Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Gail Gerono - Vice President, Investor Relations

Randy Dearth - Chief Executive Officer

Steve Schott - Chief Financial Officer

John Platz - Vice President, UV Technologies

Analysts

Ben Kallo - Robert W. Baird

Kevin Maczka - BB&T Capital Markets

Hasan Doza - Water Asset Management

Jinming Liu - Ardour Capital

David Rose - Wedbush Securities

Daniel Mannes - Avondale

Christopher Butler - Sidoti & Company

Steve Schwartz - First Analysis

Calgon Carbon Corporation (CCC) Q1 2013 Results Earnings Call May 6, 2013 10:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. And welcome to Calgon Carbon Corporation's First Quarter 2013 Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the conference over to Gail Gerono, Vice President of Investor Relations. You may begin your conference.

Gail Gerono

Thank you, Paula. Good morning and thank you for joining us. Our speakers today are Randy Dearth, Calgon Carbon’s CEO; Steve Schott, our CFO; and the guest speaker, John Platz, Vice President, UV Technologies. Bob O'Brien, our Chief Operating Officer is traveling and could not be with us today.

Before we begin, please be advised that the Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements. Today's presentations or perhaps some of the comments that Calgon Carbon’s executives make during the Q&A may contain statements that are forward-looking. Forward-looking statements typically contain words such as expect, believe, estimate, anticipate, or similar words indicating that future outcomes are uncertain.

Statements looking forward in time including statements regarding future growth and profitability, price increases, cost savings, broader product lines, enhanced competitive posture and acquisitions are included in the company's most recent annual report pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

They involve known and unknown risks and uncertainties that may cause the company's actual results in future periods to be materially different from any future performance suggested during this webcast.

Further, the company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the company's control.

Some of the factors that could affect the future performance of the company are changes in or delays in the implementation of regulations that cause the market for our products, acquisitions, high energy and raw material costs, costs of imports and related tariffs, labor relations, capital environmental requirements, changes in foreign currency exchange rates, borrowing restrictions, validity of patents and other intellectual property, and pension costs.

In the context of the forward-looking information provided in this call and webcast, please refer to the discussions of risk factors and other information detailed in, as well as the other information contained in the company's most recent annual report. Randy?

Randy Dearth

Thanks, Gail. For those of you who did not see our news release that was issued earlier this morning. I'm pleased to report that earnings per share for the first quarter of 2013 were $0.18. Our Corporate Wide Cost Savings Programs on Activated Carbon products and Services contributed to this strong performance.

Sales were essentially flat, primarily the result of $3 million negative impact from foreign exchange. At the end of today's call, I will address our strategy for sales growth and significant developments in the first quarter.

But first, Steve will review the company's financial performance for the first quarter. I will then provide the Carbon and Service update, and after that John Platz will provide a commentary on the status of Ballast Water Treatment Regulations.

We want to present you today a better understanding of the significance of alternative management system status which the U.S. Coast Guard recently granted to our Hyde Marine Ballast Water Treatment Systems. After John’s comments and Steve’s outlook, I’ll return to discuss progress on our cost reduction initiatives and other development.

So, with that, let’s get started. Steve?

Gail Gerono

Steve?

Steve Schott

Thanks, Gail, and good morning, everyone. Total sales for the first quarter of 2013 were $135 million versus $136.6 million in the first quarter of 2012, a decrease of $1.6 million or 1.1%. Currency translation had a negative impact of $3.1 million on the Activated Carbon and Service sales for the first quarter of 2013 due to the weaker yen.

Regarding our segments, sales for the Activated Carbon and Service segment increased $1.7 million or 1.4% for the first quarter of 2013 compared to 2012’s first quarter.

Demand increase in all geographic regions. In the Americas, sales increased $3 million due to customer’s use of carbon to meet the U.S. EPA’s Stage 2 Disinfection Byproducts Rule which is being phased in for drinking water facilities over the next several years. Partially offsetting this increase was lower demand and pricing for mercury removal carbons whose sales declined by $2.4 million.

Equipment sales declined $2.2 million or 13.7% for the first quarter of 2013, compared to 2012’s first quarter, primarily due to lower sales for Ballast Water Treatment Systems of $2.9 million and Ion Exchange Systems of $2.6 million.

The first quarter of 2012 included sales of $3 million for a single Ion Exchange System contract that did not repeat in first the quarter of 2013, partially offsetting these decreases were increased sales for traditional UV Disinfection Systems and carbon adsorption equipment.

Consumer sales declined by $1 million or 31.3% for the first quarter of 2013 as compared to 2012’s first quarter, due to lower demand for activated carbon cloth products. This decline is seen as temporary and largely limited to our first quarter.

Consolidated gross profit before depreciation and amortization as a percentage of net sales was 31.6% in the first quarter of 2013, compared to 31.3% in the first quarter of 2012, an increase of 0.3 percentage points.

The increase was primarily in the Activated Carbon and Service segment in both Europe and Asia regions due to a favorable sales mix which helped to offset margin decline in the mercury market as long-term contracts had expired. The first quarter of 2013 also included the favorable impact of $400,000 for the settlement of an insurance claim related to Hurricane Isaac.

Depreciation and amortization was $6.7 million in the first quarter of 2013, compared to $6.5 million in the first quarter of 2012.

Selling, administrative and research expenses were $20.9 million during the first quarter of 2013 versus $23.9 million in 2012, a decrease of $3 million or 12.6%. The decrease was primarily due to lower employee-related expenses due in part to the company's cost reduction initiatives.

Our operating expense as a percent of sales improved to 15.5%, 200 basis points better than the 17.5% we achieved during the first quarter of 2012.

The income tax rate for the first quarter of 2013 was 30.4% versus 35% for the first quarter of 2012. The lower tax rate for the first quarter of 2013 was due to activity related to the company's Datong, China, subsidiary which was sold in March of 2013. Going forward, we expect our tax rate to be approximately 35%.

In summary, our net income for the first quarter was $9.8 million or $0.18 per diluted share versus net income of $7.7 million or $0.14 per diluted share in 2012.

Turning again to our company's business segments, the Activated Carbon and Service segment recognized $20.9 million in operating income before depreciation and amortization in the first quarter of 2013, compared to $17.3 million in the first quarter of 2012. The increase was primarily due to lower employee cost related to the company's cost reduction initiatives that I had previously mentioned, as well as the favorable insurance claim settlement.

The equipment segment recognized $400,000 in operating income before depreciation and amortization in the first quarter of 2013, compared to $500,000 in the first quarter of 2012, a slight decline.

At March 31, 2013 backlog in the equipment segment totaled $27.7 million, down $4.2 million from year end. The Consumer segment recognized $400,000 in operating income before depreciation and amortization in the first quarter of 2013, compared to $800,000 in the first quarter of 2012.

Regarding our balance sheet, cash decrease during the first quarter of 2013 and at March 31, 2013 we have $14.6 million of cash. Receivables were $110.9 million for the first quarter of 2013, which was $8.9 million higher than year end 2012, much of the increase was in the Americas region due to a higher volume of billings for some significant equipment projects.

We also benefited from increased sales volumes in Europe and Asia. The receivables in our equipment business and the Asia region generally have longer payment terms then the rest of our business.

Inventories were $105.6 million for the first quarter of 2013, which was $1.6 million lower than year end 2012. We expect our product rationalization project to continue to provide improvements to both our gross profit, as well as our ongoing inventory levels.

As of March 31st, the company has total debt outstanding of $64.2 million virtually unchanged from year end 2012.

Operating cash flow used in operations was $3.7 million for the first quarter as compared to operating cash flow provided by operations of $5.2 million in 2012. The $8.9 million decrease was due to unfavorable working capital changes, primarily in accounts payable, which related to timing of payments for materials and outsourced carbons. Also contributing to the decrease were the receivable increases that I previously mentioned.

Capital expenditures totaled approximately $10.6 million for the first quarter of 2013 and included $5.7 million related to the construction of the Gila Bend, Arizona reactivation facility. Our estimated spending on capital for the full 2013 year is currently $40 million to $45 million.

Finally, I would like to provide an update on our accelerated share repurchase program. As a reminder, last November we deployed $50 million and received 3.3 million shares from Morgan Stanley. These shares were immediately removed from our standing share count for EPS purposes.

However, the program contemplates that the final settlement of shares will be based on the daily weighted average price over the program execution period which is estimated to last into the third quarter of this year.

To the extent the daily weighted average price over the full execution period exceeds the price represented by the initial shares delivered, we will be required to return shares to Morgan Stanley, and our outstanding share count will increase.

At the end of the first quarter, our daily weighted average price from program inception was already above the program price and accordingly our diluted share count has been adjusted upward by 68,000 shares. Because of the possibility of having to return shares upon program completion, we expect to file a shelf registration statement this week to facilitate the delivery of registered shares later this year.

Gail Gerono

Thanks, Steve. Next, Randy, will provide business review for the first quarter.

Randy Dearth

Thanks, Gail. Let me begin with sales. We have made it known that the bottom line is a key focus for us this year. However, we haven't forgotten about the topline. I would like to share with you the following strategy that has been developed for sales growth in our Carbon and Service segment, sell smart, sell more and sell outsourced.

Sell smart; sell products and services in the region where we can realize the highest price and margin; sell more, generate more business for our reactivation facilities across the globe where we have available capacity; and sell outsourced, distribute products manufactured by other activated carbon producers weren’t makes economic sense.

We also expect to grow sales and profitability through price increases. We initiated a price increase on Activated Carbon and Service products earlier this year. We're targeting increases that will have an impact of more than $10 million in 2013 with a focus on optimizing prices on virgin carbon and reactivation. I'm pleased to report that we believe we are on track to achieve that goal. We expect U.S. sales to account for most of the increases.

Next, let’s turn to recent developments at our reactivation plants. We started up our new reactivation facility in Gila Bend, Arizona on April 1st. The plant is operating well and it was completed on time and under budget. I visited the facility two weeks ago for the dedication ceremony, which was attended by customers as well as state, county and local officials. It’s a very impressive facility.

The 25 million pound per year plant reactivate carbon that was used to treat drinking water in Phoenix, Scottsdale and other communities in the Southwest. In order to optimize utilization of our reactivation assets, we intend to temporarily idle our plant and Blue Lake, California and divert reactivation would have typically be done there to Gila Bend. As a result, the past utilization at Gila Bend in 2013 is expected to be between 80% and 90%.

In last quarter’s call, Bob O'Brien reported that we had idled our industrial reactivation facility at Neville Island, Pennsylvania to better match our industrial area capacity with demand. We restarted the plant in early April due to a stronger demand that we projected. And we expected to continue to operate through mid June.

Next, let me give you an update on activity in emerging markets. And let's begin with the mercury removal market. On the regulatory side, the compliance date for the EPA's Mercury and Air Toxic Standards remains April 2015. However, individual states have privacy if we grant a one-year extension to power plants.

So far we're only aware of two plants that have requested and received extensions. Since our last quarterly call, the EPA raised the limits for Mercury for new coal burning generating units. This was expected and does not change our projections for the amount of activated carbon that will be needed to remove Mercury under MATS.

In the first quarter, we were awarded a contract by a major U.S. power generator to supply FLUEPAC powdered activated carbon for mercury removal. The two-year contract followed the expiration of a five-year take-or-pay agreement with the power generator.

As expected, the price and margin for the new contract are significantly lower. However, the new pricing for the FLUEPAC carbon should generate margins that are consistent with our typical virgin carbon sales.

Next, some highlights on the Disinfection Byproducts market. The next regulatory milestone is July 1st of this year when water treatment systems serving more than 50,000 but less than 100,000 customers must be in compliance with the disinfectant and Disinfection Byproducts rule. This creates an opportunity for carbon and equipment sales.

In the first quarter, enquiries for equipment were much higher than usual and were consistent with the needs of midsize facilities to meet the July 1 compliance date. Gail.

Gail Gerono

Thanks Randy. John Platz will now provide an update on the UV business. John?

John Platz

Thank you, Gail. Before I discuss the significance of the Coast Guard’s alternative management system or AMS status, I will like to review the history of Ballast Water Treatment and the attempts to regulate it.

First, why is there a need for this regulation? When the ship empties its cargo, it fills onboard tanks with Ballast Water. When that ship loads cargo, the Ballast Water is discharged. Ballast Water poses a serious ecological and economic threat since aquatic species maybe carried from port to port in a ship’s Ballast Water.

The best-known example is the European zebra mussel, which have infested a significant percentage of U.S. waterways and has required more than $1 billion in expenditure on control measures. To combat the spread of invasive species via Ballast Water, the International Maritime Organization or IMO adopted a convention in 2004 requiring treatment of ship’s Ballast Water.

The IMO convention is scheduled to take effect one year after it is ratified by at least 30 flag nations whose registered ships represent more than 35% of the world shipping tonnage. To date, 36 flag nations have signed the IMO convention, but their combined tonnage falls short of the target by 5.9%.

There are two unsigned flags of registration that on their own could surmount the shortage, Panama with about 22% of the world shipping tonnage and China Hong Kong with approximately 7%. After that, Greece, the Bahamas, Singapore and Malta each have between 4% and 5% of the world’s tonnage and have yet to sign as well.

Possible reasons that certain flag nations have not signed the convention maybe poor economic conditions in the shipping industry and concerns about undefined enforcement methods. At this point, many in the industry expect the IMO convention to be ratified by early 2014.

Because of this delay in ratification, there are compliance dates in the IMO convention that have already come and gone. It is widely expected that the IMO compliance dates will be extended once the convention is ratified. The IMO convention requires ships to operate Ballast Water Treatment Systems that have been approved by the IMO.

There are currently 32 type approved systems, 13 of them employ UV technology, including Calgon Carbon's Hyde GUARDIAN Ballast Water System. Most of the others use chemicals as a disinfectant. UV has been the technology of choice for a large portion of the Ballast Water Treatment market, approximately two thirds of the systems sold to date use UV as the method for disinfections.

Although the U.S. is a member of the IMO, the U.S. Coast Guard chose to develop its own regulation and it is already in force. Of course, it applies only the ships that discharged ballast water in United States.

The U.S. Coast Guard regulation requires vessels built after December of this year to treat their ballast water using U.S. approved equipment as soon as they are commissioned. Midsize vessels built before December must utilize U.S. approved equipment following their first dry-dock after January of 2014. All other vessels must employ U.S. approved equipment following their first dry-dock after January 2016.

Most ships are required to dry-dock every five years. So we expect ships in the two-size classes to dry-dock ratably over 60 months beginning in 2014 and 2016, respectively. There are two types of U.S. approved equipment, one is the AMS mentioned earlier and the other is U.S. type approved equipment.

The U.S. Coast Guard recognize that it would not be possible for systems to achieve U.S. type approval before the first compliance dates. To manage this, the Coast Guard’s regulation includes the provision for alternative management systems or AMS. Systems with AMS status can be used by ship operators in the U.S. for five years following the ships required compliance date.

The five-year period is designed to give the manufacturer a time to pursue U.S. type approval. To be eligible for AMS status, a system must have previously received IMO-type approval and must have quality test data deemed satisfactory by the Coast Guard. The system must also meet U.S. engineering and safety requirements.

For Ballast Water Equipment customers, Hyde’s AMS status is an important indicator of both our equipments’ immediate applicability to meet current U.S. requirements and Hyde Marine strong position in the Ballast Water Treatment market. Ship operators with U.S. compliance date just around the corner will look closely at the short list of AMS systems.

Operators will most likely further weigh which AMS system providers will have the technical capability, long-term viability and commitment to achieve U.S.-type approval. Of the nine ballast water manufacturers that have received AMS status, only three uses UV technology, including Calgon Carbon's Hyde Guardian. The Hyde Guardian is the only of these three to combine UV with disc filtration and its specialized capability to handle very heavy settlement loads.

Additionally, Calgon Carbon is the only supplier on the AM list -- AMS list that is basic in UV equipment and that has a decade long history of UV technology leadership. Hyde Marine’s quoting activity remains strong and we continue to receive orders. However, the delay in IMO ratification as well as the soft newbuild market has had a negative impact on orders for large Hyde Guardian Systems.

We have consistently received orders each quarter for smaller systems, many from the offshore service vessel and cruise ship markets. We have noticed an uptick in interest and systems to be retrofitted. And we expect a significant increase in retrofit orders in the coming quarters driven by the approaching U.S. compliance dates.

Detailed plans for ships dry-docking activities come into focus four to six months before their scheduled date. And with January 2014 marking the first U.S. retrofit compliance date, we expect to see increasing orders for Ballast Water Treatment Systems during the remainder of 2013 and beyond.

Hyde Guardian AMS status and its use of UV technology puts us in an excellent position to participate in this market. To date, we have sold more than 230 systems, a figure that places us in the top three or four on a unit sold basis. We have developed supplier relationships and streamlined and standardized manufacturing methods in preparation for the market upswing. We are ready to take maximum advantage of this regulation-driven market.

Next, I would like to discuss our traditional UV business, results of which in the first quarter of 2013 exceeded results in the comparable period of 2012. We are currently building the reactors for the first phase of the $12 million Los Angeles drinking water disinfection project as well as testing and commissioning our recent installation in Cincinnati.

Drinking water bid activity has been strengthening with more projects coming from smaller municipalities as the compliance dates for the LT2 regulation, which mandates control of cryptosporidium and giardia draw near. Our 24 in Sentinel competes well in these lower flow applications because of its efficiency and reliability.

On the wastewater side, we continue to build on the success of our C3500 Delta Wings system and it’s Title 22 Certification for reuse projects. We recently shipped a Delta Wings system that uses 768 lamps and we will be commissioning it later this year. Our municipal backlog is strong and ahead of last year at this time.

That concludes my presentation.

Gail Gerono

Thanks John. Next, Steve is back to comment on the outlook for the second quarter. Steve?

Steve Schott

Thanks Gail. Sales, we expect our second quarter 2013 sales to increase sequentially but totaled less than our second quarter 2012 sales, which were $148.4 million. Reasons for the year-over-year decline include a significant forecast to drop in equipment revenue mostly related to Hyde Marine of approximately $8 million. The weaker yen, which is expected to lower our carbon and service revenue by at least $2 million and lower mercury removal revenue.

In spite of the impacts from the weaker yen and lower mercury removal revenue, the carbon and service segment revenue is expected to be higher in the second quarter of 2013 compared to 2012. This improvement should result from stronger U.S. municipal revenue as well as the initial effects of our price increase.

Margins, we expect our gross profit before depreciation and amortization as a percent of sales to continue to improve. As a reminder, our fourth quarter gross profit was 31.2% and our first quarter 2013 gross profit was 31.6%.

We believe our gross profit in the second quarter of 2013 will show a sequential improvement of at least 100 basis points. Contributing to this expected improvement will be the benefits from our phase 2 cost reduction initiatives as well as our price increase.

Operating expense, we expect our operating expense as a percent of sales to be approximately equal to our first quarter 2013 results of 15.5%.

Gail Gerono

Thanks Steve. Randy is up next with an update on our cost savings initiatives and other corporate program.

Randy Dearth

Thanks Gail. We have made excellent progress on implementation of our $30 million three phase cost savings program. We’ve completed phase 1 and should realize 90% or $9 million from those initiatives this year. I outlined each component of this phase in our last quarterly call. Phase 2 is well underway. We should begin to see savings from these initiatives in the second quarter and we expect to realize savings of 60% of the $10 million target in 2013. We are already beginning to see results.

For example, through product rationalization efforts, we’ve reduced the number of activated carbon products that we manufacture by 45% and we are beginning to see the positive effect on rates and yields at our plants. We are in the process of implementing changes that will significantly reduce our transportation cost and we’ve also renegotiated numerous supply contracts with vendors that should result in millions of dollars of savings, and we have reduced the number of warehouses worldwide that we either own or lease.

We plan to complete implementation of phase 3 by yearend 2014. The projects in this phase should also generate savings approximately $10 million. They’re longer term in nature and some will require us to incur cost before savings are realized. For example, we’ve contracted with an operational consulting firm that has done preliminary work on plant efficiency study of our virgin manufacturing facilities. They have identified opportunities for improvement that could result in significant savings and efficiencies at both Big Sandy and Pearl River.

As it’s typical with consulting firms, we’ll be required to pay fees to the firm before the savings are completely realized. In 2013, we expect that savings will be offset by those fees. However, significant net savings will be achieved in 2014.

Phase 3 also includes new capital investment projects and IT reengineering. More details about these initiatives will be given at later day.

In an effort to optimize our global organization, we’ve also developed a new position, a Vice President position for Business Support Services, which will have responsibility for supply chain, environmental health and safety, and business analysis on a global basis.

The incumbent will also provide support to the America’s operations by directing our carbon and ion exchange equipment businesses and also field service. This senior level position will provide a great interface between our new business units, operations and our regions.

In conclusion, let me say that the transformation of Calgon Carbon into a more profitable enterprise continues. In addition to our strong focus on cost improvement, we are now developing new approaches to how we sell our products and services globally. All of this combined will in our opinion lead to increase in value of our shareholders going forward.

Thank you very much.

Gail Gerono

Thanks Randy. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ben Kallo of Robert W. Baird.

Ben Kallo - Robert W. Baird

Hi, good morning. Thanks for taking questions. First, on Datong, could you kind of give us your reasons for selling that plant and then if there is anything else in your portfolio that you are looking at that maybe generally you can’t get the details?

Steve Schott

Yeah. Ben, this is Steve. The sale was just a logical follow on to our having permanently shut that plant last fall. So we never intended to restart it and we are pleased to have completed the sale and there are no other assets in our portfolio that I’d highlight on this call for being for sale. We’re looking, as we’ve said, at all of our businesses to ensure that continuing in various parts of those businesses make sense but there is nothing that we would highlight for this call.

Randy Dearth

And Ben let me add to that because of the decision to close Datong occurred right after I joined last August and some of the data I looked at, when we made the decision in the early 2000s to go there, coal prices in China were the lowest in the world, and there weren’t many activated carbon producers at that time, since then coal prices in China have gone up substantially and we believe there is over 120 suppliers of activated carbon. So, that all played into our decision to close Datong.

Ben Kallo - Robert W. Baird

Okay. Sure. And how does that relate to your new react facility there in China and then if I could add one more on your strategy for increasing sales you mentioned increase the amount of outsourced carbon that you sold, we’ve heard about that in the past and we have seen a drag margin. So how do you balance the two? Thanks.

Randy Dearth

Well, first in the response to the Suzhou question, you know Suzhou is strictly reactivation facility. We’re essentially focused on customers, a lot of western companies that have setup shop there, and we are supplying the reactivation services but we’re now slowly trying to get into the Chinese municipal market and some of their other market. So that was totally independent of Datong.

In terms of the next question, in terms of the outsourced material, yes you are absolutely correct and that we have always sought outsourced materials in some cases coconut carbon to compliment our portfolio in some cases coal based. You know we’ll continue what makes economic sense. As we said in the call, we’re now taking decisions totally different into where we get the highest margin for our product and in certain regions of the world if it makes sense to sell more outsourced then we’ll do so, so that we can increase our margins on the product that we produce.

Ben Kallo - Robert W. Baird

Thanks very much.

Operator

Your next question comes from Kevin Maczka of BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

Thanks, good morning.

Randy Dearth

Good morning.

Kevin Maczka - BB&T Capital Markets

I wanted to ask a question on SG&A. You made a nice year-over-year improvement there in the quarter and Steve touched on it a bit as it relates to the second quarter outlook. But with the further phase 2 and 3 actions that are coming either in dollar terms or percentage terms, is this something we’re going to see continued improvement and either way you want to slice it there by dollars or percentage improvement as we get into the back half and beyond, is that how we should be thinking about that SG&A line?

Steve Schott

Hey Kevin, this is Steve. A lot of the phase 1 program initiative was focused on our OpEx more so than phases 2 and 3. So while we’ll continue to look closely at our operating expenses in SG&A and continue to look to improve them, I think that the big step change has occurred pursuant to what we accomplished in the latter half of the last year and the coming phases that we’re obviously working on phase 2 and phase 3 are very much more focused on margin improvement.

Kevin Maczka - BB&T Capital Markets

Okay. And shifting over to the top line, I think you called out in the release and on call to strength the municipal markets and industrial and now you are restarting Neville Island. Can you just give a little more color there on what you’re seeing specifically and how sustainable it is and other emerging markets than sluggish for some time?

Randy Dearth

Now we’re really excited about what we’re seeing in the municipal market and we truly believe that our value proposition of having the virgin carbon as well as our service business and also our engineering services and equipment that this is valued by our customers and we are happy about that. In terms of the decision about the Neville Island plant, again we didn’t anticipate the demand to be as high as it was and made the conscious decision to keep it going for a few more months and again because customers value our products and services and would like us to continue to service them.

Kevin Maczka - BB&T Capital Markets

Bigger picture Randy in terms of capacity you are restarting that plant, you closed and sold Datong, you had some other moving parts here on the reactivation side with new CapEx and where are you in terms of your activated carbon capacity in general.

Randy Dearth

Well, right now we’re running at a pretty good rate at both Big Sandy and Pearl. As you know, we’ve expanded our Pearl capacity. We did that last year, 20% capacity expansion. We’re constantly looking at that. We’re looking at where our next step should be. We formed a team a strategic concepts team of senior managers here at Calgon and both from the folks here in the U.S. but from around the world and we’re going to ask ourselves that question where should that capacity be and when. You can trust me when I say it’s probably not going to be a decision we make in 2013, but I think in 2014, 2015 we should probably really have a strategy of how we want to deal with that. In the meantime, we have our outsourced products that we could sell, the compliment what we have, and again we are still pushing for reactivation and we believe that will free up capacity as well of us.

Kevin Maczka - BB&T Capital Markets

Okay. Thank you.

Operator

Your next question comes from Hasan Doza of Water Asset Management.

Hasan Doza - Water Asset Management

Good morning Randy. Thanks for all the details in this call, very much appreciated.

Randy Dearth

Good morning Hasan.

Hasan Doza - Water Asset Management

I just have two questions; one, just wanted to kind of better understand your (inaudible) for second quarter results, as Steve was giving the details. So revenue, as you said, will be less than the second quarter of last year, and if I am not mistaken, second quarter of last year your SG&A as percent of sales was 15.6%. And I think Steve mentioned that you expect the second quarter of this year to be in line with first quarter which was 15.5%. So if the SG&A as a percent of sales is roughly the same as last year and revenues are less than second quarter of last year, just wanted to get an understanding, do you expect the EPS which was $0.19 last year I believe to be for this quarter, do you expect that the net income or EPS level to be -- what kind of your plan for that level as opposed to revenues and margins?

Randy Dearth

Certainly, in terms of guidance I am not going to, I can’t give you that in terms of where we think the EPS is going to be next quarter. All that being said, I think Steve outlined it clearly that the challenges we faced in the second quarter currency exchange fluctuations is going to play a part of it then the backlog in the ballast water and John I think did a good job today of outlining where we’re at with that.

Hasan Doza - Water Asset Management

Okay. I guess my second question would be you did mention in your release about lower demand and pricing for the powdered activated carbon and Calgon which owns North as I mentioned last week that experienced 70% year-over-year decline in volumes for extra carbon in the power generation market. So I was hoping would you be kind of able to quantify the magnitude of the decline in volume and pricing per pound that you an impact year-over-year.

Steve Schott

What I should say is that and we’ve given numbers for the first quarter in terms of the decline and we’ve highlighted it as a decline in the second quarter but I think everyone should have an understanding that this is a relatively small piece of our business and that on a full-year basis looking at mercury removal revenue in North America for Calgon that business is less than 5% of our total revenue. So it is not a big driver to our bottom-line results and there is a far bigger impact from drinking water revenue.

Randy Dearth

Yeah. And again I think these points to our diversification of the products that we sell and the fact that by having that diversification will helps us in situations like this.

Hasan Doza - Water Asset Management

Okay. Thanks guys.

Operator

Your next question comes from Jinming Liu of Ardour Capital.

Jinming Liu - Ardour Capital

Good morning.

Randy Dearth

Good morning.

Jinming Liu - Ardour Capital

I have two questions related to working capital. First, accounts receivable increased this quarter I think you mentioned that it was mainly related to some equipment sales. We noticed that a few companies recently suffered some collection problem in emerging markets? Can you give us more color on where those accounts receivable ready to implement sales in Pacific rich countries and who do you management -- manage credit risk there?

Randy Dearth

Well, we, first the increase in equipments billings would be around the world and where we’re in emerging markets, we try and have our counterparties provide letters of credit where possible to protect us from collection risks. So I’m not concerned that we will not eventually receive those equipment revenues. In many cases there's a retain agent what not that we do with, it’s on an extended basis. But we try and manage our risks where we need to with letters of credits.

And the remaining part of the receivable increase is, I think we mentioned was we did have stronger sales in Asia and Japan as well where payment terms are much longer than we normally benefit from in the U.S. and Europe.

Jinming Liu - Ardour Capital

Okay. Yeah. Thanks for that. And next is, certainly to inventory, I notice that inventory decreased significantly, that’s very of that. Is there, do you have a part level inventory or base inventory outstanding?

Randy Dearth

No. I’d like to see below $100 million. Obviously, with coal, the challenges we takes coal, that provides some difficulty in getting there, but, I’ve said that that I would like to see its get below $100.

Jinming Liu - Ardour Capital

Okay. Thanks.

Operator

Your next question comes from David Rose of Wedbush Securities.

David Rose - Wedbush Securities

Good morning. A couple of quick questions I think. First of which is if you could breakdown your gains in your March, while list the improvement margins versus I think the guidance you provided indicated in the fourth quarter that margins would be very challenged, did a great job on the COG side? Can you put them up in buckets where the performance came and talk a little bit more about the improvement as well in the UV side? So maybe the overall buckets in terms of improvements and then if you can breakdown by segment?

Steve Schott

David, this is Steve, I’ll try but that’s pretty challenging. We highlight the $400,000 insurance settlement which impacted favorable our margins. We, certainly, are seeing some benefit from our cost improvement programs, although more modest in the first quarter. I think we had some favorable mix issues. Certainly, we have higher municipal sales. We have -- as we highlighted lower mercury removal sales, which frankly had pretty attractive margins so we’ve more than overcome that. Beyond that, I don't have that kind of information available for the call. So I don't think I want to go further than what we just said. There might be a little more detail in our Form 10-Q.

David Rose - Wedbush Securities

Okay. And then, with respect to your comment on pricing you talked about pricing on reactivation, but I’m not sure if I understood, you are getting pricing, equal amount of pricing on version both powder and granular, or no?

Randy Dearth

Well, we are getting price increases on emerging carbon and reactivation. We don’t break it out which is which but we are pleased with the direction it is going.

Steve Schott

I think you could assume for now we’re not getting much pricing in powder.

David Rose - Wedbush Securities

Okay. That’s fair. Thank you.

Randy Dearth

You’re welcome.

Operator

Your next question comes from Daniel Mannes of Avondale.

Daniel Mannes - Avondale

Hey. Good morning, everyone.

Randy Dearth

Good morning, Dan

Steve Schott

Good morning.

Daniel Mannes - Avondale

First, a quick follow up on Ballast Water, appreciate all the color from John? One question I had is, when you talk about the two deadlines under the Coast Guard, the 2014 and ’16 sort of deadlines for, I guess, you do call small and large ship? Can you maybe breakout for us the number of ships in your forecast fall under those two and the relative sizing, because our impression is that the ship that fall under the 2014 are good deal smaller, and there maybe also be a smaller number of ships that fall under that versus the 2016. But I’d be interested in your thoughts on it?

John Platz

Sure. The two size categories relate to the Ballast capacity. The first compliance date Jan 14 relates to the midsize capacity systems, greater than 1,500 cubic meter and less than 5,000, then in 2016, the less than 1,500 and the more than, the small and the larger combined for the second date.

We’re using a value of roughly 30% of the world’s vessels fall into this first category. So if you want to pick a ground number 50,000 vessels to be retrofit, 30% of them would fall into this first compliance date.

Daniel Mannes - Avondale

Okay. And that's just for the U.S. or is that under the [IMO]…

John Platz

Right.

Daniel Mannes - Avondale

… was it nearly 30% for the U.S.

John Platz

Understood. Yeah. The 50,000 estimate is used by many to describe the worldwide retrofit requirement. And so then, one will have to make some estimations of what percentage of the world vessels will be coming to the U.S. and those estimates range from 20% of the world vessels in any one year and 60% of the world's vessels over life of vessel.

So it makes for estimating exactly the U.S. impact from this Jan 14 compliance date challenging, but if one would work with 30% of the vassals in the size category and 30% of the vessels deciding to implement because they anticipate coming to the U.S. in the next five years then you can start to hone in on it.

Daniel Mannes - Avondale

Got it. Thanks. And then real quick for Steve, just -- you had about an $800,000 other expense item this quarter? Can you -- does that relate to either what was going on it at Blue Lake or Neville or is that something else or just anymore color on that would be helpful?

Steve Schott

Foreign exchange, we last year had some small foreign exchange gains, this year we had some small foreign exchange losses, couple, $700,000 in both periods’ related to unhedged positions, Dan, and a lot of that was related to Japan.

Daniel Mannes - Avondale

So this was transaction not translation?

Steve Schott

That’s right.

Daniel Mannes - Avondale

Got it. Okay. And then real quick, just in terms of the price increase you put through, you said $10 million for ’13? Does that imply that there's sort of more outstanding potential for ‘14 or is $10 million sort of the amount in totality?

Steve Schott

No. You absolutely correct, Dan, in that assessment, we expect more in 2014. As you know with contracts and when we can implement price increases, that’s going to be vary throughout the year. We are pretty comfortable with $10 million for this year. I would be upset if we didn’t have more than $15 for next year. But, again, the jury still out because we are still working with our customers on that one.

Daniel Mannes - Avondale

$15 inclusive of the $10 or $15 in…

Randy Dearth

In inclusive of the $10.

Daniel Mannes - Avondale

I’m sorry say that again

Randy Dearth

Yeah. $15 inclusive of $10 that we’re getting this year.

Daniel Mannes - Avondale

Got it. Thank you very much.

Operator

Your next question comes from Christopher Butler of Sidoti & Company.

Christopher Butler - Sidoti & Company

Hi. Good morning, everyone.

Randy Dearth

Hey, Chris.

Gail Gerono

Good morning.

Christopher Butler - Sidoti & Company

Just saying on that, the same question on the price increases, as you say ‘15, is that the assuming another round of price increases or is it sort of the $10 million looking for a slow build over the course of this year?

Randy Dearth

Exactly. And again given contracts and timing restrictions -- again it's going to fall into 2014 on an annualized basis. So no, we don’t anticipate more pricing increases.

Christopher Butler - Sidoti & Company

And looking at the air purification market with natural gas up modestly which you say, could you talk to the pace of conversion, the thought of how this is going to play out here. Is there any real change there?

Randy Dearth

I have been watching it very closely. What excite us the most of the new advance FLUEPAC products and where we think that's going to go and we've done well in the 20 trials. And in all cases, it’s come back. There are advance products do indeed provide some advantages. So we’re excited to wait-and-see where that's going to go.

Christopher Butler - Sidoti & Company

And on Hyde Marine, are there any further approvals that you're looking for or is Calgon Carbon ready to go just waiting for regulation at this point?

Randy Dearth

Well, now that we have the AMS which is, if you will, in interim category for U.S. compliance, we will be working towards the complete U.S. type approval as the months unfold here.

Christopher Butler - Sidoti & Company

And just finally, did you repurchase any shares during the quarter?

Randy Dearth

We did not.

Christopher Butler - Sidoti & Company

I appreciate your time.

Randy Dearth

Thank you.

Operator

Your next question comes from Steve Schwartz of First Analysis.

Steve Schwartz - First Analysis

Hey. Good morning, everyone.

Randy Dearth

Good morning.

Steve Schott

Good morning, Steve.

Steve Schwartz - First Analysis

If I could direct my first question to John and John, thanks for the color on what's going on there. It’s good to have you on the call. This builds a little bit off Dan’s earlier question. In your last analyst day, you put a table with a timeline for when you thought units might come through. And it showed a significant ramp somewhere around 2017 to 2019. Is that generally valid still for how you're seeing this market develop for you?

John Platz

Yeah. For that question, if you think about the U.S. requirement, the second one for the larger body of existing vessels, starting in 2016, ratably supplied to that large segment over five years would have the -- the major retrofit market completed or winding down by 21, 22 with an absolute peak in the 17 to 19 range as you now doing both of the midsize and the small and large.

Steve Schwartz - First Analysis

Okay. All right. Well that's -- it’s good to know we have that to just work from modeling. I guess my second question that falls under Disinfection Byproducts and in the prepared remarks, you talked a little bit about moving from schedule one to schedule two and three. Personally, my impression was thinking that the biggest systems under schedule one is where you get the majority of your business. But it sounds like you're seeing the flow through of potential business as being different, maybe stronger from schedule two and three. Is that correct?

Randy Dearth

Well, actually both is the correct answer to that because we haven’t given up in the larger municipalities that have made decision go the route of a chemical solution. But they can ultimately change remind in the future to go to granular activated carbon. So we’re still focused on that.

But we've done a very strong marketing push at this smaller or midsize to smaller municipalities and educating them about the advantages of activated carbon over a chemical solution. And again from an equipment perspective, size perspective that might be a bigger target for us.

Steve Schwartz - First Analysis

Okay. And then, if I could ask one, I think we will be a fast answer for you. When exactly did you take Blue Lake off and then can you just remind us when you took Neville off. And then you said, you turned it back on in April?

Randy Dearth

Yeah. Blue Lake is not off yet. It’s not idle, it’s still running. So that decision is yet to be made when it makes more sense for our customers and for our business. Neville actually went off late last year.

John Platz

January, this year.

Randy Dearth

Yeah. January and then again came up in early April for the reasons we outlined before. It shows our demand is greater than we had anticipated.

Steve Schwartz - First Analysis

Yeah. So Neville is January offline, on in April and you plan to take it offline in …

Randy Dearth

Mid June

Steve Schwartz - First Analysis

Yeah. Okay. Very good. Thanks for taking the questions.

Randy Dearth

Thanks.

Operator

Your next question is a follow-up from Ben Kallo of Robert W. Baird.

Ben Kallo - Robert W. Baird

Hey, thanks guys. Steve, I just want to be clear on the guidance. You said the sales dropped to below Q2 last year’s level. Margin will increase sequentially about 100 basis points or more and then OpEx would be the same as in Q1 on a percentage basis?

Steve Schott

You got those all correct.

Ben Kallo - Robert W. Baird

Okay.

Steve Schott

Yeah.

Ben Kallo - Robert W. Baird

Okay. Thanks that’s all I had.

Steve Schott

Okay.

Operator

At this time, there are no further questions. I would now like to turn the floor back over to Randy Dearth for any closing remarks.

Randy Dearth

Thanks. I just like to conclude today by saying that during the past nine months, I truly believe we’d effected fundamental change in Calgon Carbon. And I really expect this momentum to continue to build throughout the reminder of this year. I truly believe this is an existing time for our customers, our employees and also our shareholders. So I’m happy to be a part of it. Thank you for your attention today. And I do look forward to talking to everybody at our next quarterly call. Thank you.

Operator

Thank you. This concludes today's conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Calgon's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts