like we are about flat again in year-to-date in 2015, just wondering if you can kind of address your expectations there how much of this is result of maybe being somewhat capacity constraint versus some of these markets just not advancing the way you thought, I think I know there were some unique situations in Q2.

Kevin this is Randy. I would say that these are due to capacity constraints we see, we do believe this is the quarter whereby again reactivation is being delayed, we pushed out some projects we expected this quarter we have predicted this quarter then pushed out the third and fourth quarter. We truly believe that is fundamentals as we have said in our comments that our market position is shared, everything seems to be solid that being said it is very important for us to initiate these growth opportunities talked about the reengineering outsource strategy we talked about our globalization and in LatAm and now into India, we do believe that there is opportunities that we have not been able to capitalize on revenue outside of Mercury that could help take us to the next level.

Randy when you look at the quarter it was quite a lift of things that kind of impacted the top line whether oil or sweetners Japan reactivation cycles and can you at least directionally kind of size those, what was the biggest headwind I mean usually we don’t talk much about things with weather and oil?

Well we definitely see when you look at our municipal business and industrial business a lot of that was reactivation that played a key part in the quarter and again to tie into the wet late spring, early summer that we have had the waters down and with that also revenues and that is playing into why municipalities are going to choose to swapped out their carbon. So that is a big piece of that, in terms of the oil and gas market not only the direct customers we have in oil and gas are now impacted by the fact that this market is slow but there is lot of ancillary businesses that also supplied them that we are seeing slow right now because the demand for oil and gas is down. So it is another bigger chunk when that market returns we will be prepared to see that increase again. With the sugar market that is one right now where we are truly are seeing a switch away from the high fructose corn sweeteners which was higher demand for the carbon cane sugar which is now lesser demand, this is a switch that we will see going away and see business decline there. So overall it is not that the fundamentals are changing, it is just that we have these one quarter differences that are affecting the results.

On that point, Randy on the sweeteners can you say a little bit more about that like how much businesses that what kind of declines are you seeing it sounds like this isn’t just a Q2 thing that reverses in Q3 and then also on Japan when you talk about the increased competitive pressures, what exactly are you seeing and how severe is that?

I’m going to let Bob talk about specific of the sugar market. Bob O’Brien: We probably seen about a 10% decrease in our business which in a quarter probably amounts to less that $2 million may be $1.5 million to $2 million and we’re monitoring this trend the basically it’s a in the U.S its sort of like a pursued health benefit using cane sugar relative to corn sweetener so that the manufacturers of corn sweeteners some of the major companies in the U.S are seeing a decline in their business. I personally think it’s going to stabilize and probably at the levels that were add but they’re being impacted by and you may see it every day products that are saying the used cane sugar rather than [indiscernible] so I believe that’s going to stabilize but that is an issue that the manufactures of fructose are fighting. There is some impact also in the sweetener market in Europe where they again make corn based and wheat based sugars and bee sugar in Europe and they for years of had protection from imports of cane sugar with the import restriction and those import restrictions are starting to go away so their markets also have been impacted so we’re seeing that but effect on in both the Americas and Europe and as I mentioned probably its affecting our business by about 10% overall in that market.

And on Japan and that will be my last question if you can just touch on the Japan increased comparative pressures? Bob O’Brien: We continued to see competition from Chinese products in Japan obviously they are right next to China so we are looking to as part of our overall strategy as we mentioned in previous calls keep more of our U.S. product in the U.S and supply Asia and Europe with more outsourced product so we are seeing more products in Japan coming from China and in fact that’s probably the direction of we’re having we’ve been purchasing products in China and so - them into the Japanese market and probably not that much of a difference in our overall margin frankly. And so that’s going to continue we have strategies in place to trying to approve our overall operations in Japan and one of those are I think that Randy alluded to mention is that we’re going to be producing some products, some DSTN products which are probably used for the D-shocks and D-knocks in Japan which we already received the contract for which is going to improve our business in the second half of the year so we offsetting the competitive impact of Chinese by in fact joining them to some extent and also by producing more products for the D-shocks, D-knocks market.

Our next question comes from Dan Mannes with Avondale.

Hi, good morning everyone.

Good morning Dan.

I have a couple quick ones you, first obviously lot of discussion on Mercury given the Supreme Court, can you may be remind us of the I guess the potential for ’16, how do you view at risk in I mean I don’t know what really - experts are tell me but when you expect actually get some resolution on a DC circuit on whether they are going to vacate or just remind a little… Bob O’Brien: Let me, if I could Dan, let me start with the second part of that question then will go back to, looking at sales but you can imagine we spend considerable amount of time since June 29, talking to environmental lawyers, energy lawyers, EPA lawyers, EPA itself, lawyers know DC in Circuit Court appeals to understand and to be able to get a feel as the direction this is going and again we express our opinion as to what we believe could potential happen here in terms of timing, there are something happening for instance we are now aware I can say with uncertainty that the DC Circuit Court with appeal hasn’t deed received everything they needed from the Supreme Court. That was a question of how long that would take because I can’t really start acting until they have; they now have it as of the few days ago. We also know that there has been emotions filed is what actively happening around this which would lead one to believe that perhaps things are going to happen sooner than later again, that speculation. But all the activity in the experts that we talk to would tend to think that this thing hopefully will get resolved quickly. Okay. Now in terms of our impact and we laid this out, with the existing business of roughly 140 million pounds we believe that’s going to stay, that’s not going anywhere standard pounds as we said in the comments 2015 we’re looking about another 120 million pounds of standard products been added to that, that’s being served today. And then the 2016 would be roughly about 150 million pounds further representing as we constantly said $270 million to $300 million of value which is where we focus. Again, our belief would be that the 19 states in Canada would remain the 2015 portion would remain, is our assumption based on the conclusion we come to and then potentially the 2016 could get delayed. Again, speculation we don’t know, but that would be the impact on the business. We are still focused on the 30% market share and value that continues we would obviously continue to strive for more but whatever pieces fall out that’s where we’ll be in terms of our revenue.

And one follow-up on the regulatory backdrop, with the clean power plant being rolled out, any update to your thoughts on the market or given the fact that doesn’t require interim compliance still 2022, that maybe beyond the scope of your view of the market? Bob O’Brien: That’s a sense we are at. Right now, obviously we’re looking at it and if there is an opportunity for any of our products we’re going to try to find that opportunity and capitalize on that. We think it’s too early, there is so much complexity and confusion and uncertainty, it’s going to take years I think for that to be settled. So at this moment in time, we don’t view that is being a concern. Maybe an opportunity but right now not a concern.

Our next question comes from David Rose with Wedbush Securities.

Good morning. Thank you for taking my call. Bob O’Brien: Good morning. Dave.

Good morning. Dave.

I’ve got a couple of questions, if you don’t mind on HIDE actually I’m just leave it to one for now. On the decrementals and on HIDE, what sort of losses should we expect for the back half of the year? It sounds like you’re hiding cost but I get the impression maybe the top line falling a little bit faster than you expected, so what sort of losses will we expect if any?

David this is Steve. I think frankly kind of hard to predict, we’re seeing in the - we tend to combine HIDE and UV business and as you noted the margins are up, the volume that is forecasted been less is going to lead to greater losses I think it’s premature for us to try and highlight how much that will be but clearly we will [indiscernible] with covering the overheads. So we’ll see a difficult third and fourth quarter but really not that material to the overall entity. So not a big concern for us and we’re very hopeful that with the second leg of the Coast Guard rule coming into effect 1116 that before the end of the year, we’ll see enough turn in and it will be temporary situation for the last six months.

But, well on the note of UV, I mean I understand you look at the business on a consolidated basis, but there as far as I can see there is not a lot of regulatory, there aren’t a lot of regulatory drivers for increased UV aside from HIDE, I’m talking all equipment now. So will all of equipment have the same headwinds? I mean we’re looking for a loss for the back half of the year for equipment? Bob O’Brien: Well this is Bob. There aren’t necessarily regulatory drivers that are driving the traditionally UV business other than - freight and control in the U.S., there are a number of projects that are ongoing that we’ll be competing for in the U.S. in the second half. So there is though some regulatory impact. The bigger opportunity I think for overall UV is it water reuse and we are in turn seeing opportunities around the world not just in the U.S. but we are competing for projects in Australia, we are competing for projects in the Middle East, that are utilizing UV for disinfection that permit water reuse and in some cases actually using the advanced oxidation process combining the UV with peroxide to destroy chemicals. So we don’t expect that business actually to decline, it’s difficult to predict that’s going to have a huge upswing but we are expecting that to certainly remain stable with some opportunities for growth over the rest of this year and through the next few years.

Thanks. I appreciate it. And the maybe the second question is, it wasn’t quite clear for me on your oil exposure as well you never really talk about oil but as far I know this is processing and refining which is downstream has been pretty positive for most of the companies in the industrial space effected to downstream utilization rates are up so how would you be effected by Bob O’Brien: Dave, this is Bob again, one of the things that has affected us this year is although the refineries are operating, a number of the refineries were having labor disputes. And we did business in refineries that mainly aimed at environmental projects. So as they do their maintenance on tankage or pumps or any thing whatever were emissions they would release they have to capture it. So we traditionally get a significant number of projects that are temporary nature of the pop up here in the year from refineries that utilize our absorption equipment primarily our air absorption equipment and they have reactivation component, because of the labor disputes at refineries perhaps even more effect than the oil prices, they were focused on keeping the refineries running and maintenance projects basically were put on the back burn so we traditionally see a number of those projects through the year and first half the year particularly in the second quarter we almost saw none. And we know that’s not a feasible long term situation so those labor disputes have been settled and we expect we’ll start to see business back from refiners again in their maintenance activities throughout the rest of this year.

Dave, this is Randy there is also an element of the ballast water treatment system in place into this, it would have success in the last couple of years in terms of being able to provide systems for offshore vessels that does support the rigs that are offshore and obviously that’s we’re seeing the downturn there this year versus what we saw last year.

Okay. Now that’s helpful. Thank you very much. I appreciate it.

Thanks, Dave.

[Operator Instructions] Our next question comes from Christopher Butler with Sidoti.

Hi, good morning, everyone. Bob O’Brien: Good morning, Chris.

Good morning, Chris.

Just to go with ballast water for a second, the leadership change at the IMO is that good news as far as ballast water of is that kind of start things from scratch again?

I don’t know that I really have a good answer to that. We know the prior head of IMO is certainly was a strongly encouraging the adoption of the ballast water treatment regulation, we do not think that’s going to change with the new President who has taken over, so we don’t think there will be any emphasis. Obviously the first element the gentlemen who is leaving the position even though he was a strong component of the ballast water treatment system; he was not able to bring the regulation to ratification. So I think we got more hope that the incoming process will actually be able to make that happen. Bob O’Brien: And Chris, these team meetings I think they will be watching that are real significant to us is the IMO general assembly meeting which is going to be in November 23 through December 2. There is also the MEPC 69 and 70; they are going to occur in 2016, March and December. So obviously you are watching us very closely to see other developed.

And shifting back to mercury, you had indicated that some of the utilities have already negotiated prices into the rates and we know that they have already put equipment in place. Should the mercury rule be nullified in some way by the end of this year? do you think there is a chance that some of these utilities just continue with the clencing process because they’ve kind of everything already setup and then similarly, have you heard any indications that states are moving forward with their own regulations in light of the supreme court. Bob O’Brien: I think certainly there maybe some utilities that because they have it in their rate structure, and perhaps because they think it’s the right thing to do from an environmental standpoint, we continue to treat obviously that would be their decision and each utility might come with a different view, but I would suspect that there was something we would be continuing to trade, even though they weren’t forced to by the Match Regulation. Relative to the States we’ve not anything specific on that if in fact the regulation would be remanded back to the EPA for complete redo it would not surprise me that a number of states would be get more involved and trying to set their own regulations but we have not really heard of any specific states that have brought that back up to the subject.

I think everybody is waiting to see what happens in the coming months with the DC Court of Appeals and then I think will dictate what States might do at that point?

I appreciate your time.

Our next question comes from Gerry Sweeney with Roth Capital.

Good morning everybody.

Good morning, Gerry.

Good morning, Gerry.

A question on Latin America I think it’s been about a year since you guys actually first announced that you’re going to start exploring opportunities you done in that market. So, anyway you can give us an update as to maybe the size of that market, you’ve been there a year, you sort of given some indications that you’ll start and get to make some progress identifying markets, customers etcetera but maybe give us a size of the market and when do we start to see some of that work come to fruition.

Sure Gerry, it’s a market about 90 million pounds of activated carbon today, primarily low quality activated carbon that we’re using. There is a not a lot of high quality product that we’re accustomed to. But we believe there is a demand for that especially with the multinational customers and with the larger chemical industry growing and the demand for water quite honestly. We have been over the last year putting a team in place, we’ve hired engineers, we’ve established an office, we have been doing a tremendous amount of marketing, we’ve translated all of our literature into Portuguese, we have a website, we have been to many different tradeshows and I’m very pleased with the progress. And you’ve heard us mentioned this whole a rethinking of our outsourced strategy that place into as well in terms of providing an opportunity where perhaps the highest quality product may not be required but a good decent quality maybe required and that’s playing into this. So, we have been talking to a lot of key accounts I would hope within the next year that we are able to start announcing some type of arrangements, agreements somewhere what we announced in North America. I’m really pleased with what I am seeing and what I’m hearing to takes it time and obviously when you couple that with an economy in Brazil there is some not the best at the moment, could take a little bit more time. We knew that going in, it wasn’t going to happen with the year or two, it’s going to take some time but we want to be there, we want to help establish more higher quality activated carbon market. We believe we are the best to do that so. Just to compare to India by the way, I’m sorry.

Yes actually that was my next question. I was just, you can shorter amount of times so obviously a little bit more work to be done there, but have you identified the size of the India market?

We estimated right now is about 130 million pounds it’s bigger than Brazil and also you see a middle class are demanding cleaner water and you were able to derive more cars and buy water filters and also municipalities now that are understanding the global technologies that exists for making air and water cleaner. So, we’re excited about the Indian market, we’re just starting in both of these regions, both of these countries, we are really started at a free flow basis and with practically no sales, so we’re optimistic that once we have all the teams in India and place like Brazil we can capitalize on that so. In terms of, you hear me talk about an acquisition strategy I believe we’re more aggressive with looking at things now than perhaps we’ve ever been, but if there is something in one of these emerging regions it could provide a platform to make sense and it’s going to give us a decent return absolutely that would help us along.

Okay, and then Steve has made me more direct and I’m not sure how much you would be able to shed light on this, but just curious as we go into, you laid out CapEx for this year but any idea what CapEx could be next year and maybe not numbers, but higher than lower than this year especially would math look likes it is being put on hold, so doesn’t look like there could be any plan expansion on that front, but just curious as to maybe a trend.

Yes, I think the long-term trend is certainly going to be lower, if we end up in $70 million, $75 million range this year while we have not done our planning for next year as that expected to decline, there will be significant spend for the Neville Island reactivation. Rehabilitation and expansion that’s the big project for us and it’s principally centered and focused in next year and then there is a chance that there would be some spending at some of our virgin plants that will fall into next year but long-term the trend Gerry is going to be for lower spend, that is what we will be looking to accomplish.

Okay. Thank you. That’s all in my end. Appreciate it. End of Q&A

This concludes the question-and-answer portion of today’s call. I will hand the program back over to Randy Dearth for any additional or closing remarks.

Thank you very much. We have already said over the last three years how impressed I’ve been with the talent at Calgon Carbon around the world and I would like to do shout at our employees to do a major SAP reimplementation takes a lot of talent, a lot of patience, a lot of time and the devotion, the dedication that I’ve seen with our employees is outstanding. So, I want to thank them for all of their support making this project success and helping us again redefine this company and take it to a different level. As I conclude I just want to say that despite the challenges that we laid out today, I would like to again say our market position, our market share and the level of demand, you heard us discussed today for our products and services they’re strong, they’re very strong and as I said the second half of the year will be better than the first and we will continue to push for new initiatives and again we will make Calgon Carbon even more valuable to shareholders. Thank you all for listening today and we look forward to talking to you next quarter.

Thank you for joining Calgon Carbon second quarter earnings results. You may disconnect and have a great afternoon.