CCC Intelligent Solutions Holdings Inc. (CCC) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Calgon Carbon's Corporation’s Fourth Quarter 2015 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Dan Crookshank, Director of Investor Relations. Please go ahead, sir.

Thank you very much, Lori. Good morning everyone. Thank you for joining us for today's conference call. Our main speakers today are Calgon Carbon's Chairman, President and Chief Executive Officer Randy Dearth; our Senior Vice President and Chief Financial Officer Bob Fortwangler, Executive Vice President and Leader of our Core Carbon and Services Business, Jim Coccagno and Executive Vice President and Leader of our Advanced Materials Manufacturing and Equipment Business, Steve Schott. Also with us today by telephone and available for questions later on is our Executive Vice President and Chief Operating Officer, Bob O'Brien, who as previously announced will be retiring on April 1st. Before we begin, I would like to remind you that today's presentation as well as additional comments that Calgon Carbon Executives will make during the Q&A portion of this call 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 such 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 remarks.

Thanks, Dan, and good morning to everyone, and thank you for joining us this morning. Given our internal organization that went into effect on January 1st, let me briefly outline the flow for our remarks. After I kick it off with a few comments on our results for the quarter and the full year, we’ll then proceed to Bob Fortwangler for the fourth quarter financial review. Then we’re going to move onto Jim and Steve to discuss developments in each of their respective businesses. We’ve then going to get back to Bob to provide our outlook for the first quarter and I’ll wrap up with some thoughts on 2016 and our strategic priorities and objectives as we move forward. So let’s start with our fourth quarter results. Given the economic conditions that continue to prevail including continued slowing in the industrial production and overall global economic growth, we reported revenues of $130.9 million and a pre-depreciation and amortization gross margin of 33.6%, both in line with the expectations we provided at the end of the last quarter. In general, market conditions were soft and our powdered activated carbon revenues for Mercury removal were seasonally lower. We did see however, some pockets of strength in the fourth quarter that our team will touch on later. If we look at the full year, we faced a combination of market, regulatory and economic challenges that negatively impacted our ability to perform to our initial full year expectations. Despite these challenges, 2015 was highlighted by a number of notable achievements that we believe combines, position us to deliver on our long term priorities to generate profitable sales growth and to fully participate in new and developing markets worldwide. Let me start by briefly recapping several of the challenges. First, the stronger U.S. dollar which had the effect of reducing our non-U.S. revenues when translated into U.S. dollars by almost $23million compared to last year. Second, the notable slowdown in the rate of industrial production growth, third, the negative change in Carbon reactivation and exchange patterns of our North American Municipal water customers, some driven by unusual weather patterns as we have discussed before. And finally, we were impacted by ongoing delays in the implementation and enforcement of ballast water discharge regulations. Moving to a few of our accomplishments in 2015, let me start with our performance in the mercury removal market, where we achieved full year sales of $58.2 million which was in line with our targeted range and garnered well in excess of 30% of the market in 2015 based on value. In addition, we captured 19 new power plant facilities representing 32 new generating units during the year. In addition, we converted 22 North American municipal water customers to customer municipal reactivation. We completed arrangements this past year with suppliers of various types of outsoared carbons that we believe will generate incremental sales in 2016 and into the future. We captured our first major customer contract in Brazil and have begun a process to make inroads into India. And despite the decline in our revenues we improved our pre-depreciation and amortization gross margins for a third consecutive year to 35.8% as compared to 34.6% in 2014 and by 5.6 percentage points from 30.2% in 2012, both thanks in part to our $50 million cost improvement program as well as our focus investments on our Virgin plants. And due to the confidence that we and our board of directors have in our ability to consistently deliver strong financial performance, in total we returned $45.4 million of value to shareholder through our open market share repurchase program and quarterly share holder dividends for the year. From a structural and cultural perspective, we made several changes that I believe put the finishing touches on our transformation. We consolidated our three Pittsburgh corporate and R&D locations into one as we moved into our new headquarters and innovation center. This reduced our square footage footprint by approximately 21,000 square feet; it updates our image and improves our ability to collaborate more efficiently across the majority of our functions. We launched this past year our updated global SAP system in July providing us with better and more reliable information that will allow us to spend less time processing data and therefore make faster and better decisions to effectively run our business. And as I discussed on last quarter’s call, we announced and have now implemented a new internal organizational structure with two new EVPs focussing on our day to day operations. This focus will allow in my opinion for further margin improvement opportunities and implementation of our global expansion initiatives. I’ll come back to you at the end of the call with some thoughts about our objectives for the year ahead. But now let me turn it over to Bob Fortwangler for financial review. Bob.

Thank you Randy, good morning everyone. Total sales for the fourth quarter of 2015 were in line with our outlook of $130.9 million. This represents a decrease of $9.7 million from last year’s fourth quarter. The strong U.S. dollar negatively impacted our sales in the current quarter by $3.9 million. Excluding the impact of translation, sales declined $5.8 million or 4%. Regarding our segments, sales in the activated carbon and service segment decreased $7.3 million to $118.9 million in the fourth quarter of 2015 compared to 2014 fourth quarter, slightly more than half of the decline or $3.7 million related to currency translation. Excluding this impact, the segment sales decreased by $3.6 million or 3%. This decline was mainly due to a non-repeating large initial municipal water fill in Asia that incurred in last year’s fourth quarter, as well as lower industrial process market sales, primarily in the Americas and Europe and lower food market and respirator product sales in the Americas. Partially offsetting this decline were higher environmental water and Environmental Air market sales in the Americas. In the equipment segment, sales decreased $2.9 million to $9.3 million in the fourth quarter of 2015 versus a comparable 2014 period primarily due to lower ballast water treatment system sales and a $600,000 impact from a cancellation of a carbon equipment contract. Sales in the consumer segment increased $400,000 to $2.7 million in the fourth quarter of 2015 as compared to last year’s fourth quarter, primarily due to higher sales of carbon cloth for both medical and defense applications. Consolidated gross profit before depreciation and amortization as a percentage of net sales was in line with our outlook at 33.6% in the fourth quarter of 2015 as compared to 35.9% in the fourth quarter of 2014. The negative impact of the lower sales and a less favourable product mix were partially offset by the favourable impact of lower coal costs and the Company’s focus on cost and operational efficiency improvements. Depreciation and amortization expense was higher than anticipated at $9.7 million in the fourth quarter of 2015 compared to $8.3 million in last year’s fourth quarter. Depreciation expense in the fourth quarter of 2015 includes incremental depreciation expense resulting from new fixed assets placed in service as well as $1.1 million in accelerated depreciation related to assets no longer in service as of December 31, 2015. Selling, administrative research expense for the fourth quarter of 2015 was $23.6 million versus $23.3 million in last year’s fourth quarter. Although flat with last year’s fourth quarter, current year fourth quarter results were higher than anticipated due to project related expenses and pension plans settlement cost. Income from operations for the fourth quarter of 2015 was $10.7 million compared to $18.8 million for the same period last year. The decline was due to the combination of the lower sales, the less favorable mix of sales, and the higher depreciation expense in the current year fourth quarter. Our income tax rate for the 2015 fourth quarter was lower than initially anticipated at 23.2% as compared to our income tax rate of 33.3% in last year’s fourth quarter. The lower tax rate in the current year was principally due to $1.1 million tax benefit related to the U.S. federal research and development tax credit. This benefit was a result of an extensive multiyear study of our research activities which we completed in the fourth quarter. In summary, net income for the fourth quarter of 2015 decreased to $7.7 million compared to $12.1 million for the fourth quarter of 2014. On a fully diluted share basis, fourth quarter 2015 earnings per common share were $0.15 compared to $0.23 for the fourth quarter of 2014 Turning back to the Company’s business segments, the activated carbon and service segment recognized $20.9 million in operating income before depreciation and amortization in the fourth quarter of 2015 compared to $26.9 million in the fourth quarter of 2014. The decline was primarily a result of the lower sales and less favourable mix of sales in this year’s fourth quarter. The equipment segment recognized an approximate $1 million operating loss before depreciation and amortization in the fourth quarter of 2015 compared to a loss of $200,000 in the fourth quarter of 2014, due to the lower ballast water treatment sales as well as the impact of the cancelled carbon equipment contract I mentioned earlier. We ended the year with a total equipment backlog of $18.5 million compared to $19.8 million at the end of 2014. The consumer segment recognized approximately $500,000 in operating income before depreciation and amortization in the fourth quarter of 2015 about $100,000 higher than last year’s fourth quarter due to the higher sales. Turning now to our balance sheet and cash flows. We ended 2015 with a cash balance of $53.6 million compared to $53.1 million at the end of 2014. Receivables were $96.7 million at the end of 2015 which was slightly higher than the $95.2 million in receivables at the end of 2014. Inventories were $110.4 million at the end of 2015, an increase of approximately $12 million from the end of 2014. This increase was principally due to higher inventory quantity related to our initiatives to sell more outsource products into current and new market areas. For the year ended December 31, 2015, cash flow provided by operations was $69.9 million, a decrease of $14.4 million compared to cash flow from operations of $84.3 million in 2014. The decrease was primarily due to the inventory increase that I just mentioned. Capital expenditures totaled $62.3 million in 2015, primarily for improvements to the Company's Catlettsburg, Kentucky activated carbon manufacturing facility, upgrades to the Company's Tipton reactivation facility in the U.K., as well as expenditures related to the Company's new headquarters and innovation center and the reimplementation of our SAP system that went live in July. We expect capital spending for 2016 to be in the range of $50 million to $60 million with the more significant item relating to our $35 million Neville Island reactivation expansion and enhancement project. We expect to spend approximately $20 million on the project in 2016. During the fourth quarter, we continued returning value to shareholders. We paid our fourth quarterly $0.05 per share dividend in December and through our open market share repurchase program, repurchased 739,000 shares for $12.1 million. For the full year, we returned a total value of $45.4 million of value to shareholders through the combination of our quarterly shareholder dividends that totalled $10.4 million and continuing to repurchase shares by repurchasing approximately 2 million shares or about 4% of our outstanding shares during the year for $35 million. At December 31, 2015 the Company’s remaining authorization to repurchase common stock were $72.3 million. We’ve continued to be active with our open market share repurchase program during the first quarter of 2016. And finally, based on the sources and uses of our funds during 2015 that I just discussed, our total debt outstanding increased by approximately $40 million to $111.4 million at December 31, 2015. That completes the financial review.

Thank you, Bob. Now we’ll hear from Jim to discuss operational developments in the core, carbon and service business.

Thanks, Dan. Let me start with our North American Municipal water business. Here, we had sequentially stronger fourth quarter as we expected and finished the year with sales that were just slightly below last year. We had some challenges with our expected GAC reactivation and exchange volumes in the middle of 2015 relating to the implications of wet weather conditions in the Eastern United States as well as the impact of water restrictions in the Western United States. Leading up to this as you know, we’ve had great success over the last five years at converting more and more municipalities to the use of GAC for the water treatment needs particularly as many municipalities choose GAC as their treatment method of choice or complying with Disinfection Byproduct Stage 2 Regulations. And just as you would expect they are always looking for ways to maximize the life of carbon and reduce the total cost of treatment as they would with any other resources they employ in their operations. Based on our ongoing interactions with our growing and more experienced customer base, we believe this behavior was also a factor in the lower than expected reactivation and exchange activity we experienced in 2015. In addition to the multiple benefits the GAC provide is a water treatment and protection solution. Our experience in 2015 provides us with valuable data points to use going forward to demonstrate that the total cost of a complete GAC solution including customer reactivation is even more economical than previously thought. We believe the use of this favorable information will enhance our ability to continue to convert more of the approximately 8,000 large size municipal water systems in North America to adopt the use of GAC with customer reactivation services for their water treatment needs. In 2015 we place more than 5 million pounds of additional GAC online and converted 22 accounts to reactivation services bringing our total accounts using CMR to 158. We expect continued growth in both of these areas going forward. Turning now to our North American industrial food and environmental water market and starting with the food market. 2015 was a challenging year in this market. However, in Q4 we believe this has stabilized and in fact we saw modest growth sequentially from the third quarter. We are encouraged by this stabilization in one of our key traditional markets. In the North American industrial markets our overall activity level continued to be negatively impacted by the slowing in growth rates of industrial production. However, we did see a pickup in maintenance projects in the fourth quarter presumably related to year end budget spending. In the environmental water market, our fourth quarter revenues were higher as expected primarily from a completion of a large environmentally water remediation project that had been deferred from the second quarter. We’ll continue to watch for changes and industrial production growth rates going forward, but we do not anticipate meaningful improvement for a few months. Staying in North America let me touch on U.S. reactivation for a moment. As we’ve previously discussed, we continue to plan to move forward with our $35 million expansion and refurbishment project at our Neville Island reactivation site which will add an addition 12 million pounds of reactivation capacity. Based on where we stand with permitting, we expect the major construction portion of the project to get underway in the second quarter of 2016 and be completed in late 2017. Turning to Asia for a moment, compared to last year’s fourth quarter 2015 fourth quarter sales in the region were lower, this was primarily due to large initial municipal water GAC fill expand across 2014 fourth quarter and into the first quarter of 2015. As part of that project we provided 2.9 million pounds of GAC in the 2014 fourth quarter followed by another 4.3 million pounds in the first quarter of 2015. Looking to 2016, and despite the large municipal water fill that occurred in the first quarter of 2015 that I just mentioned, we currently expect modest year-over-year growth in the region as a result of several new activated carbon pellets supply agreements that were awarded to us in the second half of 2015. In addition to the agreements we discussed on the last quarter’s call with Mitsui of Japan to supply a power generating unit at Wisconsin public service in the United States, our Calgon Carbon Japan unit was awarded another contract during the fourth quarter for the supply of activated carbon pellets to a customer in Korea. We also expect the conversion of our potable water and food grade reactivation in Suzhou, China to industrial use to be a key to this positive swing. However, we still await governmental approval for this change. And finally, our efforts continue in the developing markets of India and Brazil. We are making solid progress in India in both traditional and new applications and remained very optimistic about our potential there. Also despite the economic challenges in Brazil, we expect to grow in Latin America in 2016 compared to 2015. That concludes my comment.

Thank you, Jim. Now we’ll go to Steve for comments on developments and the advanced materials manufacturing and equipment businesses.

Thanks, Dan. Let me start with developments surrounding our powered activated and carbon products with the mercury removal market in North America. With the regulatory uncertainty regarding MATS now seemingly over the effected electric utilities are focused on compliance with MATS. In spite of the uncertainty that persisted through much of 2015 we nevertheless doubled our full year Mercury removal product sales from $28.7 million in 2014 and $58.2 million in 2015. Contributing to this growth was our ability to capture new business. We added 32 electric generating units as new customers and of our 60 plus units serve more than half of them are using our advanced generation products. As for our current estimates of the overall market size we believe that lower estimated usage rates by generating units as well as ongoing low natural gas cost will ultimately reduce the size of the addressable market through range of 290 million to 400 million pound of standard product annually, and value of this equate to $245 million to $270 million or an approximate 10% reduction from our prior estimate. Now, looking forward to 2016, we have some challenges to overcome. We recently learned that one of our largest customers that has been using one of our standard products in 2015 under a dual sourcing arrangement will shift their sourcing of these standard balanced to a competitor. This significant legacy contract exploration loss will need to fill with new business and we are well in our way to doing so. Of the volumes awarded thus far for those utilities looking to comply by the April, 2016 compliance state, we estimate winning 40% of the awarded volumes thus far. Of the remaining estimated 80 million standard point that have yet to be awarded many are represented by generating units likely used chemicals to treat for other pollutants. Our advanced carbon ability to treat for mercury is unsurpassed in these more difficult mercury removal environments which provide us with some optimism as we await the awarding of these bids. Other factors negatively impacting our first quarter include unseasonably warm weather in a Northeastern United States which is led to reduce volume from our customers and by virtue of the lower electric generation in one of our customers has temporarily idled two significant generating units for repairs that were expected to be completing in the near future. Considering all these factors we expect our first quarter mercury product sales to be approximately equal to the level achieved in the fourth quarter of 2015. There’s plenty of business yet to be awarded. Our advanced product continued to outperform those who our competitors and we remained confident in our ability to ultimately secure at least 30% of the value of this market. While we were off to the slower start than expected for the reasons that I mentioned, we believe we will end strong and we’ll again achieve growth in our full revenues within this market. Now turning to equipment, our 2015 equipment revenues were lower compared to 2014 by $6 million, do impart to lower sales of carbon equipment and lower balance water treatment system sales. Looking specifically at our balanced water treatment equipment market sales and orders were sluggish in 2015 driven by continued regulatory delays, a decline in oil price that pinch demand from offshore service vessels and the strong dollars that impacted our competitiveness on new build vessels installations in Asia. We book the total of 50 new orders, less than half as many as we saw in 2014. On the positive side, we continue to be very successful in the market for vessel retrofits. More than half of our orders in 2015 were for retrofits and this represented a strong share of available retrofit market. There are two important regulatory developments in this market area during the fourth quarter. In November, IMO saw three additional countries sign the ballast water treatment convention, which move the total road wide shipping tonnage represented by countries that have sign the convention to 34.35%. And this week Belgium indicated their intent to sign in early March which will bring the estimated tonnage to over 34.9%. Many now believe that ratification will occur sooner rather than later. Once ratified the convention will go into force 12 months later and vessels that discharge ballast water international ports must be equipped with an IMO type approved balanced water treatment system. As a remainder, we begin to test our UV based Hyde GUARDIAN ballast water treatment system in early 2015. Not only to update our IMO type approval but also to potentially allow us to apply for U.S. Coast Guard type approval. We continue to make good progress in our testing to more rigorous land based portion of the testing is nearly complete. Shipboard testing is expected to start in the second quarter and be completed later this year. However, in regards to U.S. Coast Guard in mid December we and three other permanent manufacturers of UV based ballast water treatment systems were notified by the U.S. Coast Guard that it would not consider a type approval application that utilized the Most Probable Number or MPN test method to determine the effectiveness of UV based ballast water treatment system. We were both surprised and disappointed by this decision which we appeal in January. We continue to emphatically believe that MPN is the most accurate and reliable test method for determining the effectiveness of a UV based system to meet the requirements under the U.S. Coast Guard regulations. The MPN test methods is use to validate the efficacy of UV based disinfection in many other applications including drinking water as well as by the International Maritime Organization who are approving UV systems to meet the IMO convention requirements. Furthermore, the U.S. Coast Guard is yet to approve any systems to meet its regulation which is full effect for all vessel as of January 1, 2016 and as of mid January is granted over 3,800 compliance extensions up from approximately 300 a year ago. In spite of these regulatory challenges we continue to estimate this market to affect approximately 64,000 vessels independent upon a number of factors including the number of manufacturers able to effectively serve this market or achieve U.S. Coast Guard type approval. This market represents potential in total revenue in the range of $18 billion to $28 billion, the single largest equipment opportunity in our history. However, considering the current U.S. Coast Guard view of the MPN test method and the continued delay in the IMO convention ratification we expect our 2016 balanced water treatment system revenues will approximate those we enjoyed in 2015. Now turning to Europe, our European operations continues to produce solid results when expressed in local currency, with 2015 sales and margins both showing improvement over 2014. Similar modest improvement is again expected in 2016. At our Tipton plant near Birmingham, England, we completed the refurbishment and expansion of our potable water reactivation facility. This will allow us to more effectively and efficiently serve reactivation plants in England and on the European continent. And finally on our manufacturing front, during the fourth quarter of 2015, our virgin carbon manufacturing plants ran extremely well generating lower inventory cost that will contribute to sequential improvement in our gross margins beginning in the first quarter of 2016. And that concludes my comments.

Thank you, Steve. Now we’ll go to Bob Fortwangler for our 2016 first quarter outlook.

Let me start with revenue. We expect our first quarter revenue to decline by 3% to 6% compared to our fourth quarter result. The sequential decline primarily due to the revenue from the significant environmental remediation project we completed in Q4 which will not repeat. This is about half of the decline. We expect slowness to continue in our industrial end market. We also expect our North American municipal water business sales to be lower in line with the trend we typically see for this business as we move from the fourth quarter of one year to the first quarter of the next. And finally based on the information shared by Steve, we expect our mercury removal sales to be relatively flat with the fourth quarter. On a positive note, we do expect to see a pickup in Japan as we execute on the new carbon pellet contracts mentioned by Jim earlier. We expect currency translation will have modest negative impact of $1 million or less as we expect to continue to operate in a relatively stronger dollar environment. We expect gross margin before depreciation and amortization to be approximately 35%. We expect depreciation and amortization expense to decline sequentially by about $1 million and for our selling, general and research related operating expense to decline sequentially by approximately $0.5 million. We expect our other income and expense in interest income and expense to be slightly higher sequentially. And finally, we expect our effective income tax rate to be in the range of 33% to 34%. I’ll turn it back to Randy for some final thoughts.

Thanks Bob. So looking back we’ve accomplished much over the past three years for reducing our costs, increasing our profitability building a solid platform from which we believe we’ll be able to deliver sustain future growth. A key component of the success is been our ongoing $50 million cost improvement program. As of the end of 2015, we have captured $35 million of the savings with the final $50 million expected to be captured approximately equally over 2016 to 2017. In effecting some of these changes aimed at improving our profitability we build our working capital and allocated the use of operating cash flow and borrowing capacity to capital growth projects. In 2016, we’ll first become more focused on cash flow generation through lowering the days sales outstanding of our receivables, reducing the aggregate level of our inventories, and spending less on growth capital with the last majored near term project out there being the Neville Island project as you’ve heard before. As we noted, we expect capital spending to be increase $50 million to $60 million in 2016. In terms of what we’re focusing on this year, we expect to further optimize our business processes in the use of the assets and particularly our new SAP system and our reactivation assets. We’re going to continue diversify and grow both in terms of our product offerings as well as through continuing to increased our penetration into new and emerging end markets and geographies. In addition, we will work to meet, maintain and build on our success in the mercury removal market and continue readying our balanced water equipment business for future growth by developing additional outsourced manufacturing arrangements. In total, we expect the combination of these efforts to generate growth in earnings, enhance our return on invested capital and create incremental value of you, our shareholders. As I mentioned several times over the past year we will continue to look to acquisitions as way to achieve these objectives. Look for us to intensify these efforts in 2016. Our balance sheet is strong with ample room for additional leverage. It will provide sufficient resources to go in this direction if we identify strategic opportunities. As you heard from Jim and Steve some of the challenges we faced in 2015 will continue into early 2016, so with consideration of uncertain economic conditions we enter the year cautiously optimistic with the expectation that year-over-year we will achieve a low single digit rate of growth in the full year sales. We expect this growth to be derived principally from our core global traditional municipal and industrial businesses, as well as growth in Japan from our new activated carbon pellet agreements and growth in our full year mercury removal revenues. We are confident that by controlling what we can and remain focused on our objectives to drive future growth that we will be positioned as market and economic conditions improved. Before opening up for questions, there are two more items I would like to address. First, with respect to the Flint Michigan situation, as a situation of Flint Michigan is unfolded over the past few months, one thing is absolutely clear. Our drinking water infrastructure in United States is in dire need of improvements. When added to the implications to drinking water supplies from the Elk River chemical spill of a few years ago, the algae blooms that have spawned in Lake Erie over past few summers it is absolutely evident that we need to do more to drive change. Solutions exist from companies like ours, and those solutions do work. I spend several days last week in Washington D.C. speaking with members of Congress as well as Agency representatives. Regardless to the planned agenda for each meeting, the situation in Flint was top of mind and the level of concern is high. Although removing lead from a water supply is not something that activated carbon is capable of. Activated carbon and our UV technology provide solutions to many of the issues faced by water municipalities around the globe. More can and will be done by our marketing teams to help keep the message flowing. And finally, I’m going to turn it over to Bob O'Brien. We saw Bob on the phone, our esteemed Executive Vice President and Chief Operating Officer at least for month or so. This is Bob’s last quarterly call and it’s a bittersweet moment for all of us here today. Bob’s has been Calgon Carbon for 42 years. He had 16 different job titles and lived in three different cities. He is without question one of the true architecture of Calgon Carbon success. So Bob, I want to formally thank you for your decades of distinguished service to this company, its employees, and its shareholders. You will be missed and your legacy will divine. So Bob, I will turn it over to you.

Well, thank you very much Randy. I truly appreciate the kind words that you have just spoken. I’m proud and thankful that I’ve been able to enjoy a long career at Calgon Carbon. Over in the years, I’ve had the opportunity to work with a very large number of fine, dedicated people and I’ve appreciated their friendship, help and support. Also I want thanks to shareholders, investors and analysts. I’ve enjoyed working with you and for you. I will miss it. And now it’s a good time for me to leave, as I’m confident that current management teams and employees are well positioned to lead the company to ever greater success. I look forward to transitioning from a participant on these quarterly calls to becoming an active listener. Thank you.

Bob, let me say once again, congratulations on a fine career and we wish you well in your retirement. So operator we’re now ready to open it up for questions.

[Operator Instructions] Your first question comes from the line of Ben Kallo of Baird.

Hi. This is Dave Delahunt on for Ben. I was wondering if you could just add a little color about your current thoughts or any updates on what are you thinking about the impact of MATS regulation going forward?

This is Steve. We think that the MATS regulation will remain in effect and that utilities, as we know we’re all working to be ready for compliance from the April 16 compliance date. We remain ready to serve those utilities and/or anxious to work through the completion of the outstanding bids that we think will occur in the next month or two months?

Great. Thank you. And also any updates on potential capacity expansions in Pearl River specifically?

We’re cautiously going to be looking at our capacity around the globe and making adjustments to see fit, so more to come on that. But as part of our overall returning value to shareholders, its one aspect that we have of that, as we said very clearly through our dividend program and our stock buyback this past year we’ve given back 45.4 million. Obviously plants are part of that. And as I said in my comments acquisitions are part of that as well and we’re evaluating all of those.

Great. Thank you.

Your next question comes from the line of Gerry Sweeney of Roth Capital.

Good morning. Thank you for taking my call.

Hey, Gerry.

Good morning, Gerry.

So you are looking at full year 2016 low single-digit growth. I was wondering if we could maybe go over a couple points to see how you get there. Starting with the municipal program, it sounds like there are some changes in the reactivation pattern going on. People are holding their fills longer because they are getting continued acceptable rates of cleaning out of them. How much has that changed over the last couple years, the refill patterns?

Let me start with that then I’m going to turn it over to Jim. But the good news over the past few years and you’ve heard us say repeatedly we’re getting more and more customers to convert customer reactivation in municipal space, that’s the good sign. I’m going to quote our esteemed colleague, Bob O'Brien to tell us that every time somebody decides to go reactivation, on that very day they’re probably starting to think about how they can extend their life as much as they can to save money and indeed we’re seeing some of that. On the good side, the positive of this is that where customers in the past have been reluctant because the cost to go with reactivation were now showing and we’ll be able to show them that because of the shorter cycles that indeed their cost model could be a little bit less and perhaps could switch them to reactivation.

Yes, before Jim jumps in -- maybe we can also look at -- you know maybe each client as they come on board versus longer reactivation how that changes your growth view of each client or how that kind of fits into the equation. I mean that’s really -- is the general questions how it all and you know factors out at the end.

In terms of revenue, let us say that on an annualized basis we estimate about $5 million to $6 million of revenue, we give up on the top line because as you know reactivation is sold to the customer at a discount. As we said many times, bottom line margin is fine, so you know there will be -- the more customers we convert, the customer reactivation obviously that’s our goal. We are going to see the topline be negatively affected. However, our strategy is to utilize our virgin assets as much as we can, and be able to use it for the food packed products and mercury and as well as this demand comes up around the world in some of these other geographies and the more customers we convert to customer reactivation, obviously that frees up that version capacity which is so vital for us.

And that being said, our ability to convert more customers and put more GAC on line in this market we do expect incremental growth going into 2016 despite the change in reactivation patterns.

Okay, so overall growth regardless of the reactivation patterns.

Correct.

Correct.

Okay. Then just on the industrial side, what’s the magnitude of the slowdown on that front? And is there a sort of a base business that the industrial players who are going to be there have, and then there's the variable that will go around, that can shift around with more or less economic demand? I'm just curious as to how that's going to play out.

Yes, that’s exactly correct. So there is a base business and then there is more project and say economic driven business. So, we feel we are well positioned in both to continue with the base business and capitalize on the project business when it comes. You know we hope that 2015 was a low point and we are now moving forward in 2016 like we said we do expect modest growth in that area moving forward.

Okay

And Gerry, let me just add to that. You know when you look at our customer base and we don’t split it out in terms of our industrial business, but it’s pretty big for us. You know we have chemical plants that are our customers; we have refineries that are customers and multitude of industrial folks. So if their production is down, either they are not using as much carbon in their process or the waste water streams aren’t being utilized as much and that affects the use of carbon. So we are at the mercy really of how much product is being produced by our customers.

Got it. And then finally, on the mercury, then I'll jump back in the queue. Steve, can you just -- what was the -- I missed it when you listed it off. The size of the market is down. It sounds like there's a larger switchover to natural gas. Can you go through those numbers again real quick?

Yes we said Gerry, 290 million to 400 million standard pounds that the market size of 245 million to 270 million, so down about 10% from where we were for the reasons that I and you just mentioned.

Got it. And do you see that going down with natural gas staying down. It doesn't look like it's going to get any -- it's pretty cheap, it's warm weather, we have plenty of it. What's the thought process on a go-forward basis?

Well so as we look to 2016 and 2017 I think the numbers that I just presented are what we believe is reflective. And on a long term basis it will be the issues we just discussed on this call and potentially other issues that the utilities might face. I think it’s probably too early to predict on a long term basis what will happen, but I wouldn’t see the market growing much beyond what we’ll enjoy in 2017 that being the first full year of compliance by all the utilities.

Got it. Thanks. I’ll jump back in the queue, appreciate it.

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

Hey good morning, everybody.

Hey Dan.

Thanks. First of all congrats to Bob, sorry this will be your last call. We’ve certainly enjoyed working together. Secondly, I wanted to go and had a couple of specific questions, one on mercury. You know Steve in your comments on the first quarter the tone was maybe a little more cautious than we anticipated. You know given the amount of business still yet to win and the likelihood that if there are wins you are probably going to see fills in the first quarter, are you leaving room depending on your win rate as you work your way through or you’re kind of already baking that in?

Yes we are baking that in. I think that you know perhaps we’ve been conservative maybe just a little Dan. I think its working to be about the same. It’s going to be $11 million to $12 million in revenue in the first quarter and we have the loss of the customer pursuant to the contract exploration that I mentioned. We have a customer who’s not insignificant with some outages at key plants that are affecting their take and the weather I think as you know has been unseasonably warm and that affects the generation. So factoring in all of those things we’re pretty confident with where we see the first quarter going.

And you are also lapping the fills from last year’s first quarter as well?

We are.

Okay. I’m just saying if compliance starts April 1, you would think that you’d be anyway, but Q2 is a slow usage period anyway. Secondly on UV, you know you mentioned the Coast Guard issue, you know I guess the question is, given your understanding of the way the Coast Guard’s treating UV, can UV meet their standard or does their standard need to change? I don’t know if you can give us a little bit more color on that?

I can. We certainly hope that their interpretation of the standard changes and that they accept the MPN method it’s proven, its commonly used, its accepted by the IMO, it’s accepted for drinking water use. It’s widely supported by our customers and the industry and it’s endorsed by global shipping organizations. So, we are going to certainly strive for recognition of the MPN method as being completely appropriate. Now that said, if we were relegated to needing to produce a different system that could comply with the test method, the Coast Guard seems to think is better, although we believe it’s not. We could do that, it would cost more, it would be bigger, it would be less efficient and it’s completely unnecessary.

Yes again to reiterate what Steve just said there, oh sorry….

No, you can -- I’d like to hear your commentary.

No, I was going to say that given to what Steve just said, there isn't a system out there that's type approved for U.S. Coast Guard. Let’s keep that in mind and the extensions are just up astonishing how large these extensions are they giving. As I mentioned in my remarks, I was in DC last week and you know talking to some conventional folks and letting them know that there is a 140 million gallons of ballast water being discharged in the U.S. ports each and every day and the coast guard is not moving ahead fast enough to get this problem solved. This is disturbing, and so I don’t -- I think we all agree that the story hasn’t been completely written yet, there is still more that it’s going to have to be worked out, but you know there’s a lot of bureaucracy that unfortunately surfacing.

And I know it’s only been a couple of months since Coast Guard made that decision, but has this impacted buying decisions. Are you seeing maybe a shift away from UV systems even for carriers just given that uncertainty or has that not changed you know the view point from potential buyers?

So on the good news front, we are still selling to U.S. customers who believe that the MPN method will be fixed and that right will prevail in this circumstance, certainly we’ve seen some delays where we thought we would have orders but they are waiting. I mean with the Coast Guard liberally granting extensions and the IMO not yet ratified there is no reason for ship owners to have to make a decision. So, I think when we look at our full year and we suggest it will be about the same, it really reflects now two years of applause in the market place as these regulations become either ratified or sorted out.

Got it. That’s good color. Thanks guys.

Sure. Thanks Dan.

The next question comes from the line of Steve Schwartz of First Analysis.

Well good morning, everyone.

Hi, Steve.

He, Steve.

Best wishes to you Bob on your retirement. We’re going to miss you. I guess my first question comes down to your prepared remarks around MATS. You mentioned in the 2016 market that you thought you were capturing about 40% share of what has come through, but then you made a comment about customers using chemicals for treating other pollutants. And I got the impression you were suggesting that maybe there were some people walking away from carbon. Can you clarify or add color to that for me?

Sure Steve, that’s not what I meant to imply at all. When they are treating for other acid gases and were using sodium bicarbonate trona, products of that nature, then the relative effectiveness of carbon in those environments is hindered and our advanced products were better. So certainly not walking away from carbon, hopefully just walking a lot closer to our carbon products and particularly our advance ones.

Okay, so in other words you are seeing other regulatory requirements push people towards your advanced products.

Well said, yes.

Yes, okay. And with respect to the -- this first customer in Brazil can you talk a little bit about what the application is that I presume its municipal and can you talk about you know what got you guys to close that sale. I mean was it the technology is our financial benefit, how did you gain that competitive edge?

Let me respond to that, Steve. Similar to our approach when we went into China, we have a lot of global international customers that are setting up a shop in Brazil, so our first contract actually is on the industrial side and not municipal side. This is our entrée, our strategy is to get there through these global manufacturers who know us, they know reactivation, they know our quality. And then once we get a foothold then to go after the municipal market and some of the local suite in the markets and others. You know to add to Brazil, I think we’ve said before in the call that there’s about a £90 million of market for carbon in Brazil, one that’s low quality and we believe there is a demand for the higher quality which we want to niche, find that niche and carve out for yourselves. You know in addition to that first contract, we also had 27 new first time customers, so which reinforces again the Calgon Carbon franchise, the brand and we’re very optimistic. Now unfortunately as you know the economic situation in Brazil isn’t rosy, but we’ve I’ve said before and I’ll say it again we are in this for the long haul, we’ve got a staff working, approaching these customers and I’m optimistic in the next few years that we’ll see more and more of these contracts fall into place.

Okay. That sounds good. And my last question, it’s more of just nuts and bolts around the fourth quarter. It sounds to me like you had two special items as we might consider them the 1.1 million in additional depreciation and $1.1 million tax benefit. Do I have that tally right?

Yes, this is Bob, yes you do. That is correct.

Okay, great. Thank you.

Thank you.

[Operator Instructions] Your next question comes from the line of Nick Prendergast of BB&T.

Hi, good morning. Just don't want to beat a dead horse here, but I want to make sure I am understanding the mercury commentary correctly. In the past we looked at the mercury market potentially as a $300 million opportunity. And I believe you had spoken to somewhere around a 30% market share. Now it looks like you are kind of cutting back on the total market size -- maybe call it, say, $260 million, somewhere at the midpoint there. But now it sounds like you are actually getting more than that 30% share at 40%. Is that correct, first of all?

Well that 40% was in reference strictly to the awards that we’ve been able to secure as it relates to the April 2016 compliance state and to be fair, there’s many words still out there. So I was really only touting our success initially, to this point, in respect of the April 2016 award process. Overall, we still expect to be at least 30% overall of the total market size which say in 2017 if we infact achieve that target or do better than we should be enjoying revenues that are in the neighbourhood of $75 million to $80 million.

$75 million to $80 million and you are doing $58 million right now?

That’s correct. We did $58 million last year and for the moment that’s what we see this year at least $58 million, correct.

And so the delta would be the incremental in 2016 and 2017 or it’s all in 2016?

It would be the end state that we would have, that we would enjoy for the full year 2017.

Got it, got it. 2017. Okay. So this is going to be spread out over 2016 and 2017, then. Okay. All right, fair enough. Thank you very much.

Thank you. I’ll now return the call to Dan Crookshank for any additional or closing remarks.

Thank you very much Lori. I just wanted our audience to know that we will be available for follow up calls as the day goes on. I’ll turn it back to you Lori to end the call.

Thank you. That does conclude today’s Calgon Carbon Corporation fourth quarter 2015 earnings conference call. You may now disconnect.